[Senate Hearing 109-412] [From the U.S. Government Publishing Office]
S. Hrg. 109-412
ENERGY INDEPENDENCE
=======================================================================
HEARING
before the
COMMITTEE ON ENERGY AND NATURAL RESOURCES UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
DISCUSSING THE GOAL OF ENERGY INDEPENDENCE
MARCH 7, 2006
Printed for the use of the Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota LISA MURKOWSKI, Alaska RON WYDEN, Oregon RICHARD M. BURR, North Carolina, TIM JOHNSON, South Dakota MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California CONRAD BURNS, Montana MARIA CANTWELL, Washington GEORGE ALLEN, Virginia KEN SALAZAR, Colorado GORDON SMITH, Oregon ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
Bruce M. Evans, Staff Director Judith K. Pensabene, Chief Counsel Bob Simon, Democratic Staff Director Sam Fowler, Democratic Chief Counsel Frank Macchiarola, Counsel Jennifer Michael, Democratic Professional Staff Member
C O N T E N T S
STATEMENTS
Page
American Petroleum Institute………………………………. 62 Bayh, Hon. Evan, U.S. Senator from Indiana………………….. 3 Bingaman, Hon. Jeff, U.S. Senator from New Mexico……………. 14 Bunning, Hon. Jim, U.S. Senator from Kentucky……………….. 46 Cischke, Susan M., Vice President of Environmental and Safety Engineering, Ford Motor Company………………………….. 23 Coleman, Hon. Norm, U.S. Senator from Minnesota……………… 4 Domenici, Hon. Pete V., U.S. Senator from New Mexico…………. 1 Feinstein, Hon. Dianne, U.S. Senator from California…………. 6 Lieberman, Hon. Joseph I., U.S. Senator from Connecticut……… 7 Lovins, Amory B., Chief Executive Officer, Rocky Mountain Institute……………………………………………… 36 Menendez, Hon. Robert, U.S. Senator from New Jersey………….. 11 Murkowski, Hon. Lisa, U.S. Senator from Alaska………………. 51 Talent, Hon. James M., U.S. Senator from Missouri……………. 12 Thomas, Hon. Craig, U.S. Senator from Wyoming……………….. 12 Verrastro, Frank, Director and Senior Fellow, Energy Program, Center for Strategic and International Studies…………….. 28 Woolsey, R. James, Vice President, Booz Allen Hamilton……….. 14
APPENDIX
Responses to additional questions………………………….. 69
ENERGY INDEPENDENCE
TUESDAY, MARCH 7, 2006
U.S. Senate, Committee on Energy and Natural Resources, Washington, DC. The committee met, pursuant to notice, at 9:40 a.m., in room SD-366, Dirksen Senate Office Building, Hon. Pete V. Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM NEW MEXICO
The Chairman. The hearing will please come to order. Thank you everyone for coming and thank you, Senators, for coming. And I apologize for being late. We will try to get to the witnesses as quickly as we can. First let me say that I am going to try to resist the lofty rhetoric and arbitrary goals that have historically tempted many when discussing this issue of energy independence. The topic today is too important to our Nation’s security to reduce our discussions to soundbites. It is clear that the United States need to reduce our dependence on foreign sources of energy. We particularly need to reduce our reliance on oil from unstable regions of the world whose values and priorities are often in conflict with America’s initiatives and place in the world. Last year, U.S. net imports equaled 59 percent of our demand. Forty-one percent of our total imports came from OPEC countries which equals 27 percent of the total U.S. consumption. Dependence to this extent can determine our national security, our economic strength, and our foreign policy. In order to make necessary changes, we have to be realistic about what is possible in the near term, but certainly we have to look with real energy and enthusiasm toward the long-term. By making energy self-sufficiency, the immediate goal would deny the reality of this situation and only invite discouragement and failure. This would be akin to putting all of our resources in the hopes of finding an elusive cure for a disease at the expense of taking important steps to treat and alleviate the symptoms in the interim. To that end, I have said on a number of occasions that while I support the advancement of science technology to reduce our dependence on foreign energy sources, I think we must also build a bridge to that age by accessing the oil and gas resources available in our country and we must reasonably and responsibly conserve our energy. As an example, from my standpoint, I believe we should have acted on ANWAR a long time ago. The majority of the Senate believes that ANWAR brings us closer to achieving energy security and I would venture to say that not a single member of this body believes that continuing to block ANWAR strengthens our energy security. Blocking progress is not a substitute for substantive policy. To the critics, talking about ANWAR for a minute, I remind you that it was 10 years and 3 months since that legislation to open ANWAR was vetoed by President Clinton. Ten point four billion barrels of oil sits under the domestic ground in ANWAR. The week of that veto, the average price of crude oil, Senator Craig, with $19.00. This morning, the price of crude oil stands at approximately $62.49. I think the numbers kind of speak for themselves. Some people must be wondering what in the world the Congress can be thinking of blocking the domestic production in favor of more Middle East oil. As we look at what our Nation can do to reduce our reliance, it is also important that the American people have a clear understanding of the steps we have already taken. Working with you, Senator Bingaman, we produced a bipartisan bill that passed with overwhelming support. It is essential that the Government works hard to implement that legislation. As we know, that legislation provided a very, very major, major addition to the use of ethanol in the United States. Already we are seeing 34 new plants, eight existing plants being expanding, 150 plants in planning stages. Second, a little known fact, oil shale, the establishment of a leasing program for research and development of technologies for the recovery of liquid fuel from oil shale and tar sands in Colorado, Utah, and Wyoming. Since that policy act, which passed just a few months ago, the Interior Department has received 20 proposals, eight of them deemed viable. The United States has 75 percent of the world’s shale. The future of shale is a bright one. It is little known at this point, but I believe we will learn much more about it, and it should be discussed in the context of this hearing today of this overall attempt to understand our future. Incentives for innovative technology, which you all will testify about, the Energy Policy Act spoke of that. We promoted wind energy and many other technologies were promoted in that bill. I could go on and talk about this for a long time, but you are here for that. In my first year in the Senate, President Nixon set a goal of energy self-sufficiency by 1980. I do not know if any of you remember that. Since that time, successive administrations, scores of members of Congress from both parties, including me, have set similar goals. I believe that energy self-sufficiency is attainable, but I do not believe it is in the short term. Nonetheless, we must pursue it as a goal in my opinion vigorously. But that is why you are here, to tell us what you think about it and how you think we might get there. With that, I yield to my distinguished colleague, Senator Bingaman. [The prepared statements of Senators Bayh, Coleman, Feinstein, Liberman, Menendez, Talent and Thomas follow:]
Evan Bayh
Prepared Statement of Hon. Evan Bayh, U.S. Senator From Indiana
Chairman Domenici, Senator Bingaman and Members of the Committee, thank you for having this hearing today on an issue so crucial to the well-being of our country. United States dependence on oil is the preeminent challenge of our generation. U.S. oil consumption affects more than just prices at the pump; it impacts our national security, our economy, our fiscal health and our environment. The United States uses twenty-five percent of the world’s oil but controls only three percent of the world’s proven oil reserves. As of right now, our demand from oil is only expected to grow, from nearly 21 million barrels a day now to 28 million barrels per day in 2030, of which nearly 70 percent will be imported. While demand in the U.S. will grow by approximately 25 percent, demand in China, India and other developing countries is projected to grow by 66 percent. To meet the projected world demand, global output would have to expand by 57 percent in 2025. The Energy Information Administration’s (EIA) most recent forecast states that the price of crude is expected to remain high at $57 per barrel in 2030. The International Energy Agency (IEA) price forecast is even more dire. According to the IEA, if oil producing countries in the Middle East and Africa do not.make immediate investments to increase production, the price will rise to $86 barrel in 2030. Even if the region does make the necessary investments, prices could average $65 a barrel. These forecasts assume the current projections for supply and demand but do not address the consequences of a supply disruption caused by terrorism, political unrest or weather. Last summer, the National Commission on Energy Policy and Securing America’s Energy Future conducted a simulation called Oil Shock Wave to explore the potential security and economic consequences of an oil supply crisis. The event started by assuming that political unrest in Nigeria combined with unseasonably cold weather in North America contributed to an immediate global oil supply shortfall. This sent prices to over $80 barrel. The simulation then assumed that three terrorist attacks occur in important ports and processing plants in Saudi Arabia and Alaska which sent oil prices immediately soaring to $123 a barrel and $161 barrel six months later. At these prices, the country goes into a recession, millions of jobs are lost as a result of sustained oil prices, and the average household would pay almost $3,000 more each year for gasoline. This simulation almost became reality with the failed attack on Abqaiq in Saudi Arabia last month. Had the attack been successful, it would have removed four to six million barrels per day from the global market sending prices soaring around the world and would likely have had a devastating impact on our economy. One of the lessons from September 11th is that we can no longer be so dependent on places like Saudi Arabia, Russia and Venezuela for our energy supply. Yet we are more dependent on foreign oil from hostile countries today than we were on September 11th–making us more vulnerable and putting the United States in a uniquely disturbing position of bankrolling both sides in the War on Terror. This goes to the heart of our security and our sovereignty. As the world confronts the prospect of a nuclear Iran, our leverage is dramatically limited by the fact that Iran is the second largest exporter of oil. We and our allies are vulnerable to energy blackmail. A few months ago, the Russians decided they weren’t pleased with the Ukrainian elections, so they simply decided to stop exporting natural gas to them–nearly causing an economic crisis in the region. How can we be sure that the radicals and America-haters who control the oil will never do that to us? Our economy is vulnerable to the price volatility of the oil market and we must do what we can to build resilience into our economy. The U.S. uses half as much oil to produce the same amount of gross domestic product (GDP) as it did in the 1970s, this is good news, but we must continue to do more. Decreasing the oil intensity of our economy will help us weather price shocks and make us more secure. We can reduce oil intensity by reducing our demand for oil. The risks faced above ground by depending on unstable suppliers and good weather are too great and to a certain extent out of our control. If the attack on Abqaiq would have been successful, there is little that we could do to moderate its impact on our economy and lower the prices which is why it is urgent that Congress and the President act now to start reducing our dependence on oil. There is no magic bullet to address a major shock to the oil market and we must take the steps necessary to reduce our dependence on oil which will make our nation stronger. We must bring the same urgency to energy security that we have on the War on Terror. Concrete steps are long overdue. But some of us have already begun to take them. Last year, I introduced legislation, the Vehicle and Fuel Choices for American Security Act (VFCASA), with Senators Lieberman, Brownback, Coleman and 6 others to make significant reductions in our oil use. My bill would reduce projected oil use by two and a half million barrels per day in 2016 and seven million barrels per day in 2026. It also provides tools to meet these aggressive targets by improving the efficiency of vehicles and increasing the production and use of biofuels. VFCASA includes new approaches for manufacturers, the federal government, scientists and consumers, all designed to encourage greater energy security. The legislation requires that in 2012, ten percent of vehicles manufactured be flexible fuel vehicles, alternative fueled vehicles, hybrids, plug-in hybrids, advanced diesels and other oil saving vehicle technologies. This percentage rises each year until 50 percent of the new vehicle fleet will be one of these oil saving technologies. It also provides tax incentives for U.S. manufacturing facilities to retool existing facilities to produce advanced technology vehicles which will help shift the vehicle fleet to more efficient vehicles while minimizing the job impact of an increased market share of advanced technology vehicles. The bill builds on the Energy Policy Act (EPAct) of 2005 by expanding the number of consumers that can take advantage of the tax credit available for the purchase of more efficient vehicles. It offers a tax credit to private fleet owners who invest in more efficient vehicles. VFCASA contains robust research provisions in the areas of electric drive transportation, including battery research, lightweight materials and cellulosic biofuels. Each of these technologies hold great potential to play a key role in reducing our dependence on oil. For instance, lightweight materials, such as carbon composites and steel alloys, hold the promise of being able to double automotive fuel economy while improving safety without increasing the cost of the vehicle. Cellulosic biofuels, which the President mentioned in the State of the Union, have the promise to be cheaper than gasoline and produce seven to 14 times more energy than is used in its production. My bill doubles the funding for bioenergy research contained in EPAct and provides additional funding for production incentives for the production of cellulosic biofuels. Additionally, the legislation provides the tools to expand the alternative fueling infrastructure so that all vehicles that can run on E85 are able to fill up at the pump with E85. Although there are approximately 5 million vehicles capable of running on E85, very few actually run on E85 because the fuel is not readily available to them. Of the approximately 168,000 gas stations in the country, only 615 have E85 pumps. My bill expands the alternative fueling infrastructure tax credit in EPAct to 50 percent to drive investment in this vital infrastructure. The legislation directs the revenues received from CAFE penalties, already collected by the government from foreign manufacturers, to fund grants to finance the expansion of the alternative fueling infrastructure. These fines vary each year depending on CAFE compliance for that year but range from $21 million to $52 million a year. Since 1999, the Department of Energy has only given out $6.9 million in grants since 1999–in one year, the amount of money awarded could triple. One DOE grantee, the National Ethanol Vehicle Coalition, will able to build 300 stations with its $2 million grant this year. With at least 10 times that amount of funding available, we should be able to build at least 3,000 stations per year through this program alone. Addressing our dependence on oil is a challenge that we can no longer ignore. Events in the world from September 11th to Hurricane Katrina to the recent attempted terrorist attack in Saudi Arabia continue to show us how urgent it is that we act immediately. I hope that this hearing today is the only the Committee’s first step in tackling the challenge of American oil dependence. I look forward to working with the Committee on solutions, such as my legislation, to this critical problem facing our country. ______
Norm Coleman
Prepared Statement of Hon. Norm Coleman, U.S. Senator From Minnesota
Mr. Chairman, it is time we stopped treating foreign oil dependence as another abstract statistic whose consequence is far removed from Americans’ daily lives. The United States is going to have to face the reality that we must break our foreign energy dependence or risk losing our autonomy. Our nation’s energy dependence is undeniably one of the greatest threats to our national security and our freedom. By 2025 it is estimated that nearly 75 percent of America’s oil supply will be imported. Also consider that two-thirds of the world’s proven oil reserves are in the Middle East and that terrorists have identified oil as a strategic vulnerability–increasing attacks against oil infrastructure worldwide. One can just imagine what would happen if OPEC, which currently accounts for well over 50 percent of our oil supplies, shut off the oil spigot. Beyond the national security implications, oil dependence also carries serious economic consequences. The total economic penalty of our oil dependence, including loss of jobs, output, and tax revenue, is estimated to exceed $300 billion annually. This is not a crisis without a solution. We can cure this dependency affliction with a bold national vision and sincere commitment to innovative energy solutions. One of those energy solutions is renewable fuels, and I am proud to be Senator from the state leading the nation in renewable fuels production. Mr. Chairman, first we need a plan to reduce our oil consumption. That is why, along with nine other senators, I introduced the Vehicle and Fuel Choices for American Security Act (VFCASA) that makes a goal of saving 2.5 million barrels per day by 2016, roughly the same amount of oil currently imported from the Persian Gulf region and lays out an achievable plan to reach that goal. One facet of this plan to reach 2.5 million barrels per day of oil savings is to promote the development and use of advanced and alternative fuel efficient vehicles. Key pieces include tax credit incentives for advanced technology motor vehicles, expansion of the consumer tax credits for advanced vehicles, loan guarantees and grants for hybrid vehicle projects, and a new federal commitment to hybrid vehicle technologies and materials. The national fuel savings generated by this bill will be immense, but if we want to free ourselves from foreign oil dependence, we must produce more fuel here at home. Let me say, I have seen Brazil’s renewable fuel economy firsthand; it’s truly impressive. In fact Brazil will not import a drop of foreign oil this year. Brazil’s energy independence success is indicative of their strong, national commitment to renewable fuels. Brazil invested heavily and directly in ethanol infrastructure, mandated that a high percentage of gasoline include ethanol, heavily supported sugar farmers during the transition to ethanol production, and ensured flex fuel vehicles were widely available. The Energy Policy Act of 2005 Congress passed this summer included important provisions to expand energy conservation and renewable energy production, particularly through the creation of the Renewable Fuels Standard (RFS). However, many of these provisions only support the current rate of growth for the renewable industry. If America is going to replicate Brazil’s energy success, stronger, bolder policies are necessary. I believe we need a national energy policy that increases availability of flex fuel vehicles, invests heavily in E-85 infrastructure, includes a sugar-to-ethanol program, and sets a national mandate for ethanol that matches our energy independence ambitions. Key elements of such a renewable energy policy are present in the Vehicle and Fuel Choices for American Security Act referenced earlier. VFCASA will increase the availability of flex fuel vehicles by setting a reasonable requirement that 10 percent of vehicles sold in the U.S. are alternative vehicles, such as flex fuel vehicles, by 2012 and 50 percent by 2016. This requirement would be coupled with a new tax credit for manufacturers for upgrades necessary to begin or expand production of advanced technology vehicles–helping industry meet this requirement. Additionally, we must dramatically increase the availability of E- 85 infrastructure if we are to grow our fuel in our fields instead of importing oil from foreign deserts. VFCASA would provide the programs and resources needed for this infrastructure by:
- Increasing the E-85 infrastructure tax credit 2. Using CAFE penalties to fund alternative fuel infrastructure 3. Creating a USDA loan guarantee program for E-85 infrastructure
Right now, about half of the nation’s E-85 infrastructure is in my home state of Minnesota. While I am proud of the vision and hard work of my rural communities to promote these E-85 pumps, we need E-85 available coast-to-coast. Brazil could not reach fuel independence without a strong sugar-to- ethanol program, and we should learn from that example. The technology is readily available and sugar’s contribution to ethanol production could begin in the very near future. Importantly, VFCASA would increase Renewable Fuels Standard by 100 million gallons in 2008 for ethanol produced domestically from sugar. This would be on top of the current RFS and would not take away from the renewable mandate going to other commodities. Yet, a mandate will not be sufficient to jumpstart a sugar-to- ethanol program in the United States. In addition to proposals included in VFCASA, Congress needs to enact a strong incentive package to match this mandate. Once a strong sugar-to-ethanol program is underway, America will have yet another abundant, reliable source for fuel. I am studying various incentive mechanisms for a sugar-to-ethanol program, and I plan to introduce legislation addressing this issue in the coming months. Finally, America needs a renewable fuel requirement that matches our ambition, but does not exceed our potential. That’s why I propose Congress enact legislation requiring 10 percent of the nation’s gasoline be renewable fuel in 10 years (2016). Today, at roughly 4 billion gallons of ethanol production, the U.S. is only using renewable fuels for 4 percent of our total fuel supply. But, at this industry’s current rate of growth, the U.S. is capable of increasing its production of ethanol about 1 billion gallons a year, meaning that in ten years (2016) the U.S. should be able to produce about 14 billion gallons of ethanol, representing about 7 percent of our fuel supply. Ten percent in 10 years is aggressive and doable. Let’s not forget that Brazil mandates gasoline contain at least 25 percent alcohol (ethanol), and that it is now so popular it accounts for 40 percent of all vehicle fuel in that nation. Mr. Chairman, your work on the Energy Policy Act of 2005 demonstrated your strong commitment to this nation’s energy and economic well-being. I urge you and this Committee to build on last year’s achievements by moving forward a plan for oil savings through fuel conservation and promotion of innovative technologies, while building a more aggressive renewable fuel policy allowing America to grow fuel here at home. Mr. Chairman, as always, I appreciate your leadership on energy issues and your continued willingness to offer an open ear to your colleagues. Thank you. ______
Dianne Feinstein
Prepared Statement of Hon. Dianne Feinstein, U.S. Senator From California
Thank you, Mr. Chairman for holding this important hearing. The amount of oil imported into the United States has climbed from 6 million barrels of oil per day in 1973 to 12 million barrels per day in 2004 (Energy Information Administration). And the percentage of foreign oil consumed in the U.S. has climbed from 35% in 1973 to 59% in 2004. So while there has been a lot of talk about decreasing our nation’s dependence on foreign oil, most of it has been empty rhetoric. This week’s cover story of BusinessWeek is “The New Middle East Oil Bonanza.” With oil prices so high, partially due to fear of oil production disruptions in Nigeria, Saudi Arabia, Venezuela, and elsewhere, billions of dollars are going into the coffers of oil- producing nations. I am seriously concerned about the impacts of America’s overdependence on foreign oil. This cannot continue. For foreign policy and for environmental reasons, the overdependence on oil is a real problem. With 5% of the world’s population, we cannot continue to use 25% of the world’s oil supply. Especially not with India and China developing at their current pace. There are things we could do today to reduce our dependency on oil, and yet we need the political will to get them accomplished. Specifically, we must raise the nation’s fuel economy standards. The Consumer Federation of America estimates that increasing the fuel economy of our domestic fleet by 5 miles per gallon would save about 23 billion gallons of gasoline each year, reducing oil imports by an estimated 14%. A fleet-wide increase of 10 miles per gallon would save 38 billion gallons, cutting imports by almost one-fifth. That is why I have introduced a very modest bill for the past three Congresses that would close a loophole in current law that allows SUVs and other light trucks to meet less stringent fuel economy standards than other passenger vehicles. Currently, the average SUV uses 715 gallons of gas per year. If the fuel efficiency standards were raised to equal that of a passenger vehicle, the same SUV would only use 546 gallons of gas per year, which would be an annual savings of 169 gallons of gas for only this one vehicle. If the SUV loophole were closed, the savings would be rather dramatic. More than 480,000 SUVs were sold in the first quarter of 2005. If those SUVs achieved an average fuel economy of 27.5 miles per gallon, we would reduce gasoline use by more than 81 million gallons of a year. And that’s just for SUVs sold in the first quarter of 2005. If this bill were to pass, the United States would save 1 million barrels of oil a day, decrease foreign oil imports by 10 percent, and prevent 240 million tons of carbon dioxide from entering the atmosphere each year. Yet the automobile manufacturers continue to fight this proposal tooth and nail and for reasons cannot understand. The technology to make these vehicles more efficient is available today. Furthermore, American auto companies are making vehicles to meet fuel economy standards in other countries. China, for instance, has issued fuel efficiency standards that are more stringent than ours. If American auto companies hope to make cars that will compete in China, then they will need to make them more fuel efficient. I hope the representative from Ford will be able to address this issue in her statement. If the Federal Government is not going to act, Congress should not stop the States from acting. In order to address the environmental impacts that burning oil has on our environment, California has adopted a law that requires automakers to reduce their global-warming emissions by 30 percent by 2016. 57% of California’s emissions come from the transportation sector–the State cannot afford to ignore the source of so much pollution. Ten other States have followed California’s lead and adopted the same standard. They include Connecticut, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington. Canada has also adopted similar standards that will require the automakers to voluntarily reduce the global-warming emissions of cars and light trucks by 5.3 million metric tons–about 25 percent–by the end of 2010. It is time to act now to reduce our dependence on foreign oil. I hope that the witnesses can provide us with some valuable policy options. I look forward to their testimony. ______
Joseph I. Lieberman
Prepared Statement of Hon. Joseph I. Lieberman, U.S. Senator From Connecticut
Mr. Chairman and Members of the Committee: Please accept my thanks for the opportunity to submit this statement as part of the record of today’s hearing in the issue of oil dependence–or, as President Bush put it, our “addiction” to oil. I am especially grateful that so soon after your own Herculean efforts to enact Energy legislation last year, you and the Committee are plunging into this vital issue in such a serious way. I hope that we will be able to work together closely to enact legislation–this year–that will put America on a path to energy security. My testimony will focus on the emerging crisis we as a country face and on the legislation that I believe can unleash the technologies, fuels and strategies we must use to deal with that crisis. At the outset, let me be clear that I am under no illusions that our economy can be completely energy independent in the literal sense of that term. We can, however, ensure that our economy grows while becoming less and less oil-intensive. We have the technology to do it, we have the homegrown fuels to do it and, more and more, I believe we have the will to do it. And, if we succeed we will be making our economy more and more resilient against the dangers and shocks of the global oil system, while freeing our national security and our foreign policy from the very real threats and distortions that our oil- dependence imposes. On November 16 of last year, I introduced as part of a bipartisan group of 10 Senators representing the American Northeast, South, Midwest and West, S. 2025, the Vehicle and Fuel Choices for American Security Act. We chose this title because nothing less than our national security is at stake. Besides myself, the rest of the “Gang of Ten,” or the “Energy Security Ten,” as some call us are Senators Sam Brownback of Kansas, Evan Bayh of Indiana, Norm Coleman of Minnesota, Lindsey Graham of South Carolina, Ken Salazar of Colorado, Jeff Sessions of Alabama, Bill Nelson of Florida, Richard Lugar of Indiana and Barack Obama of Illinois. Since then, we have been joined by Senators Johnny Isakson of Georgia and Lincoln Chafee of Rhode Island, and we expect even more of our colleagues from both sides of the aisle will be joining us soon. I hope that in the future we all look back on the day this bill was introduced as the beginning of a major shift in our national security strategy. I hope that history will say we saw a challenge to our national security and prosperity and then met it and mastered it. While geologists and economists can debate when the oil supply will “peak,” what is indisputable is that demand is now exploding as developing nations such as India and China increase consumption. A recent report by the International Energy Agency, IEA, sums up the urgent need for our legislation. According to the IEA, global demand for oil–now about 85 million barrels a day–will increase by more than 50 percent to 130 million barrels a day between now and 2030 if nothing is done. The industrialized world’s dependence on oil heightens global instability. The authors of the IEA report note that the way things are going “we are ending up with 95 percent of the world relying for its economic well-being on decisions made by five or six countries in the Middle East.” The recent attack on the Abqaiq oil processing facility in Saudi Arabia reminds us not only of our dangerous dependence on foreign oil, but that that vulnerability is recognized by our enemies. Besides the Mideast, I would add that Nigeria is roiled by instability, Venezuela’s current leadership is hostile to us and Russia’s resurgent state power has ominous overtones. In fact, we are just one well-orchestrated terrorist attack or political upheaval away from a $100-a-barrel overnight price spike that would that would send the global economy tumbling and the industrialized world, including China and India, scrambling to secure supplies from the remaining and limited number of oil supply sites. History tells us that wars have started over such competition. Because oil is traded globally, prices are set by the global market. While the U.S. can not unilaterally dictate the prices set on the global market, we can reduce our dependence on those prices by diversifying our energy portfolio, particularly in the transportation sector. Left unchecked, I fear that we are literally watching the slow but steady erosion of America’s power and independence as a nation–our economic and military power and our political independence. We are burning it up in our automobile engines and spewing it from our tailpipes because of our absolute dependence on oil to fuel our cars and trucks. That dependence on oil–and that means foreign oil because our own reserves are less than 1 percent of the world’s oil reserves–puts us in jeopardy in three key ways–a convergence forming a perfect storm that is extremely dangerous to America’s national security and economy. First, the structure of the global oil market deeply affects–and distorts–our foreign policy. Our broader interests and aspirations must compete with our own need for oil and the growing thirst for it in the rest of the world–especially by China and India. As a study in the journal Foreign Affairs makes clear, China is moving aggressively to compete for the world’s limited supplies of oil not just with its growing economic power, but with its growing military and diplomatic power as well. Second, today we must depend for our oil on a global gallery of nations that are politically unstable, unreliable, or just plain hostile to us. All that and much more should make us worry because if we don’t change–it is within their borders and under their earth and waters that our economic and national security lies. Doing nothing about our oil dependency will make us a pitiful giant–like Gulliver in Lilliput–tied down by smaller nations and subject to their whims. And we will have given them the ropes and helped them tie the knots. We can take on this problem now and stand tall as the free and independent giant we are by reducing America’s dependence on oil. Fortunately, the U.S. “oil intensity,” the amount of oil used to generate each dollar of GDP, has decreased 50% in the last 30 years. Further reducing our oil intensity is the key to reducing our vulnerability to oil supply shocks, and bolstering our national and economic security. There is only one way to do this. We need to transform our total transportation infrastructure from the refinery to the tailpipe and each step in between because transportation is the key to energy independence. Barely 2 percent of our electricity comes from oil. Ninety six percent of the energy used to power our cars comes from oil–literally millions of barrels of oil per day. This is unsustainable and dangerous. The Vehicle and Fuel Choices for American Security Act aims to strengthen America’s security by transforming transportation from the refinery to the tailpipe and each step in between, thus breaking our dependence on foreign oil. We start by making it our national policy to cut consumption by 10 million barrels a day over the next 25 years. First, we need to rethink and then remake our fuel supplies. Gasoline is not the only portable source of stored energy. Tons of agricultural waste and millions of acres of idle grassland can be used to create billions of barrels of new fuels. Our farmers could soon be measuring production in barrels of energy as well as bushels of food. Then we must remake our automobile engines as well. Vehicles that get 500 miles per gallon–or that use no refined crude oil–are within our grasp. I know that sounds unbelievable. I am going to tell you how we can do it. To help us get there, our bill also requires that by 2012, 10 percent of all vehicles sold in the U.S. be hybrid, hybrid-electric plug-in or alternative fuel vehicles. That number will rise by 10 percent a year until it reaches 50 percent in 2016. It will take time to change the composition of the U.S. automobile fleet. The average American automobile might remain in operation for 15 years or more. This means that it is essential that we begin immediately to deploy oil saving technologies. To help spur this market along, our bill amends our current energy policy to require that one quarter of federal vehicles purchased must be hybrids or plug-in hybrids. Our bill will detail how we can get there with available technology and previously unavailable Federal Government leadership. Coupling these new programs with the explicit oil-savings goals for the Federal Government is the key to the effectiveness of this proposal. I can almost hear colleagues murmur, So, Senator Lieberman, what else is new? We’ve been hearing this for years and nothing has happened. I can’t blame you if you are skeptical. The struggle for oil independence has been going on at least since Jimmy Carter was President. But things have changed since the days of Jimmy Carter and even since last summer. There is a new understanding of the depth of the crisis that our oil dependence is creating. Last summer’s doubling of gasoline and crude oil prices hit tens of millions of Americans with the global reality of oil demand and pricing. And Hurricane Katrina reminded us how vulnerable our supplies can become. This reality is bipartisan. And, along with my colleagues cosponsoring this bill, I think Americans are ready to set the serious goals that eluded us in the past and take the bold steps necessary to reach those goals. Now let me give you more details. No single technology will resolve all our energy needs in the foreseeable future. Instead, we rely on a wide array of fuel and automotive technologies that are already on the shelf or in development. The bill that we proposed puts our Nation’s transportation system on a new road–a road where the tanks are filled with more home-grown fuel–and I do mean grown–not just American corn, but from American sugar, prairie grass, and agricultural waste. We will push harder for more and quicker production and commercialization of biomass-based fuels. The Energy bill signed into law last summer created a new set of incentives for these fuel alternatives, including their commercial production. What our bill would do–again, by including a mass-production mandate for alternative fuel vehicles–is ensure that the investments would be made in the facilities to produce and market these new fuels by providing big demand for them. The bill would also create a program to guarantee that filling stations had the pumps to provide the fuel to keep pace with the growing alternative-fuel fleet produced by the mandate. Is there a model to give us confidence we can achieve this transformation? Yes. Brazil is now enjoying substantial immunity from current high world oil prices, thanks to a long-term strategy, launched during the oil shocks of the 1970s, to integrate sugar cane ethanol into its fuel supply. They started initially with a mandate that all fuel sold in the country contain 25 percent alcohol. They are now up to 40 percent biofuels. In addition to the fuel mandate, Brazil offered low-interest loans and tax breaks for the building of distilleries and subsidized a fuel distribution network. Brazil has the advantage of a substantial sugar cane industry already in place. But we have our own vast potential to develop our own biofuel supply, using feedstock like corn, crop waste, switch grass, sugarcane and fast-growing trees and shrubs such as hybrid poplars and willows. According to the Department of Energy, if two-thirds of the Nation’s idled cropland were used to grow these kinds of energy crops, the result could be dramatic. Those 35 million acres could produce between 15 and 35 billion gallons of ethanol each year to fuel cars, trucks, and buses. That is about 2.2 million barrels of fuel a day from right here in the U.S.A. What Brazil offers us, more importantly, is a case study of government leadership to combine technology mandates and subsidies to wean its transportation sector from foreign oil to a domestic alternative. The Congressional Research Service estimates that in the year 2005, we sent almost $225 billion out of the country to purchase oil, while the Brazilians are now relying on home-grown fuel. The key to their success is that they responded 30 years ago to the first storm warnings. We did not, and now the storm is at our shores, slapping against the levees of our economic strength and national security. We have to mobilize and lead a similar response as Brazil did. If we do this right, our farmers could soon be measuring production in barrels of energy as well as bushels of food. Our energy would be guaranteed “Made in America” and the profits would be guaranteed “Kept in America.” For all these new fuels to be effective, we need the flexible fuel vehicles that can take advantage of them. As I said earlier, our bill also requires that 50 percent of all vehicles sold in the U.S. be hybrid, hybrid-electric plug-in, or alternative fuel vehicles by 2016. Sound ambitious? It is not. It has already happened in Brazil. Several automakers selling cars in Brazil, including our own General Motors and Ford, already manufacture a fleet that is more than 50- percent flexible fuel cars that can run on any combination of gasoline and biofuels. The technology exists now and adds a negligible cost–about $150– to the price of each vehicle. For this we get the flexibility to power a car with fuel made from corn, prairie grass, or agricultural waste from our own heartland that will cost a lot less than gasoline does today. Maximizing fuel efficiency and promoting energy independence even further would be a new generation of flexible-fuel hybrid cars known as plug-ins because you can plug them in at night to recharge the battery. Hybrids that use both a gasoline engine and electric motor for power are already getting 50 miles per gallon. Making them flexible fuel cars, as I’ve already said, can save us more than 2 million barrels of gasoline a day. But we can do even better–dramatically better–with the plug-in hybrid that is just now on the threshold of commercialization. Like the present hybrids, it would use both a gasoline and electric motor. But the plug-in hybrid would be able to use the battery exclusively for the first 30 miles of a trip. Think of that for a minute. Although Americans drive about 2.2 trillion miles a year, according the Census, the vast majority of those trips are less than 15 miles. That means a plug-in hybrid would use zero–zero–gallons of gas or any combustible fuel for the vast majority of its trips. And experts tell me it could effectively get the 500 miles per gallon on longer trips. Plugging in your car during off peak hours–when power is in surplus and cheaper–would soon just become part of the modem daily routine, like plugging in your cell phone or PDA before you go to bed. And off-peak electricity can be the equivalent of 50 cent a gallon gasoline, I repeat–the equivalent of 50 cent a gallon fuel is feasible. Of course, electricity does not come magically through the wires to our homes. That power would come from coal, natural gas, nuclear, solar, wind or other sources–sources that we have in abundance here at home–and a little–very little–would come from oil. This isn’t pie in the sky. These vehicles could be in your garage within a couple of years. Some of the incentives for achieving this were included in the Energy bill signed into law in August. But they did not go nearly far enough. We need to couple these incentives with real performance standards and sales requirements to ensure that as soon as possible new cars are running not just on gasoline but on biofuels and electricity. As always, there is a do-nothing crowd that says the ever-rising price of gasoline and crude oil are the cure–that with higher prices people will reduce consumption and the market will respond with greater investments in the supply of oil to bring prices down. But all that would do is perpetuate the problem. Market-driven oil- dependency is still dependency on foreign oil, driving us further down the current path toward national insecurity and economic and environmental troubles. Some say that we can ease the crisis through greater domestic drilling–in places like the Arctic Refuge and other public lands or off our shores. But that won’t make a dent in the problem. In the world of oil, geology is destiny and the U.S. today has only 1 percent of the world’s oil reserves. And that small new supply wouldn’t matter much in the global market, since the price of oil produced within the United States rises and falls with the global market, regardless of where it is produced. We just don’t have enough oil in the U.S. anymore. And no matter how much more we drill, we will still be paying the world price of oil–not an American price. Our present energy and transportation systems were born at the end of the 19th and the beginning of the 20th centuries with the twin discoveries of oil extraction and the internal combustion engine. Those systems have served us well bringing growth to our Nation and the world. But it is now the 21st century, and it is time to move on. The era of big oil is over. It is time to revolutionize our entire energy infrastructure, from the refinery to the tailpipe, and begin a new era of energy independence. It is time to set America free by cutting our dependence on foreign oil and by doing so strengthen our security, preserve our independence and energize our economy. ______
Robert Menendez
Prepared Statement of Hon. Robert Menendez, U.S. Senator From New Jersey
Thank you very much, Mr. Chairman, for scheduling a hearing on an issue as important to the country as energy independence. And I’d like to thank the panelists for being here to share their views on how we can reduce our dependence on foreign oil. I was heartened to hear the president speak about the importance of ending our addition to oil in the State of the Union, but I was not at all pleased to see the budget that came out less than a week later. A budget that did not take the serious steps towards the new technologies that we need to end that addiction. A budget that shortchanges vital energy efficiency efforts such as the weatherization program that helps reduce energy costs for our low-income families and seniors. A budget that cuts funding for some promising forms of renewable energy, cuts funding for research into vehicle technologies, and even cuts funding for a program designed to make the federal government more energy efficient. Quite simply, the president has failed to match his rhetoric with real action.
OCS
Even more disheartening is the continuing efforts of the administration to dig and drill their way out of dependence on foreign oil. Shortly after the budget was released, the Interior Department’s Minerals Management service unveiled their new proposed 5-year plan for the outer continental shelf, which included a plan to begin drilling off the Virginia coast. This is flatly unacceptable for my own state of New Jersey, because the ocean knows no borders, and an environmental catastrophe off the coast of Virginia would not stay confined to the waters of Virginia. The area to be leased is less than 75 miles off the southern tip of New Jersey, more than close enough to put our beaches and vital tourism industry at serious risk. The plan also shows that instead of seriously confronting our addiction, the administration would rather simply tap another vein.
CAFE
As many of our witnesses have said in the past, and will be expressing again today, the most effective way to confront our energy problems is through efficiency. We have made excellent strides in the past few decades to make our country more energy efficient, and one of the keys to that success has been Corporate Average Fuel Economy, or CAFE, standards. According to statistics compiled by the Rocky Mountain Institute, between 1977 and 1985 our oil use went down 17% and our oil imports went down 50%, and the biggest factor in that drop was the 7.6 mile-per-gallon improvement in new domestic cars over that time. But in the 20 years since then, our overall vehicle fleet has actually become less efficient. The CAFE standard for passenger cars has been stagnant for the past two decades, and the standard for light trucks is barely 1 mile-per-gallon higher than it was in 1987. Increasing fuel economy standards should be part of the energy independence solution and part of our national energy policy.
WEATHERIZATION
Another federal efficiency program that is part of the solution is Weatherization, which provides grants to states to allow them to make the homes of low-income families and seniors more energy efficient. This has a two-fold benefit. First, it lowers energy costs, which makes it easier for people to pay their heating or cooling bills, and reduces the amount of money that we need to spend on essential assistance programs like LIHEAP. Second, it reduces our overall energy needs. According to the Oak Ridge National Laboratory, every $1 invested in the weatherization program returns $3.81 in energy and non-energy benefits, and because of the program the country saves the equivalent of 15 million barrels of oil each year. And yet, despite this track record of success, the administration has proposed cutting the program by 33%, denying over 30,000 families–families that are on the lowest rung of the economic ladder and most desperately need help–the ability to get their homes weatherized.
NEW JERSEY
Beyond becoming more efficient, we also need to shift from fossil fuels to renewable sources of energy. My own state of New Jersey has become a national leader in this field, recently enacting new incentives for the use of solar, wind, and other renewable energies, and moving towards enacting a robust renewable portfolio standard–20% by 2020. The state has put its money where its mouth is, giving over $43 million of incentives for new solar power installations over the past five years. And this has generated results, with New Jersey going from 6 solar installations in 2001 to over 1,000 today. These results could be replicated at the national level if we’re just willing to make the commitment, and then we could reduce our dependence on foreign oil, become more resilient to attacks on our energy infrastructure, protect our environment, and save money in the long run. I look forward to working with my colleagues to help make this happen. ______
James M. Talent
Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri
Mr. Chairman, Thank you for holding this hearing today. As you know, I have been a long time supporter of ethanol and biodiesel. I know that I would rather get fuel from farmers in Missouri and across the country than import it from foreign countries. I believe that the greatest provision of the energy bill was the Renewable Fuels Standard which mandated the use of ethanol in our nation’s fuel supply. The amount of biofuels to be mixed with gasoline sold in the United States is mandated at increases annually up to 7.5 billion gallons by 2012. Since the passage of the bill, 34 new ethanol plants are under construction, with 8 existing U.S. plants being expanded. And, there are more than 150 new plants in the planning stages. This construction and investment in farming will create thousands of new jobs while making us less reliant on foreign sources of oil. Additionally, new biodiesel facilities are coming online. I’m extremely pleased that last year, a farmer coop in Missouri broke ground on a biodiesel facility in Mexico, Missouri. This is one time when jobs going to Mexico is a good thing. The American Farm Bureau has estimated that the biofuels provisions in the Energy Policy Act of 2005 will create approximately 235,000 new jobs, boost American household incomes by $43 billion and have significant reductions on our importation of crude oil. I strongly supported these provisions and I’m pleased to see the industry growing as we knew it would. The President outlined a long term strategy for ethanol in the state of the Union, and it is time that the oil companies who fought the RFS come to terms with the use ethanol and biodiesel. These renewable fuels are good for the economy and good for the environment and they are not going away. Many of the witnesses today talked about the need to use technology that is deployable within the current infrastructure. I couldn’t agree more. While the ideas of hydrogen vehicles are exciting–they are such a long way off. Ethanol and biodiesel are the fuels of the future that we can use today. I think our biggest challenge now is increasing the infrastructure to get the fuels to the consumers. We are constantly increasing the number of E85 fueling stations, but we still need more to support the 6 million flex fuel vehicles on the roads. In the energy bill, Senator Obama and I sponsored a tax provision to provide tax credits to encourage fueling stations to switch from traditional petroleum based gasoline to E-85. I know that Ford had been working to promote the use of ethanol and encourage stations to offer E85. It is these incentives and industry partnerships that will go a long way toward making this domestic fuel available across the country. ______
Craig Thomas
Prepared Statement of Hon. Craig Thomas, U.S. Senator From Wyoming
Good Morning. I would like to thank you, Mr. Chairman, for convening this hearing to receive testimony on such an important issue. And I thank the witnesses for appearing before the Committee today. We’ve been saying for decades that we need to decrease our dependence on foreign supplies of energy. The first major calls for action followed the oil embargo of 1973. In that year, we imported approximately 28 percent of the oil we consumed. A restriction of supply by a group of hostile nations caused prices to increase by an average of 40 percent during that embargo and introduced a new weapon in global conflict. In 2005, we imported roughly 59 percent of the oil we consumed. This trend of increased dependence is a troublesome one. When Congress passed the Energy Policy Act of 2005 we reversed a trend of in-action on the issue of energy independence which had persisted for over a decade. I am confident that this hearing, the legislation we intend to pursue, and continued attention to energy issues demonstrates our strong commitment to fixing the problems that we face. I come from a state that is very familiar with energy issues. Wyoming produces roughly 10 percent of the nation’s primary energy, with far less than 1 percent of the nation’s people. We have oil, natural gas, uranium, and wind resources to name a few. We also have coal–a resource with enormous potential for increasing our energy independence. Coal is economical and abundant. It constitutes roughly half of the electricity generated in the United States. Advancement of coal gasification technologies, carbon sequestration, and improved mining techniques reduce many of the environmental concerns that people have had in the past. And greater use of cheaper Western coal makes this fuel a much more attractive choice going forward. We have coal here in the United States and we need to use it. We continue to develop wind, we have hydroelectric dams, and we will hopefully see the construction of new nuclear plants in the near future. Oil and natural gas are the unfortunate exceptions to these upward trends. Our level of oil consumption is the main reason we are so dependent on foreign sources of energy. The United States imported roughly 59 percent of the oil we consumed last year. Our ability to meet demand by increasing domestic production has peaked. We consume roughly two thirds of the oil we use in the transportation sector. Because of its large share of consumption, policy changes affecting the transportation sector can have a significant impact on reducing foreign dependence. Increased mileage standards, elimination of boutique fuels, lowered speed limits, and greater use of alternative fuels are just a few of the many ideas that have been advanced to decrease the transportation sector’s consumption of oil. I contend that coal can make a difference in the transportation sector as well. In addition to its proven value as a fuel for electricity, coal can reduce our reliance on foreign sources of oil for transportation needs. We have 250 years worth of coal within our own borders. Because of incentives in the energy bill we passed, a company in my home-state of Wyoming recently announced plans to construct a coal-to-liquids plant. This plant will demonstrate emerging technologies that can convert U.S. coal into clean synthetic oil at a cost of $35 to $40 per barrel compared to the current $62 a barrel cost for traditional oil. It is the first plant of its kind on U.S. soil and the National Mining Association believes that continued use of this technology could replace as much as 2 million barrels per day of oil and 5 trillion cubic feet of natural gas per day by 2025. Another area of concern to me is our nation’s electrical grid. While electricity is not something that we tend to import from hostile nations, the infrastructure associated with its delivery is vulnerable to the individuals who seek to harm us. The policies set forth in the Energy Policy Act of 2005 will make our transmission system more reliable, less congested, and cheaper for consumers. There is always room for improvement, however. I intend to continue working with the administration, the state of Wyoming, and members of Congress to ensure that our electricity becomes as reliable, efficient, and affordable as possible. The final issue I will raise is that of price. I am a strong supporter of far-sighted programs and noble goals of independence but we have to deal with our security now and that requires attention to the issue of price. Energy is the basis upon which our economy operates and if prices are high, the economy suffers. If the economy suffers then the American people do too. I believe that the bill introduced by the Chairman and Ranking Member for lease sales in the Gulf of Mexico’s Area 181 is exactly the sort of thing we need in the short term. The PACE bill also provides much needed guidance and forward-thinking on the importance of maintaining our competitive edge and strong knowledge base. I look forward to hearing from the witnesses on this important topic.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW MEXICO
Senator Bingaman. Well, thank you for having the hearing, Mr. Chairman, and for bringing this distinguished group of witnesses. I appreciate the attention to the issue. I agree with you there is a major gap between the rhetoric that we have all engaged in about the importance of energy independence and the reality of what we are actually doing legislatively, by regulation, or otherwise. I hope these witnesses can help us to understand how we could close that gap. We had the hearing with the Energy Information Administration a couple of weeks ago and what I heard from the EIA Director was that their projections are that we are going to be using more energy in the future, more of it is going to be imported, more oil is going to be imported, more natural gas is going to be imported. The projections for where we are headed are one thing, and our rhetoric is totally different. So I hope these witnesses can help us to figure out how to bring those two together. I think there are things that we could be doing now that would have a dramatic impact on this, but clearly we do not yet have that agenda worked out. As I am sure many know, we wrote a letter to Secretary Bodman urging him to give us any concrete plan that he could to support the President’s call for a reduction of imports of oil from the Middle East by 75 percent by the year 2025, which was what he stated in the State of the Union speech. I have not seen yet what the specifics are that are going to allow us to achieve that. I hope maybe some of these witnesses would have some insights into that. Thank you. The Chairman. Thank you, Senator. Now we are going to proceed with the witnesses. Mr. Woolsey, vice president of Booz Allen Hamilton, former CIA Director, you will be first. We welcome you here and thank you not only for joining us but all the work you have been doing in this area.
STATEMENT OF R. JAMES WOOLSEY, VICE PRESIDENT, BOOZ ALLEN HAMILTON
Mr. Woolsey. Thank you, Mr. Chairman. It is an honor to be before this committee on this subject. I emphasize I am testifying solely on my own behalf. I believe that energy independence is principally an issue of oil and conventional oil. I am going to, by the way, Mr. Chairman, use my 13-page statement as a talking point since remarks are limited to 5 minutes, of course. And that is dealt with in the first couple of pages of my statement. The dangers of petroleum dependence and the urgency, I think, are guided by some seven factors. First of all, that the current transportation infrastructure is committed to oil and oil-compatible products. And oil is now used very little to generate electricity. In the 1970’s, some 20 percent or more of our electricity was generated from oil. Today it is in the range of 2 to 3 percent. So major investments, whereas they may be wise, in electricity generation of different types, whether it is renewables, nuclear, or whatever, has very little impact today on oil use. They are important for other reasons, but not particularly with respect to oil use. In my judgment, hydrogen will take too long to satisfy some of the urgency that should be attached to our current oil dilemma. And a second factor is that the greater Middle East is going to continue to be the low-cost and dominant petroleum producer for the foreseeable future. As this committee well knows, they hold two-thirds of the world’s proven reserves. The growth we expect in China and India and elsewhere is going to keep demand up for a substantial time and put the greater Middle East and particularly, I think, Saudi Arabia more and more in the driver’s seat. Petroleum infrastructure is very vulnerable to terrorist attacks and other types of potential cut-offs. Ten days ago, we had the attack at Abqaiq. We have hurricane damage possible in the gulf coast. We have the possibility of regime change in the Middle East. There was almost a coo in Saudi Arabia in 1979. This reliance on this part of the world is going to be a problem for us for a long time. The possibility exists not only of a regime change and terrorist attacks, but also of financial disruption as a result of how much we are borrowing to finance our oil habits. We borrow approximately a billion dollars every working day, $250 billion a year, about a third of our overall trade deficit, in order to import oil. And over the last 30 years, some $70 to $100 billion of that has been provided by Saudi Arabia as a government and certainly more by individuals to causes such as the Wahhabi schools in Madras and Pakistan, and elsewhere in the Middle East. We found when I was chairman of the Board of Freedom House, even mosques here in the United States, very, very strongly hate literature. We are paying for that, and that is essentially the same set of beliefs that are propagated by al Qaeda. The only difference between the Wahhabis and al Qaeda is who should be in charge. But the underlying hatred of other religions, democracy and the rest, we pay for in no small measure through our borrowing for oil. As far as other economic factors are concerned, Senator Luger and I had an article some 7 years ago in Foreign Affairs in which we together estimated–and I think it is still a good estimate–that for every billion dollars of this now $250 billion a year that we borrow to finance oil, if we were producing it here in the United States from, let us say, biocrops and the rest, it would create ten to twenty thousand American jobs, most of them in rural areas, for each billion dollars that we spend here instead of for imports. And for many developing countries, oil debt is a huge share of their national debt and, therefore, of their problem of poverty. We suggest, and these suggestions were stated by former Secretary of State, George Schultz, and I in a piece last summer–we co-chaired the committee on the present danger–that one should focus on making changes that can be made within the existing infrastructure, can be made relatively soon, and which use cheap or even waste products as feedstocks. And those are the reasons why in the last several pages of testimony, Mr. Chairman, that I suggest that we concentrate– even though there are other worthy things to do–we concentrate on such things as biofuels, particularly ethanol from cellulose, which in the long run is going to be much cheaper than making it from corn or other starches, that we concentrate on diesel from waste products of all kinds, which is coming to be technologically quite feasible, and that we concentrate on plug-in hybrids so that one can use off-peak or nighttime electricity which where the rubber meets the road is the equivalent of something in the ballpark of 50 cents or so a gallon of gasoline. I do not think anyone is going to have any problem recognizing consumer demand for a vehicle that could run for, say, 20 miles or so on overnight electricity for the equivalent of approximately 50 cents a gallon of gasoline. Thank you, Mr. Chairman. The Chairman. Thank you. [The prepared statement of R. James Woolsey follows:]
James Woolsey
Prepared Statement of R. James Woolsey, Vice President, Booz Allen Hamilton
Mr. Chairman and Members of the Committee. It’s a real pleasure to appear before this Committee today on this issue. I am appearing solely on my own behalf and represent no organization. By way of identification I served as Director of Central Intelligence, 1993-95, one of the four Presidential appointments I have held in two Republican and two Democratic administrations; these have been interspersed in a career that has been generally in the private practice of law and now in consulting. A major share of the points I will make today are drawn from an August 2005 paper by former Secretary of State, George P. Shultz, and myself, although I have updated some points due to more recent work; the two of us are Co-Chairmen of the Committee on the Present Danger and the full paper may be found at the Committee’s web site (www.fightingterror.org). Energy security has many facets–including particularly the need for improvements to the electrical grid to correct vulnerabilities in transformers and in the Supervisory Control and Data (SCADA) systems. But energy independence for the U.S. is in my view preponderantly a problem related to oil and its dominant role in fueling vehicles for transportation. For other countries, e.g. in Europe, energy independence may be closely related to preventing Russia from using against them the leverage that proceeds from its control of the natural gas they need for heating and electricity. In the U.S., however, we generally have alternative methods of producing electricity and heat, albeit shifting fuels can take time. Some of these methods are superior to others with respect to costs, pollutants, global warning gas emissions, and other factors. Technological progress continues to lead to reassessments of the proper mix–for example, there appears to be progress in affordably and reliably sequestering the carbon captured during the operation of integrated gasification combined cycle coal (IGCC) plants. And progress in battery technology to improve the storage of electricity may help us expand the use of renewables such as solar and wind, which are clean but intermittent. Change is not easy in generating electricity, but we are not locked in to a single source for it, for heating, or for most other uses of energy. Powering vehicles is different. Just over four years ago, on the eve of 9/11, the need to reduce radically our reliance on oil was not clear to many and in any case the path of doing so seemed a long and difficult one. Today both assumptions are being undermined by the risks of the post-9/11 world, by oil prices, by increased awareness of the vulnerability of the oil infrastructure (as illustrated in the al Qaeda attacks ten days ago on the large Saudi oil facility at Abquaiq) and by technological progress in fuel efficiency and alternative fuels. There are at least seven major reasons why dependence on petroleum and its products for the lion’s share of the world’s transportation fuel creates special dangers in our time. These dangers are all driven by rigidities and potential vulnerabilities that have become serious problems because of the geopolitical realities of the early 21st century. Those who reason about these issues solely on the basis of abstract economic models that are designed to ignore such geopolitical realities will find much to disagree with in what follows. Although such models have utility in assessing the importance of more or less purely economic factors in the long run, as Lord Keynes famously remarked: “In the long run, we are all dead.” These dangers in turn give rise to two proposed directions for government policy in order to reduce our vulnerability rapidly. In both cases it is important that existing technology should be used, i.e. technology that is already in the market or can be so in the very near future and that is compatible with the existing transportation infrastructure. To this end government policies in the United States and other oil-importing countries should: (1) encourage a shift to substantially more fuel-efficient vehicles within the existing transportation infrastructure, including promoting both battery development and a market for existing battery types for plug-in hybrid vehicles; and (2) encourage biofuels and other alternative and renewable fuels that can be produced from inexpensive and widely- available feedstocks–wherever possible from waste products.
PETROLEUM DEPENDENCE: THE DANGERS:
- The current transportation infrastructure is committed to oil and oil-compatible products Petroleum and its products dominate the fuel market for vehicular transportation. This dominance substantially increases the difficulty of responding to oil price increases or disruptions in supply by substituting other fuels. With the important exception, described below, of a plug-in version of the hybrid gasoline/electric vehicle, which will allow recharging hybrids from the electricity grid, substituting other fuels for petroleum in the vehicle fleet as a whole has generally required major, time-consuming, and expensive infrastructure changes. One exception has been some use of liquid natural gas (LNG) and other fuels for fleets of buses or delivery vehicles, although not substantially for privately-owned ones, and the use of corn-derived ethanol mixed with gasoline in proportions up to 10 per cent ethanol (“gasohol”) in some states. Neither has appreciably affected petroleum’s dominance of the transportation fuel market. Moreover, in the 1970’s about 20 per cent of our electricity was made from oil–so shifting electricity generation toward, say, renewables or nuclear power could save oil. But since today only about three per cent of our electricity is oil-generated, a shift in the way we produce electricity would have almost no effect on the transportation or oil market. This could change over the long run, however, with the advent of plug-in hybrid vehicles, discussed below. There are imaginative proposals for transitioning to other fuels for transportation, such as hydrogen to power automotive fuel cells, but this would require major infrastructure investment and restructuring. If privately-owned fuel cell vehicles were to be capable of being readily refueled, this would require reformers (equipment capable of reforming, say, natural gas into hydrogen) to be located at filling stations, and would also require natural gas to be available there as a hydrogen feed-stock. So not only would fuel cell development and technology for storing hydrogen on vehicles need to be further developed, but the automobile industry’s development and production of fuel cells also would need to be coordinated with the energy industry’s deployment of reformers and the fuel for them. Moving toward automotive fuel cells thus requires us to face a huge question of pace and coordination of large-scale changes by both the automotive and energy industries. This poses a sort of industrial Alphonse and Gaston dilemma: who goes through the door first? (If, instead, it were decided that existing fuels such as gasoline were to be reformed into hydrogen on board vehicles instead of at filling stations, this would require on-board reformers to be developed and added to the fuel cell vehicles themselves–a very substantial undertaking.) It is because of such complications that the National Commission on Energy Policy concluded in its December, 2004, report “Ending The Energy Stalemate” (“ETES”) that “hydrogen offers little to no potential to improve oil security and reduce climate change risks in the next twenty years.” (p. 72) To have an impact on our vulnerabilities within the next decade or two, any competitor of oil-derived fuels will need to be compatible with the existing energy infrastructure and require only modest additions or amendments to it. 2. The Greater Middle East will continue to be the low-cost and dominant petroleum producer for the foreseeable future Home of around two-thirds of the world’s proven reserves of conventional oil–45% of it in just Saudi Arabia, Iraq, and Iran–the Greater Middle East will inevitably have to meet a growing percentage of world oil demand. This demand is expected to increase by more than 50 per cent in the next two decades, from 78 million barrels per day (“MBD”) in 2002 to 118 MBD in 2025, according to the federal Energy Information Administration. Much of this will come from expected demand growth in China and India. One need not argue that world oil production has peaked to see that this puts substantial strain on the global oil system. It will mean higher prices and potential supply disruptions and will put considerable leverage in the hands of governments in the Greater Middle East as well as in those of other oil-exporting states which have not been marked recently by stability and certainty: Russia, Venezuela, and Nigeria, for example (ETES pp. 1-2). Deep-water drilling and other opportunities for increases in supply of conventional oil may provide important increases in supply but are unlikely to change this basic picture. If world production of conventional oil has peaked or is about to, this of course further deepens our dilemma and increases costs sooner. Even if other production comes on line, e.g. from unconventional sources such as tar sands in Alberta or shale in the American West, their relatively high cost of production could permit low-cost producers of conventional oil, particularly Saudi Arabia, to increase production, drop prices for a time, and undermine the economic viability of the higher-cost competitors, as occurred in the mid- 1980’s. If oil supplies have peaked or are peaking in Saudi Arabia this tactic could be harder for the Saudis to utilize. But in any case, for the foreseeable future, as long as vehicular transportation is dominated by oil as it is today, the Greater Middle East, and especially Saudi Arabia, will remain in the driver’s seat. 3. The petroleum infrastructure is highly vulnerable to terrorist and other attacks The radical Islamist movement, including but not exclusively al Qaeda, has on a number of occasions explicitly called for worldwide attacks on the petroleum infrastructure and has carried some out in the Greater Middle East. A more well-planned attack than the one that occurred ten days ago at Abquaiq–such as that set out in the opening pages of Robert Baer’s recent book, Sleeping With the Devil, (terrorists flying an aircraft into the unique sulfur-cleaning towers at the same facility)–could take some six million barrels per day off the market for a year or more, sending petroleum prices sharply upward to well over $100/barrel and severely damaging much of the world’s economy. Domestic infrastructure in the West is not immune from such disruption. U.S. refineries, for example, are concentrated in a few places, principally the Gulf Coast. Last summer’s accident in the Texas City refinery–producing multiple fatalities–points out potential infrastructure vulnerabilities, as of course does this past fall’s hurricane damage in the Gulf. The Trans-Alaska Pipeline has been subject to several amateurish attacks that have taken it briefly out of commission; a seriously planned attack on it could be far more devastating. In view of these overall infrastructure vulnerabilities policy should not focus exclusively on petroleum imports, although such infrastructure vulnerabilities are likely to be the most severe in the Greater Middle East. It is there that terrorists have the easiest access, and the largest proportion of proven oil reserves and low-cost production are also located there. But nothing particularly useful is accomplished by changing trade patterns. To a first approximation there is one worldwide oil market and it is not generally helpful for the U.S., for example, to import less from the Greater Middle East and for others then to import more from there. In effect, all of us oil- importing countries are in this together. 4. The possibility exists, both under some current regimes and among those that could come to power in the Greater Middle East, of embargoes or other disruptions of supply It is often said that whoever governs the oil-rich nations of the Greater Middle East will need to sell their oil. This is not true, however, if the rulers choose to try to live, for most purposes, in the seventh century. Bin Laden has advocated, for example, major reductions in oil production and oil prices of $200/barrel or more. As a jihadist Web site has just stated in the last few days: “[t]he killing of 10 American soldiers is nothing compared to the impact of the rise in oil prices on America and the disruption that it causes in the international economy.” Moreover, in the course of elaborating on Iranian President Ahmedinejad’s threat to destroy Israel and the U.S., his chief of strategy, Hassan-Abbassi, has recently bragged that Iran has already “spied out” the 29 sites “in America and the West” which they (presumably with help from Hezbollah, the world’s most professional terrorist organization) are prepared to attack in order to “destroy Anglo-Saxon civilization.” One can bet with reasonable confidence that some of these sites involve oil production and distribution. In 1979 there was a serious attempted coup in Saudi Arabia. Much of what the outside world saw was the seizure by Islamist fanatics of the Great Mosque in Mecca, but the effort was more widespread. Even if one is optimistic that democracy and the rule of law will spread in the Greater Middle East and that this will lead after a time to more peaceful and stable societies there, it is undeniable that there is substantial risk that for some time the region will be characterized by chaotic change and unpredictable governmental behavior. Reform, particularly if it is hesitant, has in a number of cases in history been trumped by radical takeovers (Jacobins, Bolsheviks). There is no reason to believe that the Greater Middle East is immune from these sorts of historic risks. 5. Wealth transfers from oil have been used, and continue to be used, to fund terrorism and Its ideological support Estimates of the amount spent by the Saudis in the last 30 years spreading Wahhabi beliefs throughout the world vary from $70 billion to $100 billion. Furthermore, some oil-rich families of the Greater Middle East fund terrorist groups directly. The spread of Wahhabi doctrine– fanatically hostile to Shi’ite and Suffi Muslims, Jews, Christians, women, modernity, and much else–plays a major role with respect to Islamist terrorist groups: a role similar to that played by angry German nationalism with respect to Nazism in the decades after World War I. Not all angry German nationalists became Nazis and not all those schooled in Wahhabi beliefs become terrorists, but in each case the broader doctrine of hatred has provided the soil in which the particular totalitarian movement has grown. Whether in lectures in the madrassas of Pakistan, in textbooks printed by Wahhabis for Indonesian schoolchildren, or on bookshelves of mosques in the U.S., the hatred spread by Wahhabis and funded by oil is evident and influential. On all points except allegiance to the Saudi state Wahhabi and al Qaeda beliefs are essentially the same. In this there is another rough parallel to the 1930’s–between Wahhabis’ attitudes toward al Qaeda and like-minded Salafist Jihadi groups today and Stalinists’ attitude toward Trotskyites some sixty years ago (although there are of course important differences between Stalin’s Soviet Union and today’s Saudi Arabia). The only disagreement between Stalinists and Trotskyites was on the question whether allegiance to a single state was the proper course or whether free-lance killing of enemies was permitted. Stalinist hatred of Trotskyites and their free-lancing didn’t signify disagreement about underlying objectives, only tactics, and Wahhabi/ Saudi cooperation with us in the fight against al Qaeda doesn’t indicate fundamental disagreement between Wahhabis and al Qaeda on, e.g., their common genocidal fanaticism about Shia, Jews, and homosexuals. So Wahhabi teaching basically spreads al Qaeda ideology. It is sometimes contended that we should not seek substitutes for oil because disruption of the flow of funds to the Greater Middle East could further radicalize the population of some states there. The solution, however, surely lies in helping these states diversify their economies over time, not in perpetually acquiescing to the economic rent they collect from oil exports and to the uses to which these revenues are put. 6. The current account deficits for the U.S. and a number of other countries create risks ranging from major world economic disruption to deepening poverty, and could be substantially reduced by reducing oil imports The U.S. in borrows about $2 billion every calendar day from the world’s financial markets to finance the gap between what we produce and what we consume. The single largest category of imports is the approximately $1 billion per working day, or $250 billion a year, borrowed to import oil. The accumulating debt increases the risk of a flight from the dollar or major increases in interest rates. Any such development could have major negative economic consequences for both the U.S. and its trading partners. For every billion dollars of this $250 billion spent at home to produce alternative fuels, Senator Richard Lugar and I estimated (in a 1999 article in Foreign Affairs, “The New Petroleum”) that 10-20,000 American jobs would be created, principally in rural areas. This would mean that replacing $200 billion of the $250 billion that we borrow to import oil with alternative fuel production in the U.S. would create something on the order of 3 million American jobs. For developing nations, the service of debt is a major factor in their continued poverty. For many, debt is heavily driven by the need to import oil that at today’s oil prices cannot be paid for by sales of agricultural products, textiles, and other typical developing nation exports. If such deficits are to be reduced, however, say by domestic production of substitutes for petroleum, this should be based on recognition of real economic value such as waste cleanup, soil replenishment, or other tangible benefits. 7. Global-warming gas emissions from man-made sources create at least the risk of climate change Although the point is not universally accepted, the weight of scientific opinion suggests that global warming gases (GWG) produced by human activity form one important component of potential climate change. Recently in the Wall Street Journal the Nobel-Prize winning economist, Thomas Schelling, surveyed the data and concluded that we should, if effect, buy “insurance” against climate change by reducing our emissions. Oil products used in transportation provide a major share of U.S. man-made global warming gas emissions. The substitutes discussed below would radically reduce these emissions.
THREE PROPOSED DIRECTIONS FOR POLICY
The above considerations suggest that government policies with respect to the vehicular transportation market should point in the following directions: 1. Encourage improved vehicle mileage, using technology now in production The following three technologies are available to improve vehicle mileage substantially: Diesels First, modern diesel vehicles are coming to be capable of meeting rigorous emission standards (such as Tier 2 standards, being introduced into the U.S., 2004-08). In this context it is possible without compromising environmental standards to take advantage of diesels’ substantial mileage advantage over gasoline-fueled internal combustion engines. Heavy penetration of diesels into the private vehicle market in Europe is one major reason why the average fleet mileage of such new vehicles is 42 miles per gallon in Europe and only 24 mpg in the U.S. Although the U.S. has, since 1981, increased vehicle weight by 24 per cent and horsepower by 93 per cent, it has actually somewhat lost ground with respect to mileage over that near-quarter century. In the 12 years from 1975 to 1987, however, the U.S. improved the mileage of new vehicles from 15 to 26 mpg. Hybrid gasoline-electric Second, hybrid gasoline-electric vehicles now on the market generally show substantial fuel savings over their conventional counterparts. The National Commission on Energy Policy found that for the four hybrids on the market in December 2004 that had exact counterpart models with conventional gasoline engines, not only were mileage advantages quite significant (10-15 mpg) for the hybrids, but in each case the horsepower of the hybrid was higher than the horsepower of the conventional vehicle. (ETES p. 11) Light-weight carbon composite construction Third, constructing vehicles with inexpensive versions of the carbon fiber composites that have been used for years for aircraft construction can substantially reduce vehicle weight and increase fuel efficiency while at the same time making the vehicle considerably safer than with current construction materials. This is set forth thoroughly in the 2004 report of the Rocky Mountain Institute’s Winning the Oil Endgame (“WTOE”). Aerodynamic design can have major importance as well. Using such composites in construction breaks the traditional tie between size and safety. Much lighter vehicles, large or small, can be substantially more fuel-efficient and also safer. Such composites have already been used for automotive construction in Formula 1 race cars and are now being adopted in part by BMW and other automobile companies. The goal is mass-produced vehicles with 80% of the performance of hand-layup aerospace composites at 20% of the cost. Such construction is expected approximately to double the efficiency of a normal hybrid vehicle without increasing manufacturing cost. (WTOE 64- 66). 2. Encourage the commercialization of alternative transportation fuels that can be available soon, are compatible with existing infrastructure, and can be derived from waste or otherwise produced cheaply Biomass (cellulosic) ethanol The use of ethanol produced from corn in the U.S. and sugar cane in Brazil has given birth to the commercialization of an alternative fuel that is coming to show substantial promise, particularly as new feedstocks are developed. Some six million vehicles in the U.S. and three-quarters of new vehicles in Brazil are capable of using ethanol in mixtures of up to 85 percent ethanol and 15 per cent gasoline (E- 85); these are called Flexible Fuel Vehicles (“FFV”) and require, compared to conventional vehicles, only a somewhat different kind of material for the fuel line and a differently-programmed computer chip. The cost of incorporating this feature in new vehicles is trivial. Between 2003 and 2005 Brazil moved from five per cent of its new vehicles being FFVs to 75 per cent being such. Also, there are no large-scale changes in infrastructure required for ethanol use. It may be shipped in tank cars (and, in Brazil, in pipelines), and mixing it with gasoline is a simple matter. Although human beings have been producing ethanol, grain alcohol, from sugar and starch for millennia, it is only in recent years that the genetic engineering of biocatalysts has made possible such production from the hemicellulose and cellulose that constitute the substantial majority of the material in most plants. The genetically- engineered material is in the biocatalyst only; there is no need for genetically modified plants. These developments may be compared in importance to the invention of thermal and catalytic cracking of petroleum in the first decades of the 20th century–processes which made it possible to use a very large share of petroleum to make gasoline rather than the tiny share that was available at the beginning of the century. For example, with such genetically-engineered biocatalysts it is not only grains of corn but corn cobs and most of the rest of the corn plant that may be used to make ethanol. Such biomass, or cellulosic, ethanol is now seeing commercial production begin first in a facility of the Canadian company, logen, with backing from Shell Oil, at a cost of around $1.30/gallon. The National Renewable Energy Laboratory estimates costs will drop to around $1.07/gallon over the next five years, and the Energy Commission estimates a drop in costs to 67-77 cents/gallon when the process is fully mature (ETES p. 75). The most common feedstocks will likely be agricultural wastes, such as rice straw, or natural grasses such as switchgrass, a variety of prairie grass that is often planted on soil bank land to replenish the soil’s fertility. There will be a decided financial advantages in using as feedstocks any wastes which carry a tipping fee (a negative cost) to finance disposal: e.g. waste paper, or rice straw, which cannot be left in the fields after harvest because of its silicon content. Old or misstated data, frequently dealing with corn ethanol, are sometimes cited for the proposition that huge amounts of land would have to be introduced into cultivation or taken away from food production in order to have enough biomass available for cellulosic ethanol production. This is incorrect. The National Commission on Energy Policy reported in December that, if fleet mileage in the U.S. rises to 40 mpg–somewhat below the current European Union fleet average for new vehicles of 42 mpg and well below the current Japanese average of 47 mpg–then as switchgrass yields improve modestly to around 10 tons/acre it would take only 30 million acres of land to produce sufficient cellulosic ethanol to fuel half the U.S. passenger fleet. (ETES pp. 76-77). By way of calibration, this would essentially eliminate the need for oil imports for passenger vehicle fuel and would require only the amount of land now in the soil bank (the Conservation Reserve Program (“CRP”) on which such soil-restoring crops as switchgrass are already being grown. Practically speaking, one would probably use for ethanol production only a little over half of the soil bank lands and add to this some portion of the plants now grown as animal feed crops (for example, on the 70 million acres that now grow soybeans for animal feed). In short, the U.S. and many other countries should easily find sufficient land available for enough energy crop cultivation to make a substantial dent in oil use. (Id.) Some also have an erroneous impression that ethanol generally requires as much fossil fuel energy to produce it as one obtains from it and that its use does not substantially reduce global warming gas emissions. This is also incorrect. The production and use of ethanol merely recycles in a different way the CO2 that has been fixed by plants in the photosynthesis process. It does not release carbon that would otherwise stay stored underground, as occurs with fossil fuel use. But when starch, such as corn, is used for ethanol production much fossil-fuel energy is consumed in the process of fertilizing, plowing, and harvesting. Much of this is the natural gas required to produce fertilizer. But corn ethanol still normally produces a very large (over 90 per cent) reduction in the use of oil compared to gasoline. Starch- based ethanol reduces greenhouse gas emissions to some degree, by around 30 per cent. But because so little energy is required to cultivate crops such as switchgrass for cellulosic ethanol production, and because electricity can be co-produced using the residues of such cellulosic fuel production, the energy requirements for converting switchgrass and other cellulosics to ethanol is very small. Indeed, with the right techniques reductions in greenhouse gas emissions for celluslosic ethanol when compared to gasoline are greater than 100 per cent. The production and use of cellulosic ethanol can be, in other words, a carbon sink. (ETES p. 73) Biodiesel and Renewable Diesel The National Commission on Energy Policy pointed out some of the problems with most current biodiesel “produced from rapeseed, soybean, and other vegetable oils–as well as . . . used cooking oils.” It said that these are “unlikely to become economic on a large scale” and that they could “cause problems when used in blends higher than 20 percent in older diesel engines”. It added that “waste oil is likely to contain impurities that give rise of undesirable emissions.” (ETES p. 75) The Commission notes, however, that biodiesel is generally “compatible with existing distribution infrastructure” and outlines the potential of a newer process (“thermal depolyrnerization”) that produces renewable diesel without the above disadvantages, from “animal offal, agricultural residues, municipal solid waste, sewage, and old tires”. (This was designated “Renewable Diesel” in the Energy Act of this past summer.) The Commission points to the current use of this process at a Conagra turkey processing facility in Carthage, Missouri, where a “20 million commercial-scale facility” is beginning to convert turkey offal into “a variety of useful products, from fertilizer to low-sulfur diesel fuel” at a potential average cost of “about 72 cents per gallon.” (ETES p. 77) There have also been promising reports of the potential for producing renewable diesel from algae. Other Alternative Fuels Progress has been made in recent years on utilizing not only coal but slag from strip mines, via gasification, for conversion into diesel fuel using a modern version of the gasified-coal-to-diesel process used in Germany during World War II. Qatar has begun a large-scale process of converting natural gas to diesel fuel. In the realm of non-conventional oil, the tar sands of Alberta and the oil shale of the Western U.S. contain huge deposits. Their exploitation involves issues of cost which must be resolved, both economic and environmental, but both may hold promise for a substantial increases in oil supply from other-than-conventional sources. 3. Encourage the commercialization of plug-in hybrids and improved batteries A modification to some types of hybrids can permit them to become “plug-in-hybrids,” drawing power from the electricity grid at night and using an all-electric mode for short trips before they move to operating in their gasoline-electric mode as hybrids. With a plug-in hybrid vehicle one has the advantage of an electric car, but not the disadvantage. Electric cars cannot be recharged if their batteries run down at some spot away from electric power. But since all hybrids have tanks containing liquid fuel, plug-in hybrids have no such disadvantage. The “vast majority of the most fuel-hungry trips are . . . well within the range” of current (nickel-metal hydride) batteries’ capacity, according to Huber and Mills (The Bottomless Well, 2005, p. 84). Current Toyota Priuses sold in Japan and Europe have a button, which Toyota has disconnected for some reason on American vehicles, that permits all-electric driving for up to a kilometer. Basically what is needed is to equip such hybrids with adequate batteries so that this capability can be extended. Over half of all U.S. vehicles are driven less than 30 miles/day, so a plug-in hybrid that can obtain that range on overnight electricity alone might go for many weeks without visiting a gasoline station. It is important that whether with existing nickel- metal-hydride batteries or with the more capable lithium-ion batteries now commercially available for computer and other applications, it is important that any battery used in a plug-in hybrid be capable of taking daily charging without being damaged and be capable of powering the vehicle at an adequate speed. Some of the electric vehicles used in California in the late 90’s (indeed hundreds are still in use) provide useful data on current battery capabilities. An electric vehicle would typically have a battery several times the size and capability of a plug-in hybrid battery. The experience of Southern Cal Edison with its all-electric fleet of Toyota RAV-4’s is very promising in this regard. A number of these electric vehicles’ nickel-metal-hydride batteries have been charged thousands of times, daily for years, and still provide sound performance. Indeed the California experience with electric vehicles (EV’s) in the 1990’s suggests that we are so close to being able to have plug-in hybrids that small businesses may move soon to converting existing hybrids. At U. Cal. (Davis) Professor Andy Frank has been designing and operating plug-in hybrids for years that now, with commercially- available batteries, operate all-electrically for 60 miles at up to 60 mph before the hybrid gasoline-electric feature needs to be used. Whether development is needed for some improvements to lithium-ion batteries or only financial incentives for mass production of them or the more mature nickel-metal-hydride batteries, such efforts should have the highest priority because plug-in hybrids promise to revolutionize transportation economics and to have a dramatic effect on the problems caused by oil dependence. Moreover the attractiveness to the consumer of being able to use electricity from overnight charging for a substantial share of the day’s driving is stunning. The average residential price of electricity in the U.S. is about 8.5 cents/kwh, and many utilities sell off-peak power for 2-4 cents/kwh (id at 83). When one takes into consideration the different efficiencies of liquid–fueled and electric propulsion, then where the rubber meets the road the cost of powering a plug-in hybrid with average-cost residential electricity would be about 40 per cent of the cost of powering the same vehicle with today’s approximately $2.50/gallon gasoline, or, said another way, for the consumer to be able to buy fuel in the form of electricity at the equivalent of $1/gallon gasoline. Using off-peak power would then equate to being able to buy 25-to-50 cent/gallon gasoline. Given the burdensome cost imposed by current fuel prices on commuters and others who need to drive substantial distances, the possibility of powering one’s family vehicle with fuel that can cost as little as one-tenth of today’s gasoline (in the U.S. market) should solve rapidly the question whether there would be public interest in and acceptability of plug-in hybrids. Although the use of off-peak power for plug-in hybrids should not require substantial new investments in electricity generation for some time (until millions of plug-ins are on the road), greater reliance on electricity for transportation should lead us to look particularly to the security of the electricity grid as well as the fuel we use to generate electricity. Even though plug-in hybrids would be drawing power from the grid to charge their batteries and drive the first 30, or so miles each day, ongoing studies suggest their use would sharply reduce global warming gas emissions compared to driving the same amount of mileage on gasoline.
CONCLUSION
The dangers of dependence on conventional oil in today’s world require us both to look to ways to reduce demand for it and to increase the supply of alternatives. The realistic opportunities for reducing demand soon suggest that government policies should encourage hybrid gasoline-electric vehicles, particularly whatever battery work is needed to bring plug-in versions thereof to the market, and modern diesel technology. Light-weight carbon composite construction should also be pursued. The realistic opportunities for increasing supply of transportation fuel soon suggest that government policies should encourage the commercialization of alternative fuels that can be used in the existing infrastructure: cellulosic ethanol, biodiesel/renewable diesel, and (via plug-in hyrids) off-peak electricity. Both of the liquid fuels could be introduced more quickly and efficiently if they achieve cost advantages from the utilization of waste products as feedstocks. The effects of these policies are multiplicative. All should be pursued since it is impossible to predict which will be fully successful or at what pace, even though all are today either beginning commercial production or are nearly to that point. Incentives for all should replace the current emphasis on automotive hydrogen fuel cells. If even one of these technologies is moved promptly into the market, the reduction in oil dependence could be substantial. If several begin to be successfully introduced into large-scale use, the reduction could be stunning. For example, a 50-mpg hybrid gasoline/ electric vehicle, on the road today, if constructed from carbon composites would achieve at least 100 mpg. If it were also a Flexible Fuel Vehicle able to operate on 85 percent cellulosic ethanol, it would be achieving hundreds of miles per gallon (of petroleum-derived fuel). If it were also a plug-in, operating on either upgraded nickel-metal- hydride or newer lithium-ion batteries, so that 30-mile trips could be undertaken on its overnight charge before it began utilizing liquid fuel at all, it could be obtaining in the range of 1000 mpg (of petroleum). If it were a diesel utilizing biodiesel or renewable diesel fuel its petroleum mileage could be infinite. A range of important objectives–economic, geopolitical, environmental–would be served by our embarking on such a path. Of greatest importance, we would be substantially more secure.
The Chairman. Our next witness is Susan Cischke, vice president, environmental and safety engineering, Ford Motor Company. We thank you very much for coming.
STATEMENT OF SUSAN M. CISCHKE, VICE PRESIDENT OF ENVIRONMENTAL AND SAFETY ENGINEERING, FORD MOTOR COMPANY
Ms. Cischke. Thank you. And good morning, everyone. At Ford, we recognize that we have a responsibility to help address America’s energy security needs and we are accelerating our efforts to develop innovative solutions. Recently we committed to increase our hybrid production capabilities to a quarter million units a year by 2010 and to continue our leadership in ethanol-powered, flexible-fuel vehicles. We believe that our Nation’s energy challenges can only be properly addressed by an integrated approach that is a partnership of all stakeholders, which includes the automotive industry, the fuel industry, government, and consumers. We must all accept that these are long-term challenges and that we are all part of the solution. At Ford, we are moving ahead with a range of technological solutions because there is simply no single solution. There is no silver bullet. We know that when a customer considers purchasing a vehicle, they are concerned with numerous attributes, including price, quality, safety, performance, comfort, and utility. And from our perspective, no one factor can be ignored in the highly competitive U.S. marketplace. As a result, we are working to accelerate the commercial application of all areas of advanced vehicle technologies, including hybrids, flexible- fuel vehicles, advanced clean diesel, hydrogen-powered, internal-combustion engines, and fuel-cell vehicles. The portfolio approach that we are taking ensures that we are able to offer consumers a range of products that meet their specific needs and circumstances. And make no mistake. It will ultimately be the consumers who decide. At Ford, we recognize that hybrids have an important place within this portfolio of solutions. They deliver excellent benefits in lower speed, stop-start traffic, and offer many customers break-through improvements in fuel economy, up to 80 percent in city driving without compromise. Expansion of our hybrid plant is now clearly an important part of our strategy with increases in our production capacity as well as our model offerings. In fact, we want to offer hybrids on half of our Ford, Lincoln, and Mercury models by 2010. In addition to hybrids, we believe the greater use of renewable fuels like ethanol will help reduce reliance on foreign oil. We applaud Congress’ efforts that resulted in the Energy Policy Act of 2005, as well as the President’s recent commitment to address our Nation’s addiction to oil. Ford has been building flexible-fuel vehicles for over a decade, and we are an industry leader in this technology. These vehicles are capable of operating on up to 85 percent ethanol or gasoline or a mixture in between. By the end of this year, Ford Motor Company will have placed a total of nearly two million flexible-fuel vehicles on America’s roads and for 2006, this includes America’s best- selling vehicle, the Ford F150. As a whole, the U.S. auto makers will have produced a total of nearly six million flexible-fuel vehicles. And if all these vehicles were operated on E-85, over two and a half billion gallons of gasoline a year could be displaced. And we are not stopping there. A little over a month ago, we unveiled the Ford Escape hybrid E-85 research vehicle, which marries two petroleum-saving technologies, hybrid electric power and E-85 flexible-fuel capability. Although there are many technical and cost challenges to address, we believe that if just 5 percent of the U.S. fleet were powered by E-85, HEVs, oil imports could be reduced by 140 million barrels a year. But there is a problem. Even though the volume of E-85 vehicles continues to grow rapidly, there are less than 600 E- 85 fueling stations in the United States and that is out of over 170,000 retail gas fueling stations nationwide. For ethanol to compete, we need strong, long-term focus on policies that increase U.S. production and accelerate infrastructure development. At the same time, as the President pointed out in the State of the Union address, we need national research efforts to produce ethanol for more energy-efficient cellulosic materials like rice straw, corn stover, or switch grass. Looking to the future, we are looking at what we think is an important transitional technology, hydrogen-powered internal-combustion engines. Ford is a leader in this technology and we think it is a bridge to the development of a hydrogen infrastructure and ultimately fuel-cell vehicles. And we are in the process of developing hydrogen-powered shuttle buses for fleet demonstrations in North America starting later this year. Even further down the road, hydrogen-powered fuel cells appear to be another promising technology for delivering sustainable transportation. Hydrogen can be derived from a wide range of feedstocks to increase energy diversity and fuel cells are highly energy efficient and produce no emissions, like our Ford Focus fuel cell. We have already placed a small fleet of these vehicles in three U.S. cities as part of the U.S. Department of Energy’s Hydrogen Demonstration Program. As you can imagine, R&D investment that goes with all this work is a very big number, certainly in the billions, not the millions, and it will only grow in the future. But there is only so much we can achieve without the help of others outside the industry. It is clear that the solution to the energy issue associated with road transport will need to come from advances in fuels as well as vehicle technology. We need the oil industry to endorse an integrated approach here in the United States just as they are beginning to do with auto makers and government officials in Europe. Without the wholehearted involvement of the fuel industry, we cannot move forward far enough or fast enough and we obviously need key partners like the oil industry to invest in developing and marketing renewable fuels like E-85. And there is a great deal that policymakers can do as well. Government incentives for advanced technology vehicles and E-85 infrastructure can accelerate the introduction of these vehicles and fuels into the marketplace. And there is also a role for government in educating the public on energy efficiency. In the end, it will ultimately be the size of the car park, consumers’ choice of vehicles, how many miles they drive, and driving behaviors that will determine how much fuel we consume. The challenges of energy security are considerable, but they are not insurmountable. And there is an enormous amount we can achieve if we act together. We have to ensure that our business is sustainable by making vehicles that continue to meet the changing needs of the 21st century. And that is a responsibility we owe our customers, our shareholders, and our employees. But at another level, all of us have an opportunity to do something about energy independence and that is a responsibility we owe future generations. Thank you for the opportunity to address the committee. The Chairman. Thank you very much, Ms. Cischke. We appreciate your testimony. [The prepared statement of Ms. Cischke follows:]
Susan M. Cischke
Prepared Statement of Susan M. Cischke, Vice President of Environmental and Safety Engineering, Ford Motor Company
Members of the Committee: My name is Susan Cischke and I am the Vice President of Environmental and Safety Engineering at Ford Motor Company. Energy security is a significant issue facing our nation. I appreciate the opportunity to share with you Ford Motor Company’s views on this issue. Energy is literally the fuel that powers the industrial and manufacturing growth of the United States. The energy supply disruptions of last summer, increases in global demand, and geopolitical concerns with some of the oil rich regions of the world led to significantly higher energy prices and consumer angst at the fuel pump. It’s our view that action must be taken in all sectors of course, if we are to meet these challenges as a nation. At Ford, we recognize that we have a responsibility to do something to help address America’s energy security needs, and we are accelerating our efforts to develop innovative solutions. As Bill Ford has said, “Ford Motor Company is absolutely committed to making innovation a central part of everything we do.” In our recent product announcements we committed to increase our hybrid production capabilities to a quarter-million units a year by 2010 and to continuing our leadership in ethanol powered flexible fuel vehicles. These new product initiatives are a strong commitment for Ford and our customers, and they recognize a changing marketplace. But there is a limit to what we can achieve on our own. We believe that our nation’s energy challenges can only be properly addressed by an Integrated Approach: that is, a partnership of all stakeholders which includes the automotive industry, the fuel industry, government, and consumers. The truth is that we must all accept that these are long-term challenges and that we are all part of the solution. So let me set out how we at Ford Motor Company believe each stakeholder can play its part. I’ll start with the automotive industry itself, because we clearly have a central role to play. The industry has taken significant steps in improving the fuel efficiency of our products. At Ford Motor Company we see this not only as being socially responsible but a business necessity, and we are moving ahead with a range of technological solutions simultaneously–because there is simply no single solution, no “silver bullet”. We know that when customers consider purchasing a vehicle, they are concerned with numerous attributes including price, quality, safety, performance, comfort and utility. From our perspective, no one factor can be ignored in the highly competitive U.S. marketplace. As a result, we are working to accelerate the commercial application of all areas of advanced vehicle technologies, including hybrids, flexible fuel vehicles, advanced clean diesels, hydrogen-powered internal combustion engines and fuel cell vehicles. The portfolio approach that we are taking ensures that we are able to offer consumers a range of products that meet their specific needs and circumstances. And make no mistake; it will ultimately be the consumers who decide. This diversity of customer needs within and across markets is why we are investing in a portfolio of solutions. The result is a period of unprecedented technological innovation. Innovation–in matters of the energy, renewable fuels, safety and design–is the compass by which we are setting our direction for the future. At Ford, we recognize that hybrids have an important place within this portfolio of solutions. They deliver excellent benefits in lower speed stop/start traffic and offer many customers breakthrough improvements in fuel economy–up to 80% in city driving–without compromise. And much of this technology is also applicable to our fuel cell and ethanol vehicle development efforts. In 2004, we launched the world’s first gasoline-electric full hybrid SUV, the Escape Hybrid. In 2005, we expanded this technology to the Mercury Mariner Hybrid, and have announced plans to offer this technology on the Mazda Tribute SUV, and the Ford Fusion, Mercury Milan, Ford Five Hundred and Mercury Montego sedans, plus the Ford Edge and Lincoln MKX crossover vehicles. Expansion of our hybrid offering is now clearly an important part of our overall innovation strategy which embraces our recent commitment to increase our production capacity to up to 250,000 hybrids per year by 2010 and to offer hybrids on half of our Ford, Lincoln and Mercury products. Nevertheless, a key challenge facing hybrids is the incremental costs–both in terms of higher prices for components and engineering investments–that must be overcome for this technology to transition from “niche markets” to high-volume applications. In addition to hybrids, we believe that greater use of renewable fuels like ethanol, a domestically produced renewable fuel, will help reduce reliance on foreign oil. We applaud Congress’ efforts that resulted in the Energy Policy Act of 2005, as well as the President’s recent commitment to address our nation’s addiction to oil. Ford has been building flexible fuel vehicles (FFVs) for over a decade, and we are an industry leader in this technology. These “FFVs” are capable of operating on up to 85% ethanol, or gasoline, or any mixture in between. By the end of this year, Ford Motor Company will have placed a total of nearly 2 million FFVs on America’s roads, and for 2006 this includes America’s best selling vehicle–the (5.4L) Ford F-150 FFV. As a whole, the U.S. automakers will have produced a total of nearly 6 million vehicles. If all of these vehicles were operated on E85, over 2.5 billion gallons of gasoline a year could be displaced. And we are not stopping there. A little over a month ago we unveiled the Ford Escape Hybrid E85 research vehicle which marries two petroleum-saving technologies–hybrid electric power and E85 flexible- fuel capability. Though there are many technical and cost challenges to address, we believe that if just 5% of the U.S. fleet were powered by E85 HEVs, oil imports could be reduced by about 140 millions barrels a year. But there is a problem. Even though the volume of E85 vehicles continues to grow rapidly, there are less than 600 E85 fueling stations in the U.S.–and that’s out of over 170,000 retail gasoline fueling stations nationwide. For ethanol to compete as a motor fuel in the transport sector and play an increasingly significant role addressing our nation’s energy concerns, we need strong, long-term focus on policies that increase U.S. ethanol production and accelerate E85 infrastructure development. At the same time, as the President pointed out in the State of the Union address, we need national research efforts to pursue producing ethanol from more energy-efficient cellulosic materials like rice straw, corn stover, switch grass, wood chips or forest residue. Ford is also working on advanced light duty diesel engines. Today’s clean diesels offer exceptional driveability and can improve fuel economy by up to 20-25%. This technology is already prevalent in many markets around the world–nearly half of the new vehicles sold in Europe are advanced diesels–and Ford continues to accelerate our introduction of diesel applications in these markets. There are, however, many hurdles that inhibit wide scale introduction of this technology in the U.S. We are working to overcome the technical challenges of meeting the extremely stringent Federal and California tailpipe emissions standards, and to address other issues such as fuel quality, customer acceptance and retail fuel availability. Looking to the future, we are working on what we think is an important transitional technology to sustainable transportation– hydrogen-powered internal combustion engines. Ford is a leader in this technology. We think it’s a “bridge” to the development of a hydrogen infrastructure and, ultimately, fuel cell vehicles, and we are in the process of developing hydrogen powered E450 H2ICE shuttle buses for fleet demonstrations in North America starting later this year. Ford is also working on applying this engine technology to stationary power generators and airport ground support vehicles to further accelerate the technology and fueling infrastructure development. Even further down the road, hydrogen powered fuel cells appear to be another promising technology for delivering sustainable transportation. Hydrogen can be derived from a wide range of feedstocks to increase energy diversity, and fuel cells are highly energy- efficient and produce no emissions. Our Ford Focus Fuel Cell vehicle is a state-of-the-art, hybridized fuel cell system–sharing much of the same hybrid technology we developed for our Escape Hybrid SUV. We have already placed a small fleet of these vehicles in three U.S. cities as part of the U.S. Department of Energy’s hydrogen demonstration program collecting valuable data. As you can imagine, the R&D investment that goes with all this work is a very big number–certainly in the billions, not the millions–and it will only grow in the future. Many of our competitors and suppliers are also investing heavily. But there is only so much we can achieve without the help of others outside our industry. We need an integrated approach. It is clear that the solution to the energy issues associated with road transport will need to come from advances in fuels as well as vehicle technology. We need the oil industry to endorse an Integrated Approach here in the U.S., just as they are beginning to do with automakers and government officials in Europe. We at Ford are clearly excited about the potential role of renewable fuels. However, the fact is that without the whole-hearted involvement of the fuel industry, we cannot move forward far enough or fast enough. We obviously need key partners like the oil industry to invest in developing and marketing renewable fuels like E85–and we need it to do so now and rapidly. We fully support government incentives to encourage the industry or others to accelerate this investment. There is a great deal that policy makers can do at all levels as well. We would like to see more R&D support for vehicle technologies and renewable fuels. Government incentives for advanced technology vehicles and E85 infrastructure can accelerate the introduction of these vehicles and fuels into the marketplace. Government must play a critical role to promote U.S. innovation and can do so by expanding and focusing R&D tax credits for a broad range of energy efficient technologies. We would also like to see greater investment in improved road traffic management infrastructure in order to reduce congestion and save fuel. According to the American Highway Users Alliance, about 5.7 billion gallons of fuel are wasted annually due to congestion. Effective traffic light synchronization is a good example of a change that could lead to big reductions. There is also a role for government in educating the public on how to drive in an energy efficient manner. In the end, it will ultimately be the size of the car park, and consumers’ choices of vehicles, how many miles they drive, and driving behaviors that will determine how much motor fuel we consume. A person who drives in an energy-conscious way–by avoiding excessive idling, unnecessary bursts of acceleration and anticipating braking–can enjoy much better fuel consumption, today. And government can play a key role to raise public awareness. We believe that awareness is a simple and effective early step which is why we have introduced driver training programs in Europe and recently developed on-line training for all Ford Motor Company employees. Consistent implementation of an Integrated Approach will allow us to achieve much more in a shorter timeframe and at a significantly lower cost than if each stakeholder were to pursue its own agenda in isolation, however well-intentioned they might be. The challenges are considerable but not insurmountable, and there is an enormous amount we can achieve if we act together in an integrated manner. We have to ensure that our business is sustainable by making vehicles that continue to meet the changing needs of the 21st century. That’s a responsibility we owe to our customers, shareholders and our employees. But at another level, all of us have the opportunity to do something about energy independence–and that’s a responsibility we owe future generations. Thank you again for the opportunity to address the Committee.
The Chairman. Frank Verrastro, director and senior fellow, Center for Strategic and International Studies, we welcome you. We have seen your testimony and we thank you so much for your ideas.
STATEMENT OF FRANK VERRASTRO, DIRECTOR AND SENIOR FELLOW, ENERGY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES
Mr. Verrastro. Thank you, Mr. Chairman. I would also like to note at the outset that the last time I appeared before this panel, you characterized the presentations of myself and fellow witnesses as comparable to the warnings of the Paharo Dimaro Swartee, the bad news birds. Regardless of whether my current invitation attests to the accuracy of those past predictions or simply a reflection of the fact that the committee has new staff members, I nonetheless appreciate the opportunity to come back before you today. Since you have copies of my prepared remarks, let me use this time to highlight a few of the major points. And I agree with much of what has been said already. Page two of my testimony contains a pie chart indicating the EIA’s projections for global energy demand growth in 2025, as well as the relative share of the major fuel groups. Similar forecasts have been published the IEA, OPEC, and others. And while the exact share numbers differ under each of the forecasts, the trends are always the same. Global energy demand is predicted to increase by 50 percent over the next 25 years, yet the relative shares of the five major fuel groups, oil, natural gas, coal, nuclear, and renewables, are expected to remain remarkably constant. A snapshot of just North America would mirror this global projection as we comprise about 30 percent of worldwide demand. Europe would show a greater concentration of nuclear and, hence, a lower share of fossil fuels. But in the developing world, those countries least able to utilize cutting-edge technology and the area’s largest projected area where we see a doubling of demand over the next 20 years, fossil fuels continue to exceed 90 percent, carrying obvious consequences for consumer competition and for the environment. Analyzing this forecasted future leads to two seemingly inescapable conclusions. The first is that absent major technological breakthroughs, significant changes in consumption patterns and policy, or massive dislocations to alter the course of events, consumption trends depicted by this chart are simply unsustainable for the long term. Second, even assuming a significant contribution from a wide range of alternative fuels, conventional energy sources will continue to dominate the landscape for at least the next several decades. I would also add that since the topic of this hearing focuses on energy independence, that despite the obvious political attraction, such a notion may, in fact, be a misguided quest and that we might be better served by recognizing the reality of our current energy interdependence while mapping out a strategy for managing the transition to a different energy future. Rising oil prices in recent years have heightened interest in a variety of alternative sources of liquid and nonliquid fuels, including natural gas, fuel cells and batteries, methanol, ethanol, biodiesel, coal to liquids, gas to liquids, industrial, municipal, and agricultural waste streams, other forms of biomass conversion, hydrogen, and electricity. All have great promise, but most have problems, both aspects of which are outlined in greater detail in my testimony. Bio refineries, digesters, and other waste energy process facilities are clearly in the sights of investors, although their most significant supply impacts may be felt on a regional rather than national basis, at least until expanded distribution and delivery infrastructure is put in place. Analysis performed by EIA and the National Renewable Energy Lab estimates that even under optimistic assumptions, alternative transport fuels, excluding electric hybrid plug- ins, can be expected to displace or replace a maximum of 10 percent of conventional liquid transport fuels by 2030, leaving petroleum-based fuels, new technologies, conservation, and improved efficiency gains to deal with the remaining 90 percent. For purposes of comparison, a billion gallons of alternative fuels per year roughly translates to 65,000 barrels a day of conventional gasoline and maybe less depending on energy context. And we currently consume over nine million barrels a day of gas every day. In short, while contributions from alternate fuels will be helpful as a component in meeting increased consumer demand, petroleum-based fuels are likely to remain the overwhelming fuel of choice for at least the next 20 years. At the same time, however, we cannot ignore preparations for transitioning to the inevitable post-oil world, a transition which former Energy and Defense Secretary, Jim Shlesinger, has characterized as the greatest challenge this country and the world will face outside of war. As with any transformational change, issues surrounding the approach, time horizon, and leverage designed to accomplish this objective remain the keys to success. Dealing with an energy transition is no less daunting. To the extent practicable, every effort should be made to pursue policies and changes that fully take into account investment in market practices and utilize as much as possible existing infrastructure and currently available technologies. Minimizing uncertainty, avoiding conflicting and contradictory policy signals and selecting options based on economic efficiency and merit rather than political efficacy are also highly recommended. And fuels alone are not the answer. We need radical changes to our motor vehicles, both in terms of energy and design and construction material, as well as to the way we transport goods and people. In conclusion, let me add that the oil market is truly a global market. Reducing America’s oil consumption can potentially have a dampening effect on prices, but will not completely insulate us from supply disruptions or price volatility. We frequently speak about politically unstable sources of supplies from around the globe, but the largest protracted losses of global oil and gas output in both 2004 and 2005 were the results of hurricanes in the U.S. Gulf of Mexico. The Stone Age did not end because we ran out of rocks. Something better came along. The oil age will similarly be overtaken when a better solution or series of component solutions emerge. We can and should accelerate that process, but need to do so carefully and prudently by introducing cost- effective substitutes, using available market mechanisms, and educating the public on the need for change, and, in the meantime, by better managing demand and our global relations with suppliers and consumers alike. Thank you, Mr. Chairman. The Chairman. Thank you very much. [The prepared statement of Mr. Verrastro follows:]
Frank Verrastro
Prepared Statement of Frank Verrastro, Director and Senior Fellow, Energy Program, Center for Strategic and International Studies
Mr. Chairman, Members of the Committee, I appreciate the opportunity to appear before you today to discuss the broad ranging topic of America’s energy independence. I currently serve as Energy Program Director and Senior Fellow at the Center for Strategic and International Studies (CSIS), but my professional background also includes a variety of energy policy positions in the White House, and the Departments of Interior and Energy, as well as senior executive positions dealing with both upstream and downstream issues in the energy sector, first as Director of Refinery Policy and Crude Oil Planning for TOSCO Corporation, and more recently as a Senior Vice President at Pennzoil Company. Given the composition of this morning’s panel, the bulk of my remarks will be directed at the issue of oil import dependence and prospects for replacing and reducing petroleum demand for transportation fuels, but more generally I will also touch on the U.S. energy balance and proffer the view that we would be well advised to pursue a broader array of options for ensuring that our energy needs are met. These options should include:
stimulating additional supplies of conventional and traditionally non-conventional fuel sources, including renewables and alternatives; improving energy efficiency and conservation efforts; promoting research and technology development, and where applicable, accelerating the deployment of useful technologies; addressing infrastructure needs to facilitate the delivery of fuel choices; pursuing the development of a more comprehensive energy strategy that recognizes the potential for simultaneously introducing transformational policies while managing the realities of our existing energy interdependence in a global energy market, and performing the above activities consistent with current investment and market practices.
I would also add that focusing on Energy Independence, while politically attractive, may in fact be a misguided quest and that we would be better served by mapping out a strategy for managing the transition to a different energy future as our current path is clearly unsustainable.
OUR EVOLVING ENERGY WORLD
Mr. Chairman, the events of the past few years have served to refocus attention on the critical role which energy plays in our national and global economies. Rising global oil demand, concern over the adequacy, reliability, and pricing of energy supplies, the environmental implications of increased use of fossil fuels, the cost of those supplies for developed and developing economies alike, trade and capital flows, and global geopolitics are issues that preoccupy business and governments around the globe. Faced with these evident realities, concern over the continued ability of this nation to secure energy supplies from an increasing list of inaccessible, high risk or less than reliable parts of the world has prompted policymakers to once again raise the issues of both the desirability and achievability of energy independence. U.S. consumers have come to both enjoy and expect a healthy domestic economy, which is underpinned by an energy supply that is at once available, affordable, secure, and environmentally benign. In this new world are those criteria able to be satisfied or are they just beyond the reach of current energy paradigms and policies? Global energy demand is projected to increase by 50 percent over the next 25 years, yet the relative shares of the five major fuel groups–oil, natural gas, coal, nuclear and renewables–are expected to remain remarkably constant, with fossil fuel consumption still accounting for over 85 percent of total energy demand in 2025. In the developing world, that figure exceeds 90 percent (see figure below),* carrying obvious consequences for consumer competition and the environment. ________________ * All graphs have been retained in committee files. ________________ As we consider our energy options, I would strongly urge that we not forget the substantial contributions that conservation and improved efficiency can make to achieving our future energy goals. In the power generation sector, it currently takes three to four units of primary energy to produce one unit of delivered electricity. Conservation, efficiency and infrastructure delivery improvements coupled with additional contributions from renewable energy sources can obviate the need for additional, incremental production of fossil fuels for power generation purposes. Similarly, improving auto efficiency and accelerating the deployment of proven technologies into the auto fleet can, over time, make a substantial contribution to reducing transportation fuel demand. Analyzing this forecasted future leads to two seemingly inescapable conclusions. The first is that absent major technological breakthroughs, significant changes in consumption patterns and policies, or massive dislocations that alter the course of events, the consumptions trends depicted by this chart are simply unsustainable for the long term. Secondly, even assuming a significant contribution from a wide range of alternative fuels, conventional energy sources will continue to dominate the landscape for at least the next several decades.
THE ROLE OF THE UNITED STATES IN A GLOBAL ENERGY MARKETPLACE
For the past thirty years, U.S. oil policy initiatives have centered around 4 major themes: increasing and diversifying sources of conventional and unconventional energy supplies both at home and abroad; encouraging, wherever practicable and politically achievable, the adoption of improvements in conservation and fuel efficiency; the expansion of the strategic petroleum reserve; and reliance on Saudi Arabia to balance oil markets and moderate prices. For the most part, in an era of surplus supply, this strategy has largely worked. Times and market conditions, however, may well be changing. Global demand for all energy forms is accelerating, and resources are increasingly controlled by national players, whose primary national objectives may not conform to traditional market practices or concerns. It took the world 18 years (from 1977-1995) to grow global oil demand from 60 to 70 million barrels per day (mmb/d); eight years to grow from 70 to 80 mmb/d; and if current projections are correct, global oil demand will exceed 90 mmb/d by 2010. Forecasts for oil consumption in 2030 approximate 115-120 mmb/d–roughly half again as much as we currently consume. Setting aside the debate about resource availability or so called “peak oil,” market growth of that magnitude will require huge investments, place enormous strains on transportation and infrastructure needs, and carry significant implications for security, global geopolitics and the environment. In addition, the entry of new market players, like China and India, with growing energy appetites and expanding economies may pose competitive threats to America’s market dominance. Added to that are heightened security concerns about threats to infrastructure and facilities posed by terrorist groups and insurgents. Taken together, these changing circumstances have the potential to re-order the marketplace and fundamentally alter the geopolitical balance that has governed the past half century. Such changes may also warrant a thoughtful recalibration of our economic, security, environmental, energy and foreign policy calculations and policy choices. The United States is currently the world’s largest producer, consumer, and net importer of energy. We are home to roughly 5 percent of the world’s population and produce 17 percent of the total energy supplied. Yet in the process of generating some 30 percent of global GDP, America consumes nearly a quarter of the world’s energy. In terms of energy self-sufficiency, the United States in 2004 produced (domestically) roughly 71 percent of the total energy it consumed. Today, the United States remains self-sufficient in meeting virtually all of its energy needs with the exception of two key energy forms–petroleum, and increasingly, natural gas–both of which are critical commodities. In its recently released 2006 Annual Energy Outlook, the U.S. Energy Information Administration (EIA) forecasts that overall energy usage in the United States will continue to increase at an annual growth rate of 1.2 percent for the next 25 years. U.S. energy demand for all fuels is projected to increase from roughly 100 quadrillion Btus (Quads) to over 127 quads by 2030 with oil, gas and coal leading the way. Projected incremental growth for non-hydro renewables will also be substantial, but starting from such a small base, is expected to account for about 7 percent of total domestic energy demand by 2025, with 60 percent of that amount devoted to grid-related electricity generation. In contrast, total U.S. demand for petroleum products, largely driven by increases in transportation fuel needs, is projected to increase by over 30 percent from current levels (slightly below 21 mmb/ d in 2005) to just over 27.5 mmb/d in 2030. Demand for all forms of petroleum fuels except for the bottom of the barrel increase, and total gasoline demand increases to about 12.5 mmb/d. Petroleum fuels currently supply 97 percent of all domestic transportation needs. After a brief period of increased output (from 2006-2015, largely as a result of additional production from the deep water of the Gulf of Mexico) domestic crude oil production is expected to resume its gradual decline. And with U.S. refineries running at or near capacity, absent substantial new investment, increased domestic demand means expanding reliance on imported petroleum, both for crude oil and, increasingly, refined petroleum products. In 2025, net petroleum imports are expected to account for 60 percent of demand (up from 58 percent in 2004), although that figure could increase to almost 70 percent depending on assumptions about price and economic activity. Net imports of refined petroleum products increase from 17 to 22 percent of total oil imports by 2030. The rise in oil import levels, both in absolute and relative terms, carries important infrastructure, logistical, environmental, financial, trade, security, and foreign policy implications. Assuming investment continues to lag in the creation of additional domestic refining capacity, the projected rise in imports of refined petroleum product increases U.S. vulnerability to supply disruptions and potentially undermines the value of the Strategic Petroleum Reserve (SPR). A similar picture emerges for domestic natural gas, although demand continues to grow between now and 2015 before leveling off as coal demand for power generation accelerates. As demand for natural gas increases, the United States will increasingly rely on nonconventional domestic production (e.g., tight sands and coal seam gas), gas from Alaska, on increased imports of pipeline gas from Canada (to the extent they are available), and on LNG from sources in Latin America, the Caribbean, Africa, the Middle East, Australia, and Russia. Projected supplies of LNG imports assume that additional regasification capacity will be permitted and constructed either within the United States or in areas proximate to U.S. borders–an uncertain assumption. In addition to environmental, safety, competition, and siting issues, opponents of additional LNG regas projects increasingly cite security and foreign policy concerns about exposing the U.S. electric grid system to reliance on imports from countries, many of which are oil exporters found in troubled regions of the world. (Global gas reserves data is shown in the next figure.)
AN INCREASING ROLE FOR ALTERNATIVE FUELS
Rising oil prices in recent years have heightened interest in a variety of alternative sources of liquid fuels. At present, two biologically derived fuel forms, ethanol and biodiesel, are used in the United States to supplement supplies of conventional gasoline and diesel. In principle, biodiesel can be blended into conventional diesel or heating oil in fractions compatible with the fuel system and/or its construction materials. On the plus side, biodiesel’s blending promotes flexibility and reduces carbon monoxide emissions. Unfortunately, depending on the precise chemical composition of the solvent, too high a concentration can damage certain plastics and rubber (system) components and may contribute to increased emissions of nitrogen oxide. Ethanol can be readily blended into gasoline. Since the late 1970s, cars and light trucks built for the U.S. market are capable of running on a 10 percent ethanol blend. A limited number (roughly 5 million) of the 220 million vehicles currently on the road are also capable of running on blends of up to 85 percent ethanol. Most fuel ethanol currently produced in the United States is distilled from corn. Since corn is also a food crop, however, there are questions related to the volume of ethanol that can be readily produced from corn without affecting crop prices, as well as limitations on the amount of acreage available to dedicate to fuel crop planting. In addition, since only a portion of the plant material can be used to produce ethanol, issues have been raised about how to handle the residual waste material–e.g., stalks, leaves and husks. A partial answer to this dilemma has resulted in research into what is called cellulosic ethanol, but transportation and energy content issues still remain to be resolved. For example, since a gallon of ethanol contains less energy than a comparable gallon of gasoline, poorer mileage ratings and more frequent fuel stops are impediments that need to be overcome. Additionally, cold weather start problems and transport in carriers other than pipelines may complicate gasoline substitution on a national scale. There have also been promising breakthroughs in creating other forms of fuels from a wide variety of sources, including biomass, agricultural, industrial and municipal waste streams, coal to liquids (CTLs), gas to liquids (GTLs), “synfuels” made from oil sands, shale and extra heavy crudes, and biomass to liquids (BTLs) processes that derive fuels from waste wood and other non-food plant sources. Biorefineries, digesters and other waste to energy process facilities are clearly in the sights of investors, although their most significant supply impacts may be felt on a regional rather than national basis, at least until expanded distribution and delivery infrastructure comes on line. In this regard, better data collection would be most helpful. The National Renewable Fuels Laboratory (NREL) and EIA have been discussing data improvements to better capture a more complete picture of how biofuels activity is developing within the U.S., but resource limitations affecting data collection and modeling have limited that effort. It is worth noting, however, that based on current government data, the capital investment costs for most, if not all, of these synthetic fuel technologies is considerably more than that required for a traditional crude oil refinery (see page 57, of EIA’s 2006 Annual Energy Outlook). Further, for purposes of comparison, EIA estimates that there is currently some 300,000 b/d of installed corn ethanol capacity in the United States and an additional 12,000 b/d of biodiesel capacity. Additionally, excluding “pilot” facilities, the latest EIA statistics indicate that there are currently no commercial BTL, GTL or CTL plants in the United States. In contrast, U.S. refining capacity currently exceeds 17 million barrels per day and domestic gasoline demand averages over 9 million barrels per day. The mandated target of producing 7.5 billion gallons of ethanol (fuel) by 2012 translates into roughly 490,000 b/d, representing approximately 3 percent of projected domestic transportation fuel needs in 2012 and less than 5 percent of total gasoline demand. Analyses performed by EIA and NREL estimate that even under optimistic assumptions, alternative transport fuels (excluding electric hybrid plug-ins) can be expected to displace/replace a maximum of 10 percent of conventional liquid transport fuels by 2030, leaving petroleum based fuels, conservation and improved efficiency gains to deal with the remaining 90 percent. A 2004 report prepared by the bi-partisan National Commission on Energy Policy came up with similar results, projecting a 10-15 percent reduction in U.S. oil consumption in 2025 by substituting non-petroleum transportation fuel alternatives in combination with the adoption of more stringent CAFE standards for cars and light trucks and providing incentives to encourage the production and purchase of fuel efficient vehicles. In reaction to the Commission’s report, EIA analysis attributed a 7.3 percent reduction in petroleum fuel usage to the adoption of tougher fuel efficiency and CAFE standards. In short, while contributions from alternative fuels will be helpful as a component in meeting increased consumer demand for transport fuels, for at least the mid-term, absent significant policy and regulatory changes to promote increased fuel efficiency, major technological breakthroughs, and substantial changes in consumer/driver behavior (based on environmental, security or foreign policy considerations), petroleum based fuels will remain the overwhelming fuel of choice for at least the next 20-30 years. Given projections for increasing fuel demand, the inescapable conclusion is that oil imports will also be with us for decades to come. In that context, we would do well to ratchet down the political rhetoric surrounding the notion of achieving energy independence and instead refocus our efforts to deal with an inter-dependent energy future and simultaneously prepare for the (longer term) transition to a post-oil world, a transition which former Energy and Defense Secretary James Schlesinger has characterized as “. . . the greatest challenge this country and the world will face–outside of war.”
U.S. OIL IMPORTS–SOURCES AND CONCERNS
In his State of the Union address, President Bush advanced the challenge of reducing this nation’s “addiction to oil” and reducing by 75 percent our reliance on oil imports from the Middle East. At best, this line was a thinly veiled attempt to drum up domestic political support for a valiant yet difficult effort to reduce petroleum consumption. At worst, it showed a decided lack of understanding of U.S. import sources, global oil markets and reserve holders. In 2005, the primary oil suppliers (crude oil and refined product) to the United States were, in volumetric order, Canada, Mexico, Venezuela, Saudi Arabia and Nigeria. Imports from Iraq ranked a distant sixth. The top 5 suppliers provide over 60 percent of total U.S. oil imports. The entire Middle East, by contrast, accounted for roughly 17 percent of last year’s imports (representing about 11 percent of total domestic petroleum consumption). Looking forward, imports of Canadian and Mexican oil are expected to decline as their respective production levels decline and/or domestic requirements increase. In contrast, imports from the Middle East and OPEC sources generally (in part because these countries represent the several of the largest reserve holders in the world, both for oil and gas) are expected to increase. Managing relationships with these suppliers should be a priority under any policy the U.S. devises for dealing with future energy requirements.
PITFALLS AND WARNINGS
As with any transformational change, issues surrounding the approach, time horizon and levers designed to accomplish the objective remain keys to success. Dealing with an energy transition is no less daunting. To the extent practicable, every effort should be made to pursue policies and changes that fully take into account investment and market practices and utilize as much as possible existing infrastructure and currently available technologies. Minimizing uncertainty, avoiding conflicting or contradictory policy signals, and evaluating/selecting options based on economic efficiency and merit rather than political efficacy are also are highly recommended. A few examples: Less than eight months ago, the Congress adopted the Energy Policy Act of 2005. The Act was notable in many respects, but when read against the oil reduction challenges laid out by the President in the State of the Union address may unintentionally lead to uncertainty and paralysis in terms of energy investment. The energy legislation specifically included provisions designed to encourage additional refinery capacity construction within the United States, yet the President’s challenge to displace petroleum usage could likely have a chilling impact on both international upstream investments and domestic refining additions, both expensive and long-lived investments. Similarly, after much debate and deliberation and for a wide variety of reasons, the single MTBE-related provision (repeal of the oxygenate mandate) that survived the energy conference has resulted in a reduction in available octane enhancing components and will likely produce higher ethanol and gasoline prices while reducing gasoline availability. A third example relates to the permitting of additional LNG regasification facilities in the United States to handle increased volumes of imported natural gas. As indicated earlier, as we strive to reduce reliance on imported oil, we appear to be simultaneously encouraging increased import dependence of natural gas–the bulk of which may come from similar import sources. And finally, at a time when policymakers are intent upon encouraging specific types of large scale energy investments, does it really make sense to hamstring major industry players by proposing tax changes that ultimately reduce their ability to pursue those investments? Altering the trajectory of future demand for petroleum based fuels is prudent policy for a wide variety of reasons. But in doing so, we should not confuse displacing oil with the larger objective of tempering overall consumption and improving efficiency as the main priorities. Crop growing also requires energy. Plug in vehicles that run on electricity require energy sources to generate that power–the bulk of which currently comes from coal, although nuclear, natural gas and renewables also play significant roles. The oil market is a truly global market. Reducing America’s oil consumption can potentially have a dampening effect on prices, but it will not completely insulate us from supply or price volatility. We frequently speak about “politically unstable” sources of oil supplies around the globe, but the largest protracted losses of global oil and gas output in both 2004 and 2005 were the result of hurricanes in the U.S. Gulf of Mexico. The Stone Age did not end because we ran out of rocks–something better came along. The Oil Age will similarly be overtaken when a better solution or a series of component solutions emerge. We can and should accelerate that process, but need to do so carefully and prudently–by introducing cost effective substitutes, while employing (insofar as possible) existing infrastructure and delivery systems, minimizing uncertainty, using available market mechanisms and educating the public on the need for change.
CONCLUSION
Over the past 50 years, U.S. energy policy has been faithfully diverse, often internally inconsistent, amazingly flexible in adjusting to public, market and commercial pressures, and incomprehensible to most observers. It is likely to retain many of these unique elements. The 1970s provided the last clear articulation of an attempted national energy strategy–and this was largely in response to global energy events. The 1973 Arab Oil Embargo prompted the development of the SPR, the adoption of CAFE (Corporate Average Fuel Efficiency) standards, and the formation of the International Energy Agency (IEA). Domestic natural gas shortages and the prospects for declining oil supplies prompted President Carter’s decision to lift oil price regulation and pursue energy sector transformation, ushering in a new era in U.S. policy driven by the market. In short, economics has prevailed over the past 25 years. Until recently, oil prices have remained relatively low and U.S. energy efficiency has increased. However, changing market and political conditions may complicate America’s policy agenda going forward, and these include:
Energy security, broadly defined in terms of attacks on infrastructure, and greater vulnerability to imported energy supply threats, either physical or financial, due to growing production concentration; Market developments, particularly in alternative fuels and with respect to climate change. In the future, markets may drive policy more than policy drives markets; Less multilateral cooperation in the international oil trading and investment market places as governments pursue specific narrow interests; Increased vulnerability to supply disruptions due to growing natural gas import dependence in the power sector; and Political hostility to U.S. policy in specific regions as allies and friends abandon the United States to ensure their own political survival.
The role of the United States as an energy producer, consumer, and importer has already been noted in some detail. The energy future of the country seems at once very clear but very worrisome: declining domestic production and rising domestic demand, with the gap to be covered by imports from suppliers whose national interests may not and historically have not coincided with our own. This almost inevitable growth in reliance on foreign supplies would, to the casual observer, seem to be a call to action, to define and implement policies that would concomitantly expand domestic supplies while setting demand management efforts in motion. To do so, however, requires a certain political will on the part of both the U.S. consumer and the government. And, to date, despite higher energy prices, real and threatened interruptions in supply, environmental damage, hurricanes and blackouts, that critical ingredient remains lacking. All energy producer/exporters and consumer/importers are bound together by a mutual interdependency. All are vulnerable to any event, anywhere, at any time, which impacts on supply or demand. This means that the U.S. energy future likely will be shaped, at least in part, by events outside of our control and beyond our influence. Calls for energy independence, absent major technological breakthroughs and a national commitment, ring hollow, and in the near term are both unrealistic and unachievable. In the absence of decisive political will to undertake those steps necessary to improve efficiency, promote conservation, encourage the development of domestic energy resources and renewable energy forms, learning to manage the risks accompanying import dependency may be the only reasonable course of action. It is against this backdrop that future U.S. environmental, economic, foreign, energy and security policies must be fashioned. Thank you.
The Chairman. Mr. Lovins, chief executive officer of the Rocky Mountain Institute, we welcome you and your testimony will be made a part of the record.
STATEMENT OF AMORY B. LOVINS, CHIEF EXECUTIVE OFFICER, ROCKY MOUNTAIN INSTITUTE
Mr. Lovins. Mr. Chairman, thank you for this opportunity to provide a broader context amplified in my written testimony for how to achieve energy independence without compromising national security. Both energy independence and its purpose, energy security, rest on three pillars. First, making domestic energy infrastructure, notably electric and gas grids, resilient because domestic is not necessarily secure. Second, phasing out, not expanding, vulnerable facilities and unreliable fuel sources. And, third, ultimately eliminating reliance on oil from any source. Listing those three pillars in the order I did emphasizes that achieving the third goal without the first two creates only an illusion of security. Hurricane Katrina might as well have read my 1981 finding for DOD that a handful of people could cutoff three-quarters of the oil and gas supply to the Eastern States in one evening without leaving Louisiana. We should worry not only about already attacked Saudi oil choke points like Abqaiq and Ras Tanura but also about the all- American Strait of Hormuz proposed in Alaska. DOE policy that did not undercut DOD’s mission would shift from brittle energy architecture, the next major failure inevitable, to more efficient, resilient, diverse, dispersed, renewable systems that make it impossible. It would avoid electricity investments that are meant to prevent blackouts, but instead make them bigger and more frequent. It would stop creating attractive nuisances for terrorists from vulnerable LNG and nuclear facilities to over- centralized U.S. and Iraqi electric infrastructure. And it would acknowledge the nuclear proliferation correctly identified by the President as the gravest threat to national security is driven largely by nuclear power. Each of these self-inflicted security threats can be reversed by cheaper, faster, more abundant, and security- enhancing alternatives available both from comprehensive energy efficiency and from decentralized supply. For example, nuclear power has already been eclipsed in the global marketplace by resilient, inherently peaceful, lower cost and lower risk micro power. That is a big win for national security and profitable climate protection and a vindication of competitive markets over central planning. Energy independence is not only about oil. Many sources of LNG raise similar concerns of security, dependence, site vulnerability, and cost. I do not expect that Iran and Russia would be more reliable, long-run sources of gas than Persian Gulf states are today of oil. Fortunately, half of U.S. natural gas can be saved by end- use efficiency and electric demand response with average costs below a dollar per million BTU, four times cheaper than LNG, thus making LNG needless and uncompetitive. America’s oil problem is equally unnecessary and uneconomic. Seventy-seven weeks ago, my team published “Winning The Oil End Game,” an independent, peer-reviewed, detailed, transparent, and uncontested study co-sponsored by the Office of the Secretary of Defense and the Chief of Naval Research. It shows how to eliminate U.S. oil use by the 2040’s and revitalize the economy led by business for profit. Welcomed by business and military leaders, our analysis is based on competitive strategy for cars, trucks, planes, and oil, and on military requirements. Our study shows how the United States can redouble the efficiency of using oil at an average cost of $12.00 per saved barrel and can substitute, save natural gas, and advance biofuels, chiefly cellulosic ethanol for the remaining oil at an average cost of $18.00 per barrel. Thus eliminating oil use would cost just one-fourth its current market price, conservatively assuming that its externalities are all worth zero. Side benefits would include a free 26-percent reduction in CO2 emissions, a million new jobs, three-fourths in rural and small-town America, and the opportunity to save a million jobs now at risk. America can either continue importing efficient cars to displace oil or make efficient cars and import neither the cars nor the oil. A million jobs hang in the balance. The key to wringing twice the work from our oil is tripled efficiency, cars, trucks, and planes, integrating the best 2004 technologies for ultra-light steels or composites, better aerodynamics in tires, and advanced propulsion can do this with 2-year paybacks. For example, new low-cost carbon composite manufacturing techniques can cut in half the weight and fuel use of our cars and light trucks, improve their safety, comfort, and performance, and not raise their manufacturing costs. Just for illustration, I brought along a little piece of such a material to illustrate that plastics have changed since “The Graduate.” Oil elimination’s compelling business logic will drive its eventual adoption, but supported public policy could accelerate it without requiring new taxes, subsidies, mandates, or Federal laws. This could be done administratively or by the States. Many innovative policies could also transcend gridlock. Size and revenue-neutral feebates could speed the adoption of super-efficient cars far more effectively than gasoline taxes or efficiency standards and would make money for both consumers and auto makers. While the policies could also support automotive retooling and retraining, super-efficient planes, advanced biofuels, low- income access to affordable personal mobility, and other key policy goals all at zero net cost to the Treasury. Early implementation steps are encouraging. Our analysis has already led Wal-Mart to launch a plan to double its heavy truck fleets’ efficiency and to consider tripled efficiency a realistic goal. The Department of Defense is also recognizing fuel- efficient platforms as a key to military transformation. Military needs for ultra-light, strong, cheap materials, and the science and technology commitments that that implies can transform the civilian car, truck, and plane industry as much as DARPA created the internet, GPS, and the chip and jet engine industries, and thus can lead the Nation off oil so we need not fight over oil, net negamissions in the Persian Gulf, mission unnecessary. I believe the shortest path to an energy policy that enhances security and prosperity is free-market economics, letting all ways to save or produce energy compete fairly at honest prices, no matter which kind they are, what technology they use, where they are, how big they are, or who owns them. That would make the whole energy security, oil, climate, and most proliferation problems fade away and would make our economy and our democracy far stronger. Thank you, Mr. Chairman. The Chairman. Thank you very much for your comments. [The prepared statement of Mr. Lovins follows:]
Amory B. Lovins
Prepared Statement of Amory B. Lovins,\1\ Chief Executive Officer, Rocky Mountain Institute \2\
Both energy independence and its purpose, energy security, rest on three pillars: ________________ \1\ Published in 29 books and hundreds of papers, Mr. Lovins’s work has been recognized by the “Alternative Nobel,” Onassis, Nissan, Shingo, and Mitchell Prizes, a MacArthur Fellowship, the Benjamin Franklin and Happold Medals, nine honorary doctorates, and the World Technology, Heinz, Lindbergh, Jean Meyer, and Time “Hero for the Planet” Awards. He’s a longtime advisor to the Departments of Energy and Defense and major energy firms worldwide. \2\ RMI is an independent, nonpartisan, entrepreneurial, nonprofit applied research center that creates abundance by design. Working mainly with the private sector, it fosters the efficient and restorative use of resources to make the world secure, just, prosperous, and life-sustaining. In recent years, RMI’s consulting team has redesigned $20 billion worth of facilities for advanced energy efficiency and has served or been asked to serve over 80 Fortune 500 firms.
- Making domestic energy infrastructure, notably electric and gas grids, resilient. 2. Phasing out, not expanding, vulnerable facilities and unreliable fuel sources. 3. Ultimately eliminating reliance on oil from any source.\3\ ________________ \3\ Since oil is a fungible commodity in a global market, national energy policy correctly recognizes that the problem is oil use, not imports: see n. 13, p. 14. For example, even if the U.S. imported no oil, it would still be a price-taker in the world market, so its economy, like its trading partners’, would still be buffeted by oil- price volatility. Oil infrastructure is also inherently vulnerable even if it is domestic (n. 4).
Listing them in this order emphasizes that achieving the third goal without the first two creates only an illusion of security. Hurricane Katrina might as well have read my 1981 finding \4\ for DoD that a handful of people could cut off three-fourths of the Eastern states’ oil and gas supplies in one evening without leaving Louisiana. We should worry not only about already-attacked Saudi oil chokepoints like Abqaiq and Ras Tanura, but also about the all-American Strait of Hormuz proposed in Alaska.\5\ DOE policy that didn’t undercut DoD’s mission would: ________________ \4\ A.B. & L.H. Lovins, Brittle Power: Energy Strategy for National Security, Brick House (Andover MA), 1981, and Rocky Mountain Institute, 1989; OCR scan reposted at www.rmi.org/sitepages/pid1011.php; summarized in A.B. & L.H. Lovins, “The Fragility of Domestic Energy,” Atlantic, pp. 118-126, Nov. 1983 (Attachment One hereto. Attachment one has been retained in committee files). \5\ Former Director of Central Intelligence R. James Woolsey, an Oklahoman not per se hostile to petroleum, testified against Arctic National Wildlife Refuge drilling on national-security grounds (Energy Subcommittee of USHR Science Committee, 1 Nov. 2001), and wrote that such drilling’s “real show-stopper is national security. Delivering that oil by its only route, the 800-mile-long Trans-Alaska Pipeline System (TAPS), would make TAPS the fattest energy-terrorist target in the country Uncle Sam’s `Kick Me’ sign. / TAPS is frighteningly insecure. It’s largely accessible to attackers, but often unrepairable in winter. If key pumping stations or facilities at either end were disabled, at least the above-ground half of 9 million barrels of hot oil could congeal in one winter week into the world’s biggest ChapStick. / The Army has found TAPS indefensible. It has already been sabotaged, incompetently bombed twice, and shot at more than 50 times. Last Oct. 4 [2001], a drunk shut it down with one rifle shot. / In 1999, a disgruntled engineer’s sophisticated plot to blow up three critical points with 14 bombs, then profit from oil futures trading, was thwarted by luck. He was an amiable bungler compared with the Sept. 11 attackers. Connect the dots: Doubling and prolonging dependence on TAPS hardly seems a prudent centerpiece for what advocates whimsically called the Homeland Energy Security Bill./ Reliance both on Mideast oil and on vulnerable domestic energy infrastructure such as TAPS imperils the security of the U.S. and its friends.” (R.J. Woolsey, A.B. & L.H. Lovins, “Energy security: It takes more than drilling,” Chr. Sci. Mon., 29 Mar. 2002, www.rmi.org/images/other/EnergySecurity/S02-05-- TakesMareThanDrill.pdf. For documentation, see hyperlinks to p. 73 in A.B. & L.H. Lovins, For. Aff., pp. 72-85, July/Aug. 2001, www.rmi.org/ images/other/Energy/E01-04 FoolsGoldAnnot.pdf, and later supplementary references at www.rmi.org/sitepages/pid171.php#E01-04.)
shift from brittle energy architecture that makes major failure inevitable to more efficient, resilient, diverse, dispersed systems that make it impossible; \6\ ________________ \6\ N. 4; “Surprises and Resilience,” RMI Solutions, pp. 1ff, spring 2006, www.rmi.org/sitepages/pid1200.php. ________________ avoid electricity investments that are meant to prevent blackouts but instead make them bigger and more frequent; \7\ ________________ \7\ Bigger power plants sending bigger bulk power flows through longer transmission lines tend to make the grid less stable (id.). Leading engineering analysts of electric-grid theory are reaching similar conclusions, e.g., http://eceserv0.ece.wisc.edu/ dobson/PAPERS/ carrerasHICSS03.pdf. FERC doesn’t let resilient options compete. ________________ stop creating attractive nuisances for terrorists, from vulnerable LNG and nuclear facilities to overcentralized U.S. and Iraqi electric infrastructure; \8\ ________________ \8\ See n. 4 for discreet details. Since the invasion of Iraq, private recommendations that its electricity infrastructure be rebuilt in decentralized form, virtually invulnerable to insurgent attack, have been repeatedly rejected. ________________ acknowledge that nuclear proliferation, correctly identified by the President as the gravest threat to national security, is driven largely by nuclear power.\9\ ________________ \9\ A.B. & L.H. Lovins and L. Ross, “Nuclear Power and Nuclear Bombs,” For. Aff. 58(5):1137-1177, Summer 1980. Had that article’s recommendations been adopted, we would not today be worrying about Iran and North Korea. In brief, nuclear power makes widely and innocently available the key ingredients–fissile materials, equipment, technologies, skills–needed to make bombs by any of the 20 known methods (other than stealing military bombs or parts). (New reactor types and the proposed reversal of the Ford-Cheney non-reprocessing policy greatly intensify these perilous links.) But in a world that took economics seriously, nuclear power would gracefully complete its demise, due to an incurable attack of market forces (n. 10), so these ingredients of do-it-yourself bomb kits would no longer be items of commerce. This would make them harder to get, more conspicuous to try to get, and politically far costlier to be caught trying to get, because for the first time the reason for wanting them would be unambiguously military. This would not make proliferation impossible, but would make it far more difficult and much easier to detect timely: intelligence resources could focus on needles, not haystacks. The U.S. example is critical because if a country with such wealth, technical skill, and fuel resources claims it cannot meet its energy needs without nuclear energy and reprocessing, then it invites every other less fortunate country to make the same spurious claim. Yet the U.S. could still offer to meet the intent of the Non-Proliferation Treaty’s Article IV bargain by sharing today’s cheaper, faster, more effective energy technologies (n. 10) to boost global development. The NPT’s specifically nuclear bargain was written by nuclear experts, in a nuclear context, around 1969-70, when nuclear energy was widely believed to be cheap and indispensable. Now that the market has decided otherwise, Article IV should be reinterpreted to achieve the same electricity-for-development goal by more modem, speedy, and affordable means, starting immediately with U.S./Indian energy cooperation: improving the non-nuclear 97% of India’s electricity system could produce enormously greater, wider, faster, and cheaper development benefits.
Each of these self-inflicted security threats can be reversed by cheaper, faster, more abundant, and security-enhancing alternatives, available both from comprehensive energy efficiency and from decentralized supply. For example, nuclear power has already been eclipsed in the global marketplace by resilient, inherently peaceful, lower-cost, and lower-risk micropower.\10\ That’s a big win for national security and profitable climate protection,\11\ and a vindication of competitive markets over central planning. ________________ \10\ Low-carbon cogeneration plus decentralized no-carbon renewables surpassed nuclear power’s global capacity in 2002 and its annual electricity output in 2005, and they are far outcompeting central stations despite typically lower subsidies and bigger obstacles. In 2004, micropower worldwide added 2.9 times as much output and 5.9 times as much capacity as nuclear power did (or at least ten times if electric efficiency were also included). Industry projects that in 2010, micropower will add 160 times as much capacity as nuclear power adds. Micropower comprises cogeneration (combined- heat-and-power using 1-120 MWe gas turbines, 1-30 MWe engines, and steam turbines only if in China), plus renewables excluding big hydro (>10 MWe). Electricity savings are probably even bigger than micropower additions but are not being well tracked. See A.B. Lovins, “Mighty Mice,” Nucl. Eng. Intl., pp. 44-48, Dec. 2005 (Attachment Two. Attachment two has been retained in committee files), www.rmi.org/ sitepages/pid171.php#E05-15, and for details, “Nuclear power: economics and climate-protection potential,” 11 Sep. 2005 / 6 Jan. 2006, www.rmi.org/sitepages/pid171.php#E05-14. Statistics at www.rmi.org/sitepages/pid171.php#E05-04 and .www.ren21.net/ dobalstatusreport/issue Group.asp. \11\ Choosing the best buys first could relieve climate concerns not at a cost but at a profit, because efficiency generally costs less than the energy it saves: A.B. Lovins, “More Profit With Less Carbon,” Sci. Amer., pp. 74-82, Sept. 2005, www.sciam.com/media/pdf/ Lovinsforweb.pdf (Attachment Three. Attachment three has been retained in committee files), and its extended bibliography, www.rmi.org/images/ other/Climate/C05-05a–MoreProfitBib.pdf. Reducing global energy intensity not by the normally assumed 1%/y but by 2%/y would eliminate CO2 growth; slightly faster improvement would stabilize climate. Both the U.S. and certain states have sustained intensity reductions well over 2%/y, and attentive companies around 6%/y, all at a handsome profit. Yet climate politics focus on cost, burden, and sacrifice rather than on profit, jobs, and competitive advantage. Fixing this sign error is the key to crafting a profitable climate solution. Of course, buying carbon-free resources judiciously, not indiscriminately, yields the most climate solution per dollar and per year. Expanding nuclear power would reduce and retard climate protection, simply because it’s costlier and slower than its key competitors–cogeneration, certain renewables, and efficient end-use. See Lovins papers in n. 10. ________________ Energy independence is not only about oil. Many sources of LNG raise similar concerns of security, dependence, site vulnerability, and cost: Iran and Russia won’t be more reliable long-run sources of gas than Persian Gulf states are of oil. Fortunately, half of U.S. natural gas can be saved by end-use efficiency and electric demand response with average costs below $1 per million BTU–four times cheaper than LNG \12--making LNG needless and uncompetitive. ________________ \12\ Saving 1% of U.S. electricity, including peak hours, can save 2% of total U.S. natural gas consumption and cut the gas price by 3-4% (see n. 13, pp. 112-116, 219-220). In this decade, such straightforward efficiencies could cut $50 billion off the Nation’s annual gas and power bills and relieve many gas and electricity constraints without costly, controversial, and vulnerable supply-side investments. The main obstacles are that gas efficiency isn’t on the federal policy agenda, and that 48 states reward utilities for selling more electricity and gas while penalizing them for cutting customers’ bills. Scores of other barriers, too, block wider purchases of energy efficiency in all sectors (see pp. 11-20 in www.rmi.org/images/other/Climate/C97-13-- ClimateMSMM.pdf), but each obstacle can be turned into a business opportunity if policy focuses systematically on “barrier-busting.” ________________ America’s oil problem is equally unnecessary and uneconomic. Seventy-seven weeks ago, my team published Winning the Oil Endgame–an independent, peer-reviewed, detailed, transparent, and uncontested study cosponsored by the Office of the Secretary of Defense and the Chief of Naval Research.\13\ It shows how to eliminate U.S. oil use by the 2040s and revitalize the economy, led by business for profit. Welcomed by business and military leaders, our analysis is based on competitive strategy for cars, trucks, planes, and oil, and on military requirements. ________________ \13\ Winning the Oil Endgame: Innovation for Profits, Jobs, and Security, RMI, 20 Sep. 2004, by A.B. Lovins, E.K. Datta, 0.-E. Bustnes, J.G. Koomey, & N.J. Glasgow; Forewords by George Shultz and Sir Mark Moody-Stuart; .PDF download free at www.oilendgame.com. That site also posts the Executive Summary (Attachment Four. Attachment four has been retained in committee files), 24 Technical Annexes, lay summaries from Ripon Forum (www.rmi.org/sitepages/pid171.php#OilDependence) and Fortune (www.rmi.org/images/other/Energy/E04-21_FreeFromOil.pol), Robert C. McFarlane’s Wall Street Journal op-ed (http://online.wsj.com/ public/page/0,,public_home_search,00.htm1#SB110350663319704480), and many other articles and reviews, and offers the 331-page hard-copy book for $40. ________________ Our study shows how the U.S. can redouble the efficiency of using oil at an average cost \14\ of $12 per saved barrel, and can substitute saved natural gas and advanced biofuels (chiefly cellulosic ethanol) for the remaining oil at an average cost of $18 per barrel. Thus eliminating oil would cost just one-fourth its current market price, conservatively assuming that its externalities are worth zero. Side- benefits would include a free 26% reduction in CO2 emissions, a million new jobs (three-fourths in rural and small-town America), and the opportunity to save a million jobs now at risk. America can either continue importing efficient cars to displace oil, or make efficient cars and import neither the cars nor the oil. A million jobs hang in the balance. ________________ \14\ Refiner’s acquisition cost on the short-run margin, 2000 $, 5%/y real discount rate. ________________ The key to wringing twice the work from our oil is tripled- efficiency cars, trucks, and planes. Integrating the best 2004 technologies for ultralight steels or composites, better aerodynamics and tires, and advanced propulsion can do this with two-year paybacks.\15\ For example, new low-cost carbon-composite manufacturing techniques can halve cars’ weight and fuel use, improving safety, comfort, and performance without raising manufacturing cost.\16\ ________________ \15\ Compared with EIA 1/04 Reference Case vehicle characteristics and fleet mix, fuel economy could be improved by 69% for cars at a levelized Cost of Saved Energy of 57 cents/gal, by 65% for Class 8 trucks at 25 cents/gal, and by 65% for planes at 46 cents/gal. The first 25% of truck and 20% of airplane fuel savings are free. Please see n. 13 and its Technical Annexes 4-6 and 12 for full analytic details and documentation. \16\ Because the advanced composites’ higher cost is offset by simpler automaking and smaller powertrains. See n. 13, pp. 44-73, Tech. Annex 5 (www.oilendgame.com/TechAnnex.html), and Intl. J. Veh. Des. 35(1/2):50-85 (2004), www.rmi.org/images/other/Trans/T04- 01_HypercarH2AutoTrans.pdf. One cost-competitive carbon-composite structural manufacturing process, being commercialized by a small firm, Fiberforge’, of which (full disclosure) I’m Chairman and a small shareholder, is described at www.fberforge.com/DOwNLOADS/ FiberforgeACCE05.pdf and in trade press articles at www.fiberforge.com/ PAGES/DETAIL_PAGES/inthenews.html. ________________ Oil elimination’s compelling .business logic would drive its eventual adoption. But supportive public policy could accelerate it without requiring new taxes, subsidies, mandates, or federal laws; this could be done administratively or by the states. Many innovative policies could also transcend gridlock. Size- and revenue-neutral feebates \17\ could speed the adoption of superefficient cars far more effectively than gasoline taxes or efficiency standards, and would make money for both consumers and automakers.\18\ Novel policies could also support automotive retooling and retraining, superefficient planes, advanced biofuels, low-income access to affordable personal mobility, and other key policy goals, all at zero net cost to the Treasury.\19\ ________________ \17\ Such feebates (= fee + rebate) would broaden the price spread within each size class by charging fees on less efficient vehicles and using the revenue to pay rebates on more efficient vehicles. Whether you pay a fee or receive a rebate depends on your efficiency choice within the size class you prefer. A typical feebate slope–$1,000 per 0.01 gallon/mile difference from the “pivot point” efficiency level set within each size class–would arbitrage the spread in discount rate between consumers and society, so a car buyer would consider full lifecycle fuel savings (nominally 14 years) rather than just the first 2-3 years. DOE/ORNL modeling, closely matching RMI’s, shows that such feebates yield both producer and consumer surplus. See n. 13, pp. 186- 190. \18\ See n. 13, pp. 169-190. \19\ See n. 13, pp. 178-226. The 2005 Energy Policy Act’s 3-5-year biofuel credits are too brief for investment horizons; any serious incentive, especially in an area fraught with investment uncertainties, should last at least a decade. However, I generally prefer abolishing energy subsidies to adding new ones, and I fear that the same broad policy conditions that created the energy market collapse of 1984-85 are now being repeated. ________________ Early implementation steps are encouraging. Our analysis led Wal- Mart to launch a plan to double its heavy truck fleet’s efficiency and to consider tripled efficiency a realistic goal.\20\ The Department of Defense is also recognizing fuel-efficient platforms, as a key to military transformation. Military needs for ultralight, strong, cheap materials can transform the civilian car, truck, and plane industries– much as DARPA created the Internet, GPS, and the chip and jet-engine industries–and thus lead the Nation off oil so we needn’t fight over oil: negamissions in the Persian Gulf, Mission Unnecessary.\21\ ________________ \20\ L. Scott, “Twenty First Century Leadership,” 24 Oct. 2005, www.walmartstores.com/Files/21st%20Century%20Leadership.pdf. \21\ Fuel-efficient platforms offer huge benefits in force protection, tens of billions of dollars’ annual savings in fuel logistics, and multi-divisional realignments from tail to tooth: n. 13, pp. 84-93, 221, and 261-262; Defense Science Board, More Capable Warfighting Through Reduced Fuel Burden, 2001, www.acq.osd.mil/dsb/ reports/fuel.pdf. ________________ The surest path to an energy policy that enhances security and prosperity is free-market economics: letting all ways to save or produce energy compete fairly, at honest prices, no matter which kind they are, what technology they use, where they are, how big they are, or who owns them. That would make the energy security, oil, climate, and most proliferation problems fade away, and would make our economy and democracy far stronger.\22\ ________________ \22\ Both a quick low-budget experiment (www.nepinitiative.org) and the National Commission,on Energy Policy (www.energycommission.org) revealed a broad ground for trans-ideological consensus on these general lines. The former effort found that a bipartisan group of private- and public-sector energy leaders could readily agree on a comprehensive, visionary, but practical framework for national energy policy by focusing on what they already agreed about thus making what they disagreed about largely superfluous.
The Chairman. I am going to start with Senator Thomas and come back to me at a later date. Senator Thomas. Senator Thomas. Mr. Chairman, thank you very much. Thank you, ladies and gentlemen, for your comments. Certainly this is an area we are all concerned with. We talk about it in fairly broad terms, but I think we have to talk about it and how we move. We have a policy now. The question is how do we implement that policy. I wanted to talk about something a little different. It seems to me we have long-term issues that are going to take a while. We have a problem, however, in the short term, and that is dealing with, for example, I think we have a real opportunity to convert coal, which is our largest fossil resource, to diesel fuel, for example. We can do that very shortly. As a matter of fact, we have plants prepared to do that right now. Unfortunately, I think our budgets and so on do not show much effort to give incentives to do that short-term thing. In the bill, the policy bill, I put in there that we need plants like this and some of them in areas over 4,000 feet so that we get out where the coal is. But, unfortunately, we do not have much support for that in the budget and so on. So at any rate, Mr. Woolsey, it seems like some of these things, ideas that you have are pretty long term. What do we do in the next 4 of 5 years? Mr. Woolsey. Well, Senator, cellulosic ethanol is now coming on the market, Iogen in Canada, backed by Shell oil, diesel from waste products such as turkey carcasses from a Canagra slaughter house—- Senator Thomas. Tell me about the volume of that, however. Oil from turkey carcasses obviously is not going to amount to much of anything. Mr. Woolsey. No. But that process works for used tires, for animal waste, for chicken litter, for billions of tons of waste of all kinds. And it has been so demonstrated in a pilot plan. And the cellulosic ethanol, the Wright brothers have already flown on this. The enzymes and genetically modified biocatalysts are working and they are producing cellulosic ethanol. It is a question of getting these–and I think the same thing is true of plug-in hybrids–the question is getting these up on the step of moving into large-scale production. It is not that one has to collect people for that project. Senator Thomas. Okay. Thank you. Let us talk about automobiles. We are going to have this business going on. How are you going to move, again, in a fairly short time, to make a conceivable difference between what we are doing now and what we are going to do–I just do not think we can—- Mr. Woolsey. Well, let me give one example, Senator. Brazil will—- Senator Thomas. Well, I have moved to the next witness. Mr. Woolsey. Sorry. Ms. Cischke. Well, we have two million vehicles on the road today from Ford Motor Company and six million in the industry. But if they cannot get E-85, then it becomes a problem. We are working with a company called Verisun Energy to increase the number of stations in the United States. And I mentioned before, we have 600 today and that is out of 170,000 gas stations. So some of the investment can happen very quickly in terms of getting dedicated fuel and then that would help quite a bit in the vehicles that we operate today. Senator Thomas. What is the balance between the cost of ethanol production in terms of particularly if it is done through crops and what we save in the final analysis? Ms. Cischke. Yes. Well, as you know, there is less energy in ethanol than there is in gasoline, there is about 28 percent less energy. So the fuel economy would be reduced by about 25 percent. But right now the cost of ethanol is cheaper than gas. And we believe that, as was mentioned before, in the cellulosic ethanol, that there could be a lot more done to develop that in a very cost-effective manner, and then that has even more benefit from a—- Senator Thomas. What can we do about CAFE standards? Ms. Cischke. Well, as you know, we are working very closely with NITSA to get to the maximum feasible CAFE standard, as well as reforming CAFE so that we cover a number of different product lines and it does not penalize the full vehicle manufacturers. But we have had CAFE for over 30 years and the whole desire for CAFE was to reduce our dependence on foreign oil. And it really has not had that effect because people are driving more. Senator Thomas. Well, you have not gotten CAFE standards, however. You have not reduced that. We have not seen a market change in automobiles. Ms. Cischke. Well, we have. We have increased CAFE quite a bit. In fact, we have improved energy efficiency of the vehicles quite bit, but we have also—- Senator Thomas. Tell me what the CAFE standards are now. Ms. Cischke. Well, it is 27\1/2\ for cars and it will be 22.2 for trucks in the next couple years. Senator Thomas. But it is not now. Ms. Cischke. Pardon? Senator Thomas. Is it not now. Ms. Cischke. For trucks? Senator Thomas. No. For 27 miles. That is not in place now. Ms. Cischke. Twenty-seven and a half, yes. Senator Thomas. Most of the cars out on the street are not 27 miles a gallon. Ms. Cischke. By law, the average CAFE fleet for each company is 27\1/2\ miles per gallon for the car—- Senator Thomas. For new ones, for new ones. Ms. Cischke. Yes, exactly. For new ones, right. Senator Thomas. All right. Mr. Lovins, you sort of indicated that there is no role for nuclear power? Mr. Lovins. I think it has died of an incurable attack of market forces despite a great deal of devoted talent and effort that have been put into it. Senator Thomas. You think it has died? Mr. Lovins. Yes, sir. I think the effect of the new subsidies you voted last year, which will pay roughly the entire capital costs of the next six plants, if any, will be roughly the same as that of defibrillating a corpse. It will jump, but it will not revive. And you may have noticed, Senator, that after those subsidies were voted, Standard & Poors put out two research reports saying they thought it would have no material effect on the builders—- Senator Thomas. Don’t you think the availability of the fuel and the cleanliness in the air impact will have some method of using nuclear fuel? Mr. Lovins. Well, as explained in the attachment for Nuclear Engineering International to my testimony, Senator, what matters is not simply the attributes of any particular technology, but its economic competitiveness within a market where there are many other technologies. Senator Thomas. None of which are now being used? Mr. Lovins. Senator—- Senator Thomas. See, my problem is—- Mr. Lovins [continuing]. Please be so kind as to look at the attachment because what it shows from industry data and government data is that micro power, some renewable, some fossil fueled cogen worldwide is already bigger than nuclear power in both output and capacity and is really many times faster. So those technologies not only do exist, but—- Senator Thomas. I have not seen those kind of facts before. Mr. Lovins. That is why I submitted—- Senator Thomas. And it comes back to the matters. All right. Thank you. Mr. Lovins. Thank you. The Chairman. Thank you very much, Senator. Senator Bingaman. Senator Bingaman. Thank you very much, Mr. Chairman. Let me ask Ms. Cischke? Ms. Cischke. Yes. Senator Bingaman. Ms. Cischke. Mr. Lovins says in his testimony new low-cost carbon composite manufacturing techniques can have cars’ weight and fuel use, improving safety, comfort, and performance without raising manufacturing cost. Has Ford looked at the benefits that might be achieved through moving to these low-cost carbon composite materials and, if so, what have you concluded? Why are we not seeing a move toward this by U.S. manufacturers? Ms. Cischke. Well, we are looking at all areas of where we can take weight out of the vehicle without compromising safety as well as improvements in today’s internal combustion engines. And all that does take investment. You know, when we tool up for a vehicle and we do research and development, it takes a long time to get that into the system. And so overall, we are always looking at ways that we can reduce the weight of the vehicle, improve aerodynamics, a number of different things. But from an overall standpoint, we share many of the body styles. We share a lot of components. So it takes time to be able to put that across the whole fleet. Senator Bingaman. But do you agree that once the investment is made to make the transition that, in fact, the manufacturing cost of cars from these new materials would be less than is currently the cost using the materials you have now? Ms. Cischke. I think it is something we would have to study. I have seen some of the data that I was shown by Mr. Lovins earlier. And we are looking at it in our research area, but I do not think that we have costed that out in terms of what it would take for our manufacturing plants and whether there would be a savings. Senator Bingaman. Back in, I believe it was April of last year, your company and the other U.S. manufacturers, auto manufacturers, I think all auto manufacturers, not just U.S. auto manufacturers, but all manufacturers, entered into a Memorandum of Agreement with the government of Canada to reduce greenhouse gas emissions from vehicles by 2010. Is there any reason why that same agreement would not make sense in the United States, that the same commitments that the companies have made with regard to vehicles sold in Canada should not apply also here in the United States? Ms. Cischke. Well, actually, it does in many ways. When we looked at the whole agreement with Canada, it is based on total greenhouse gases, so it involves more than just fuel economy. It is not a fuel economy standard. But if you take a look at what we have done in all areas and apply the fuel economy we are getting today in the United States, it would be equivalent to what we are shooting for in Canada. So the differences have a lot to do with how they are quantified in terms of greenhouse gas savings. And it is very similar to what we have. Senator Bingaman. So you do not really think there is any difference between what you agreed to do in Canada and what you are doing in the United States? Ms. Cischke. That is correct. Senator Bingaman. Okay. Let me just ask Mr. Lovins if he would take a minute and explain this proposal that he has for revenue-neutral feebates. That is an interesting proposal and an alternative way to get increased efficiency in automobiles alternative to CAFE standards. Could you just explain that briefly for us? Mr. Lovins. Yes, Senator. Gasoline taxes are a pretty good signal to drive less if you have alternatives, but they are a very weak signal to buy an efficient car because that price signal in the fuel is diluted many fold by the other costs of buying and running a car and then heavily discounted at consumer discount rates. So consumers really only look at the first 2 or 3 years of fuel savings. CAFE standards, we all know about and are pretty well gridlocked. We found that a more effective method would be to take each size class of light vehicles and institute forward a feebate system. That is a combination of a fee and a rebate, so that within each size class separately, the less efficient vehicles pay a fee according to how inefficient they are and the more efficient vehicles get a rebate paid for by the fees according to how efficient they are. So you would have an incentive within each size class to buy a more efficient vehicle, but no incentive to buy a different size than you wanted. And widening the price spread has the effect that you would look at the whole life cycle, say 14 years of fuel savings, not just the first 2 or 3 years. So you would make an investment decision that is efficient for society. The Oakridge DOE modeling of feebates comes to the same conclusions we did and adds that it would make more money for auto makers. At least one major auto maker already agrees with that. Senator Bingaman. Which auto maker is that? Mr. Lovins. I am not at liberty, Senator, to say which, but it is one that might surprise you. Senator Bingaman. Okay. My time is up, Mr. Chairman. The Chairman. Senator Bunning. Senator Bunning. Thank you, Mr. Chairman. First of all, I would like to put my opening statement into the record. The Chairman. It will be admitted. Senator Bunning. Thank you. [The prepared statement of Senator Bunning follows:]
Jim Bunning
Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
Thank you Mr. Chairman. It has been a difficult year for Americans who are facing higher gasoline costs and home heating expenses. Instability in foreign nations, like Iraq and Nigeria, and the devastation along the gulf coast at home have caused significant spikes in energy prices. I think that with energy prices at these highs, we can see clearly that our national security is threatened by our continued reliance on imported oil. Last year, we were finally successful in passing a comprehensive national energy plan. This wide-ranging legislation will impact nearly every facet of the energy industry and will encourage the development of cleaner technologies and renewable fuels and is the first step toward energy independence. I know my colleagues are aware that it will take time and the vigilance of Congress to ensure that the Energy Policy Act is properly implemented and funded. I think one of our top priorities should be on our most abundant domestic fossil fuel: Coal. New technologies will make burning coal both cleaner and more efficient. We are even developing coal-to-liquid technology that can create a synthetic transportation fuel from coal. American coal reserves will be our best tool to overcome our reliance on Middle East oil. We also have other domestic energy reserves, like ANWR and the Outer-Continental Shelf. I believe we can tap these oil and natural gas reserves in an environmentally sound way. That is way I have fought for ANWR and OCS legislation that will provide America with a new domestic source of fuel. I think we also need to develop our renewable fuels, especially stimulating biodiesel and ethanol production. In some parts of the world–and a few places in Western Kentucky–people drive their cars and trucks on a blend of fuel that is 85% ethanol. That means only 15% of the fuel is based on oil. The potential for this technology is great, and it is up to us to help it off the ground. We can use these domestic fuel sources to meet the energy challenges of the next 25 years. I look forward to developing these ideas further with the panel before the Committee today. Thank you Mr. Chairman.
Senator Bunning. Many of you have focused on biodiesel and transportation fuels, but coal is our most abundant domestic fossil fuel and accounts for half of our electric generation. The Energy Information Administration predicts coal will continue to be the centerpiece of our energy production for the next 25 years. That is not me. That is our Energy Information Administration. I believe we can lessen our dependence on imports by using clean coal power and nuclear energy to replace the imported natural gas and oil that currently goes to producing electricity. Do you believe that developing more efficient and cleaner coal technologies should be a priority, Jim? Mr. Woolsey. Senator Bunning, I think that since only 2 to 3 percent of our electricity now comes from oil, that whether it is clean coal or nuclear or renewables has a very limited effect to use those for electricity production. And the debates between them are important debates. I think that has very little impact on our oil dependence, which I think is the heart of the matter. I think that clean coal, particularly integrated gasification combined cycle coal with carbon sequestration has real promise. And we so said at the National Energy Policy Commission. Senator Bunning. I want to ask a question about that. Following up, I have been impressed with the new coal to liquid technology that you are talking about that can turn coal into synthetic liquid fuel. Other parts of the world like South Africa have been using this technology for decades. Mr. Woolsey. Yes, sir. Senator Bunning. I know there are several pilot facilities here in America, but what do we need to do to push this industry into full commercial-scale operations? Mr. Woolsey. Well, that is the German Fisher Trofe’s process developed in the air war years and used by the Germans in World War II to generate their diesel fuel. And as you say, the South Africans have substantially improved it in the intervening years. But I think one has to be able, if one is going to produce diesel fuel that way, to make sure that one can sequester successfully the carbon. And I think there is some promise of that with the integrated gasification combined cycle coal technology, but I am not sure whether there has been substantial progress sequestering the carbon for Fisher Trofe. And one of the other witnesses may know more than I about Fisher Trofe. But in principle, using coal to produce diesel fuel is certainly an option and one that we ought to vigorously explore further. Senator Bunning. Let me ask the Ford Motor representative. In some parts of the world and a few places in west Kentucky, people drive their cars and trucks on a blend of fuel that is 85 percent ethanol. And you spoke about that. Some of you on the panel have mentioned that the best case scenario for biodiesel is that it will only replace 10 percent of gasoline use for transportation. What are the limiting factors? Can the Government help address the problem like infrastructure and efficiency? Ms. Cischke. Well, certainly for the E-85, which is 85 percent ethanol, we do need infrastructure help. As I mentioned, there are only 600 stations and we need to have that help. We believe that by introducing a very popular vehicle like the F150 that will be able to run on E-85, it will do a lot to drive the demand for it because there is a lot of volume there. Senator Bunning. But didn’t we have the same trouble with diesel when we first started out? Ms. Cischke. Well, I am a little confused. Senator Bunning. I mean, I can just remember gasoline stations all of a sudden adding diesel pumps. Ms. Cischke. Right. Now, that is true. In Europe, as you know, almost 50 percent of the vehicles over there take diesel fuel so they have a lot more diesel than we do gasoline. The difference, though, is the oil industry can determine the balance between gas and diesel. But now when we are adding ethanol, it is a totally different process and a different supplier. And so we do need the oil industry to be behind increasing the ethanol production. So we have got a little bit different situation. Senator Bunning. But we are not going to get that. As you well know, they are not going to sell ethanol to replace their own product. Ms. Cischke. Well, they could. We are working with our partners, BP, and they are looking at biofuels in the future. It may not be ethanol. It might be another type of biofuel that could eventually replace gasoline. It is just that we need this research to happen and we need some incentive to make it happen. And we are seeing that now—- Senator Bunning. But I thought we did that in the energy bill. Ms. Cischke. Yes. And I think you are seeing some benefit of gas stations right now putting in capital investment for dedicated pumps. In companies like Verisun that I mentioned, we are trying to support. But we need the whole oil industry to be doing this research as well. Senator Bunning. Go ahead. My time is expired, but go ahead. Mr. Lovins. Senator, you may be surprised, but Shell is the world’s largest seller of biofuels. Senator Bunning. Right now? Mr. Lovins. Right now. Shell, BP, and others are making major investments in that area. And about half of Europe’s biodiesel, which in 2003 was 17 times our biodiesel production, is sold by oil companies as a brand new product. Senator Bunning. But is it produced by Shell or is it bought outside the company? Mr. Lovins. They use both models, sir. But my point is that an increasing number of major oil companies see biofuels as a logical transitional product and are making major investments both to produce and to sell it. Senator Bunning. Thank you, Mr. Chairman. The Chairman. Thank you. Senator Feinstein. Senator Feinstein. Thank you very much. I would like to ask the representative from Ford this question. If Ford is saying that it can meet Canada’s greenhouse gas reduction regime, which is approximately 25 percent by 2010, why is the company fighting California’s law to reduce greenhouse gas from vehicles by 30 percent by 2016? Ms. Cischke. Well, overall, the Canadian agreement is a national agreement. And the difficulty we have with California is it is a State agreement and it is very difficult. We believe that the fuel economy standards need to be nationwide. Otherwise, it puts companies in an untenable situation trying to balance—- Senator Feinstein. So you would support then nationwide standards to do something similar to what California is doing? Ms. Cischke. Yes. We would support nationwide standards. And, again, we need NHTSA to set the maximum fees for technologies. When I indicated that we were meeting Canadian commitments, that is forecasting out where we believe the fuel economy will be for our fleet at that time. And it is also the greenhouse gas holes which are more than just the fuel. Senator Feinstein. Would you work with us on a bill that would take that tact? Ms. Cischke. Well, we are trying to develop a national dialog to do this through NHTSA in order to achieve the maximum feasible ability, I guess, to do the fuel economy. And we believe that the CAFE reform that NHTSA is working on in truck CAFE will help along those lines as well. Senator Feinstein. As you know, this is very important to my State because 57 percent of emissions come from transportation, whereas nationally it is much less, about a third. So having this kind of national effort across the board, do you believe it would be realistic to set the goal of reducing greenhouse gases from vehicles by 30 percent by 2016? Ms. Cischke. That is a very aggressive number. We have looked at what it would take in terms of even if we produced a hundred percent hybrids, we could not make that number. Senator Feinstein. What do you believe would be realistic? Ms. Cischke. That is a pretty complex answer. And I think that is why working together–and, again, we are saying it has got to be a combined solution with auto makers, with the oil industry, with the consumers because, as you know, a lot of the issues have to do with how people drive. And the fact is we are predicting almost a 50 percent increase in vehicle miles traveled over the next 20 or 30 years. So we really do need to reduce the vehicles on the road and the consumers can do a lot in terms of driving more efficiently. Senator Feinstein. The Bush administration found that 99 percent of flexible-fuel vehicles on the road today never use a drop of E-85 ethanol. As a result, the administration found that this loophole actually increases America’s oil dependence by 14 to 17 billion gallons of gasoline per year. As I understand it, Ford uses its fuel economy credits for these flex-fuel vehicles to lower fuel economy standards for the rest of the automobiles so that we are not really doing much to increase vehicle economy. What would you suggest we do to really increase fuel economy? I had a bill just to bring SUVs over 10 years up to the fuel economy of the sedans which the fleet number, as you said, is 27 miles per gallon as opposed to the SUV at 20 miles per gallon. And it went down because there is really no support for that. Detroit opposes it very strongly. What do we do that Detroit could support to really rapidly increase fuel economy standards? Ms. Cischke. Well, I think we have to be very sensitive to what the consumers want to buy. Right now in the auto industry, over 30 vehicles get better than 30 miles per gallon in fuel economy, yet it accounts for less than 5 percent of our sales. So we have a challenge in terms of putting vehicles out there that nobody wants to buy. And that is a real problem for all the auto companies. When you mentioned the E-85 usage, this is kind of a chicken and the egg type situation. We need the fuel in order to make the vehicles run on E-85, but the fuel is not going to be there unless there is enough volume of vehicles. And I think by introducing a very popular-selling vehicle like the F150 to run on ethanol in a lot of the corn States where farmers would also get the benefit there will help drive that market. So I think there is a number of things that we need to do. But, again, I think we have to be sensitive to giving customers what they want and trying to do it in the most fuel efficient way. Hybrids are a good example of that. And as you know, Ford is committed to producing 250,000 hybrids by 2010 and offering those to our customers in over half of the models that we will sell in that timeframe. Senator Feinstein. Yes. Congratulations on that program. Ms. Cischke. Thank you. Senator Feinstein. Thank you, Mr. Chairman. The Chairman. Thank you very much. Senator Murkowski. Senator Murkowski. Thank you, Mr. Chairman. And I, too, would like my opening statements to be included in the record if I may. The Chairman. It will be included in the record. [The prepared statement of Senator Murkowski follows:]
Lisa Murkowski
Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
Mr. Chairman, thank you for holding this hearing. I’ll be brief. For three decades the holy grail of energy debate has centered on whether the United States can become “energy independent,” which some has interpreted as meaning we should produce ALL of our energy needs domestically, while others have interpreted as meaning we should produce a sizeable amount of our energy domestically–certainly far more than the 41% of our oil needs that we supply today, while remaining less dependent on imported liquefied natural gas. For years we’ve heard that energy independence is a pure pipe dream given that America–not counting ANWR–has just over 20 billion barrels of proven conventional oil reserves (1.6% of known world reserves), while the Middle East has 57% of the world’s known supply of conventional oil and nearly as much gas. But with rises in both oil and natural gas prices because of the exhaustion of much of the cheap “conventional oil and gas,” because of sharp increases in demand for energy from developing nations and because of environmental fears, we may well be moving into a period when unconventional fuels and new technology, including alternative fuels, can increase our domestic energy production and dare we say permit energy “independence.” The Pentagon last year began seriously funding research efforts to promote bio and synthetic fuel development to meet military needs. The Energy Policy Act of last summer provided research funding, tax incentives and policy changes to spur biofuels like ethanol, and hybrid vehicle sales to cut consumption; increased oil and gas recovery from heavy oil deposits and by use of carbon dioxide to produce more fuel from aging fields. We promoted oil shale and tried to speed permitting for conventional fossil fuel development on federal lands. We pushed the next generation of nuclear power, increased funding for wind, solar and geothermal energy, and increased the incentives–slightly–for more hydro power. The Energy bill furthered research and pilot plants for combined– cycle coal gasification, so we can produce more power, fuels and other products from coal–while producing near zero air pollution and possibly releasing no carbon into the atmosphere. And the Energy Bill encouraged energy efficiency, raising appliance and home and office heating and cooling standards. And in the short range we have the ability to produce more gas and oil from the Outer Continental Shelf, unlock billions of barrels of oil from Alaska’s Arctic coastal plain–you knew couldn’t get through a statement without plugging quick action to open ANWR–and also push other additional conservation and fuel efficiency efforts. What I hope to get from this hearing and our witnesses is an assessment of how likely all this new technology is to work within the constraints of real-world economics, and if it does, how much energy we are likely to produce, how much conventional oil and natural gas we are likely to displace, and what the environmental consequences–both good and bad–will be for us and the globe. And if any of our witnesses have ideas we have not thought of, I would love to hear them too. Thank you.
Senator Murkowski. Mr. Lovins, in looking at your testimony as well as some of the backup documentation that you have provided with it, you are arguing against producing more oil from Alaska basically from the security perspective. And I keep reading with interest the same phrase you have used, the all-American Strait of Hormuz, as well as the reference to this world’s biggest chapstick. So I went to your Atlantic monthly article and was reading it with great interest, but I noticed that it was written back in 1983. A heck of a lot has changed since 1983. And certainly from a security perspective, we kind of pride ourselves up in the State of Alaska on watching over this asset that we have. We realize that it is a long silver thread running through the State providing a valuable resource to the country. We recognize that security is an issue and we work very, very hard to make sure that we do provide for that protection. Unfortunately, you cannot prevent somebody from taking a potshot at it and inflicting some limited damage. But, overall, if you look at the track history of that pipeline for the past 30 years, it has got a pretty good record. And I find it unfortunate that some of the phrases that I see in this 1983 article keep sticking around because I think that it does do damage to the efforts that we have been doing in terms of providing for close to 20 percent of the country’s domestic oil needs for the past 20 some odd years. Let me ask you. You are focusing on the oil perspective in your comments. We are in the process now of trying to move Alaska’s natural gas from our north slope to the lower 48 States. And we would do this through a proposed natural gas pipeline. Do you have the same issues in terms of security for a natural gas pipeline to meet that energy need for this country that you have indicated in your comments about oil? Mr. Lovins. Senator, I think many of the details would differ. The gas pipeline would not be hot and would not have to be above ground and, therefore, very exposed. You would not have the coal restart problem that a hot oil pipeline does. That is the source of the chapstick comment. I would call your attention to the more recent article originally entitled “The Alaskan Threat to National Energy Security” that’s cited toward the end of footnote five in my prepared testimony, and it was published just weeks before 9/11 with a title change by the editor. And the annotated version of that, which is cited, details that the security issues I described have not gone away. The reason that Mr. Woolsey’s written testimony here today refers to a potentially devastating attack on the pipeline, and I presume the reason that he testified in the House against drilling in the arctic refuge on national security grounds is exactly my reasoning. And I find the scariest episode in the 30-year record you refer to, Senator, is not the drunk taking a potshot at the line. Rather it is the disgruntled engineer who was very fortunately caught months before blowing up three critical and very hard to fix parts of the line with 14 bombs he had already built and cold weather tested. And he was caught only because he involved someone else in the plot who turned him in. He was not aiming to hurt the United States. He intended to make money in the oil future’s market. But as Mr. Woolsey and I wrote in the Christian Science Monitor in 2002, that guy was an amiable bungler compared to our al Qaeda adversaries. Senator Murkowski. Well, we disagree that there are security issues as they relate to any resource aspect, whether it is a pipeline, an oil pipeline, a refinery. We should be concerned it. Our water sources, we should be concerned about them. But the reality is that when we have had a shutdown in the State of Alaska, the longest shutdown we have ever had was 66 hours and that was due to an earthquake that was, I think, 7.6 on the Richter Scale. It was a pretty substantial earthquake. Otherwise, essentially what we are looking at are shutdowns that really do not exceed more than 48 hours. So, anyway, the security aspect is one that we get concerned about. We are focused on it, but we are doing a pretty darn good job with the project. Mr. Chairman, I have other questions, but I see my time is up. The Chairman. Thank you very much. I am going to claim my time for just a moment Senator Bingaman, because I am probably going to have to go to a budget meeting of Members. Let me go back to why we had this hearing and just take one at a time. Mr. Woolsey, the purpose of this hearing is to talk about goals, discuss energy independence. First, does the idea of energy dependence make sense? I do not want a long dissertation. Is it something we should try to do? Mr. Woolsey. I do not worry nearly as much about natural gas as I do about oil for the reasons I stated, Mr. Chairman, so I tend to put this more in terms of oil security because shifting trade patterns does not do any good. In other words, if we were to buy less from the Middle East and more from Canada and Europe buys more from the Middle East and less from Canada, it does not really change anything. So to my mind, it is conserving conventional oil, moving away from it toward a range of these possibilities that a number of people, a number of Senators have raised, and some of which I emphasized along with Amory and others. I think that is the heart of the matter, so I would tend to say it is more oil security than it is energy independence. The Chairman. All right. And what is your view on that subject? Just the same question, same observation on your part. Ms. Cischke. Yes. I think that we know that we can drive both research in the fuel as well as advanced technology vehicles by encouraging that research through tax incentives and others. So we believe that there is an opportunity to use renewable fuels, like E-85, and eventually hydrogen if we develop the incentives to get people to invest in those. The Chairman. Mr. Verrastro. Mr. Verrastro. Senator, as I said in my statement, I think that the real crux of the issue is reducing consumption both globally and in the United States. If we reduce consumption by definition, we reduce imports. And I do not actually see that there is a huge difference between gas and oil. If you look at the areas of the world that have hydrocarbons, while we are importing more natural gas and building LNG gas facilities, if we are really concerned about unstable sources, take your pick. The Chairman. Mr. Lovins. Mr. Lovins. Mr. Chairman, I would agree with all of those comments and emphasize the importance of seeing them within the broader context of all of the things that drive energy security. It is not only about oil. It is about many kinds of vulnerability. And it is important that we get rid of them rather than make them worse. The Chairman. I just want to make an observation about ANWAR and your concerns about supply interruption. I cannot imagine that oil supply from Alaska to the United States is any more or less secure. Probably more secure than many sources of oil in the world today. There are far more insecure areas than it. So I do not understand the concern you have about it versus Iraq, Iran, and all the other countries that are so vulnerable. Mr. Lovins. Senator, it is—- The Chairman. I just made an observation, please. Mr. Lovins. Okay. The Chairman. Let me ask, since you all seem to be saying to us we should do something in the area of reducing our transportation use of crude oil derivatives so that we minimize our security, let me ask again, particularly of you, Mr. Woolsey, how serious a problem is this in terms of the United States and its future? We prepare ourselves for war. We commit ourselves totally for things like winning a war. I am not speaking of this war, but a war. How would you describe based on your experience this problem that we have with reference to oil dependency? Mr. Woolsey. I agree with former Secretary Shlesinger that it is the biggest threat to American security outside the area of combat itself. And just one illustration. Ten days ago, these al Qaeda radars attacked Abqaiq. Abqaiq has in it sulfur clearing towers through which the sulfur is removed from Saudi crude. If you take those out with, say, a hijacked aircraft, which is a scenario in one recent book, you could take some six million barrels a day off line for over a year. That would send oil to well over a hundred dollars a barrel. My friend, Bud McFarland, who was national security advisor to President Reagan, said I am an old Marine artillery-man and he said I have been up there and seen those towers and I could take them out with a good Marine mortar squad. So that type of crisis in the Middle East itself, quite apart from policies of governments there, is an immediate and direct threat to American security as far as I am concerned. The Chairman. Have you seen any estimates, any of you, of what might happen to the price of oil if the oil from Iran suffered from a total boycott in the world market? Mr. Woolsey. It is about four million barrels a day. I am sure it sends it up to over a hundred dollars a barrel, but I do not know how far. The Chairman. Have you seen any numbers on that? Mr. Verrastro. Senator, we have done some work on that and Jim is right. It is four million barrels day. The export market is a little over two million barrels a day depending on the amount of time if there were to be an embargo. Increased production from other sources as well as drawing down stocks both in Europe and the United States could offset the loss of Iranian crude. The problem is that if at the same Venezuela, Nigeria, Saudi Arabia, Iraq, it makes it more difficult. But you could do it. The Chairman. Well, I think what we are hearing here is that this talk about boycotting, stopping the flow of oil, doing something to Iran with reference to their economy, the truth of the matter is that is a two-edged sword. It hurts them. They cannot stand it very long, but the price of oil could go to a hundred dollars a barrel without any question. Mr. Woolsey. It is very much a two-edged sword if we cutoff Iranian exports. But Iran refines almost all of its crude abroad. So if we cutoff its imports of gasoline and diesel fuel, that might be far more effective. The Chairman. Ford Motor, let me ask, are you seeing signs in the marketplace that the price of gasoline is affecting the consumer choice of cars and are they choosing more efficient vehicles and is this trend something you are expecting and building pursuant to? Ms. Cischke. Yes. We have seen some of that, especially after Katrina, that the SUV sales did go down a bit. We had prepared for that in designing cross-over vehicles and getting back into the car business at Ford. And so we are adjusting our sales mix to match with the customers’ need. But we have also noticed a slight drop in the interest in the hybrids and that is a very fuel-efficient technology. Part of it is due to the early adopters of technology that have probably purchased those already. And in order to encourage the more mainstream customers, things like tax incentives help along that line as well. The Chairman. Okay. Last question and one for each of you. Mr. Woolsey, we have established the fact that what we are trying to do on independence is address the issue of transportation fuel. What two things would you recommend that we do if our goal is that and we wanted to achieve it? Mr. Woolsey. Encourage biofuels and plug-in hybrids via some combination of feebates as Amory suggests and tax incentives. The Chairman. All right. Ms. Cischke. Again, tax incentives for advanced vehicle technology as well as the fuel and also education for the public in terms of how important it is to conserve energy and there is things they can do along that line as well. The Chairman. If you got those things, would that have any bearing on whether you were interested in modifying the 1985 CAFE standards? Ms. Cischke. Well, we are working with NITSA to modify those standards in order to again look at maximum feasible technology as well as different classifications to make CAFE a little bit more productive. The Chairman. But if we did those things you recommend, you still would not support amendments to the CAFE standard to change the standards to mandate a more efficient fleet? Ms. Cischke. No. I think what we are saying basically is we have to address to what our consumers are demanding and we have got to find a way to make them want to buy more fuel-efficient vehicles. The Chairman. Thank you. What are your two? Mr. Verrastro. Increase fuel efficiency through technology, including what Amory is talking about, lighter-weight vehicles, and CAFE standards as well, and then supplemental sources of fuel. I would just point out that I—- The Chairman. What do you mean supplemental? Just tell us what it is. Mr. Verrastro. Biofuels, I think, is the most attractive right now and cellulosic ethanol. I would point out that all forms of fuel or crop raising takes energy. Plug-in hybrids, clearly that you would use them on off-peak hours, but you still need more coal and more natural gas, more nuclear to produce that extra electricity. So it all comes at a cost somewhere. The Chairman. What would your two be? Mr. Lovins. If you are asking on a technical level, I would say tripled efficiency, cars, trucks, and planes, and a diverse dispersed, decentralized resilient, invulnerable electric system. If you are asking on a policy level, I would say size and revenue-neutral feebates and encouraging the States to reward gas and electric utilities for cutting your bill, not for selling you more energy. That would free up half the gas in the country and a lot of that could be substituted back for oil. The Chairman. Okay. With that, we are going to go through the rest of it. I think the next Senator is Senator Salazar; is that right? He was here earlier. Senator, you were here and had to leave for something. I am going to recognize that unless—- Senator Salazar. I had to go to a Veterans’ Affairs hearing. But if Senator Dorgan has to go, please go. The Chairman. All right. Senator Dorgan, he wants you to go. Senator Dorgan. Thank you, Mr. Chairman. First of all, Mr. Lovins, I have always enjoyed your work and research and writing in these areas. And you do say, however, in your last paragraph of your statement, that the surest path to energy policy that enhances security and prosperity is free-market economics. It is the case, however, much of what you propose will require policy changes and will not be necessarily a part of free-market choices. Isn’t that the case? Mr. Lovins. Senator, I think the policy suggestions in winning the oil end game are very much less interventionist than anything else I know in energy policy. And by the way, such interventions as are suggested are generally in the category of getting out of the way and are typically at a State rather than Federal level. We do not suggest in there a need for any new Federal laws, taxes, mandates, or subsidies. So it is pretty much the opposite of flavor from energy policy as we have known it. Senator Dorgan. But the feebates themselves would be Federal policy, correct? Mr. Lovins. They could ultimately be Federal. I think like most suggestions, they should be piloted at a State level and they could perfectly well be adopted just at a State or regional level. Senator Dorgan. Mr. Woolsey, following up on the question by the chairman about the goal of independence, in addition to having a supply of oil which is actually critical to our economy and to the functioning or our economy, in addition to that, it is the case that our dependence on foreign oil at the moment is likely financing terrorism. Is that the case? Mr. Woolsey. Absolutely. This is the first war the United States has fought, Senator, this War on Terrorism, I guess except for the Civil War, in which the United States pays for both sides. By shipping a billion dollars every working day abroad in debt, $250 billion a year to pay for imported oil, we are funding things like indirectly the Madrassas, the Wahhabis running Pakistan, and the rest. And that educates in hatred and hostility to democracy, to all other religions and the rest. So I think you are exactly right. Senator Dorgan. Go to the 9/11 Commission report for some of that information as well. Mr. Woolsey. Absolutely. Senator Dorgan. You know, I think a dispassionate observer living off of our planet and looking at this planet and seeing that we use what, 84 million barrels a day that we extract from the planet. One-fourth of that is used in this little spot called the United States. A substantial portion of the inventory exists in another part of the globe covered with sand. And they would look at this part of the country or this part of the planet, the United States, needing a quarter of it, 60 percent of what it needs coming from off our shores, particularly from troubled parts of the world and they would say, well, how could they not have been so concerned about that that they would have taken dramatic action, because tonight or tomorrow or next Saturday or God forbid next month or whenever, a terrorist action or some other cataclysmic action could just simply throw this country’s economy flat on its back. It will affect every job. It will affect everything we do. And so when the chairman has a hearing, the chairman and Senator Bingaman have a hearing that talks about the goal of energy independence, this is not just some etherial notion about what would be nice to do. This is really an urgent priority for a country. I mean, I guess the question is, do we have the luxury of deciding whether to try to strive for independence specifically of oil or is this an urgent requirement for this country at this point? Mr. Woolsey. I think it’s extremely urgent, Senator Dorgan. I think that this could collapse on us at most any time. There was almost a coo in Saudi Arabia in 1979. And Iran could cutoff for a while for its own reasons of pursuing its nuclear program, terrorist attacks in a number of places. This is something that we need to fix and we need to fix now. And that is the reason why I think this portfolio of moving forward with several different types of encouragement for biofuels and plug-in hybrids is, and I think Amory’s lightweight materials are another, that if you work these problems together, the effect is multiple. A hybrid that now gets 50 miles a gallon, if it becomes a plug-in hybrid, it gets about 125 miles per gallon of petroleum products. The rest is electricity from the grid. If you make it out of lightweight materials, like Amory suggest, you’re probably up to 250 to 300 miles per gallon because the lightweight materials are so good at reducing cost of fuel. And if it is an E-85 capable vehicle that is a flexible- fuel vehicle–and by the way, Brazil has gone in 2 years from having 5 percent to 75 percent of their new cars be flexible- fuel vehicles. So if it’s a flexible-fuel vehicle that can use E-85, you’re now up close to a thousand miles per gallon. If one of those or more than one do not work out real well, you have got a portfolio in which you are moving forward and maybe some work out better than others. But if we only get up to two or three hundred miles per gallon, how bad is that? So to me, that is the essence of it. We want to do things that are compatible with the existing infrastructure and can do quickly. Senator Dorgan. I think my time is about up. A couple people wanted to comment. I did want to ask you about hydrogen because I agree with the urgency of the short term and the urgency to do a lot of things in the short term, but I also believe that in the longer term, the 25- and 50-year term, that hydrogen fuel cells are a very important part of our future. But, Mr. Chairman—- Senator Thomas [presiding]. We have some more that want to ask questions. Senator Dorgan. Mr. Chairman, I understand. Thank you. Senator Thomas. Senator Talent. Senator Talent. Let me ask Ms. Cischke a question and then just a question for everybody. I know you are developing a hybrid vehicle that is capable of running on E-85—- Ms. Cischke. That’s correct. Senator Talent [continuing]. To get the efficiencies associated both with hybrid and also E-85. Maybe you could discuss your plans. And then to everybody, and Senator Dorgan just touched on this, how fast are we building out the infrastructure for E-85 and what can we do to make that go faster? Ms. Cischke. Yes. Ford did announce recently a research program to take a hybrid vehicle and run it on E-85. And there are some technology challenges in terms of evaporative emissions and other things. But we believe there is a lot of promise there because you are marrying two fuel-saving technologies, the hybrid, which helps more in the city driving, and then the E-85, which would be on the road. I just wanted to comment a bit on the plug-in hybrids as well because more research has to be done on that. But there are changes in the vehicle system. We need more batteries, a little bit heavier. We are concerned with battery life. So we do have to figure out how we balance that. But if the electricity we get from the grid is not a clean source as it is in Japan and others, then I am not sure we are making a good tradeoff in terms of the energy. So there is a lot of work that needs to be done in these advanced technologies. And we do believe that there is not one clean solution. It has got to be a number of different clean diesel, hybrids, fuel cells, a number of things that we are working on. Senator Talent. Thank you. Do you all have any comments on building out the infrastructure for E-85 which in layman’s terms, I think, means in large part having pumps available to the average consumer that E-85 is available to. Ms. Cischke. In fact, Ford has entered into a program with Verisun to try and increase the number of fueling stations. I know other manufacturers have as well. But I think we do need to get more stations available so that we can have E-85 used in all the vehicles that are out there today. Senator Talent. Because we are building the plants and I think in the Midwest in particular, that process, that cat is out of the bag and that is going to happen. We have just got to get it to consumers. Mr. Verrastro, do you have a comment? Mr. Verrastro. Yes. Two things. The first point is that the flexible-fuel vehicles run on about 10 to 15 percent alcohol or ethanol rather than 85 percent. An E-85 is a totally different bird. There are evaporative emissions issues in terms of the environment. There is also massive transportation and distribution issues. You cannot put it in a pipeline. In our country on the coast, we have the greatest demand for fuels. If you grow corn or use cellulosic ethanol and then transport it to the coast and you cannot put it in pipelines, you have to find a different distribution system. Clearly in Europe, the oil companies have taken to incorporate biodiesel and biomass and other fuels at their retail stations. It is the cost of a tank and a pump. But this transition to move to E-85, I am not sure that that is the answer. Brazil, as Jim Woolsey just said, is kind of the poster child for ethanol. And over the weekend, they reduced the content of the ethanol in their fuel from 25 percent to 20 percent because they cannot produce enough of it. So to think that we are going to grow our way crop-wise into an energy solution, I think is far reaching. Mr. Woolsey. Senator, Brazil is using sugarcane which has to be cultivated. Grass grows pretty much everywhere. And with cellulosic ethanol, the National Energy Policy Commission found you do not need more land available than is already in the soil bank and is already on farmers’ land with grass to be mowed. And it is 30 million acres. You do not need more land than that to replace half the gasoline in the country. So I do not agree that we have a land scarcity problem with respect to that. Senator Talent. And I agree with your statement, too, Mr. Woolsey. I mean, it cautions against viewing technology in a snapshot and making policy. The top of page 9 where you say the developments that are currently going on with regard to ethanol, biodiesel, genetically engineered plants basically, are comparable in importance to the invention of thermal and catalytic cracking of petroleum. In other words, there was a time when you could have made all the arguments against petroleum and said, well, gee, it is never going to be available, we are not going to be able to get enough of it, and the rest of it. Mr. Woolsey. Absolutely. A century ago, before thermal cracking was invented, you could use about 1 percent of petroleum to produce gasoline. And you can use less than 1 percent of what grows to produce ethanol now. But the genetically modified biocatalysts, and you do not have to change the plants themselves–it is just the enzymes and the yeasts that operate the process–those have now been invented and it is being used in Belgium and Canada with Shell backing to produce cellulosic ethanol. Senator Talent. The more that we do, the more options we are going to have for the future. And the more this technology matures, the more the infrastructure builds out, the more options we are going to discover for the future. Mr. Woolsey. Absolutely. Senator Talent. If I have time, Mr. Lovins can comment, but I do not want to take more than my time, Mr. Chairman. Senator Thomas. Go ahead. Try and hold it down a little bit. Mr. Lovins. Senator, I would call the Commission’s attention to the Bio Alcohol Fuel Foundation, baff.info in Sweden. There is a majority bill pending in the Swedish Parliament to require the top half of the filling stations to provide E-85 in the next few years. And both Volvo and Saab have said that they could by then be making as in Brazil total flex vehicles which take anything from pure ethanol to pure gasoline, any blend. That is one of the reasons for the success of the Brazilian program. There are no captive customers, so biofuels really have to compete just on price and they do without subsidy. Senator Thomas. I would like to go ahead, if we don’t mind, with Senator Salazar. Senator Salazar. Thank you very much, Senator Thomas and Senator Bingaman. I just wanted to followup on a comment from Senator Talent and the responses with respect to where we can go with renewable fuels. It seems to me that given what the President has said on our addiction to foreign oil and what the National Renewable Energy Lab is telling us and the energy experts is that we really do not have a lot of limitations. They tell us that within 6 years from now, we are going to be at a point where we can be in the commercial production of cellulosic ethanol, which I think is going to open a whole new door. So I think we ought never to look at the current snapshot of technology as being a limitation that we currently have as we seek energy independence, oil security, or whatever it is that you might want to call it. Here is my question for all four of you. There are a number of us, Senator Luger, Senator Coleman, and there are six Republicans, six Democrats on the bill, S. 2025. It essentially sets out a target of getting us to reduce oil demand in this country by some ten million barrels by the year 2031. That is the target. And the tools to get us there essentially are twofold. One is major investments in renewable energies, including ethanol and other kinds of renewable energy sources, and, second, incentives and programs for advanced technologies, including flex-fuel vehicles and hybrid plug-ins and the like. My question to all of you–and I know, Mr. Woolsey, you have been involved in this for some time–if you would comment on that and in this context. The President told us at the White House the other day, he said I want to be bold. I do not want to be foolishly bold. And if we are in the face of this national security crisis which I believe we are in with respect to our over-dependence on foreign oil, how bold can we be and is 2025 the right direction for us to go? Mr. Woolsey. Senator Salazar, I very much support that bill. I think that the President’s objective is about three times in 2025 what ANWAR would have delivered. It is about maybe 8 percent of our oil and ANWAR was about three. Your objective in the bill is about three times the President’s objective, about 25 percent replaced by these other fuels and by economies. Senator Salazar. Is that a foolish target? Mr. Woolsey. I do not think it is a foolish target at all. I think it is a very reasonable target. Senator Salazar. Reasonable? Mr. Woolsey. And I think that especially if one approaches as the bill does with these several approaches at once as noted, one may work out a bit slower or a bit better. Another may work out a bit faster or a bit worse. We do not know. But if one moves with the efficiency and things like plug- in hybrids and with the biofuels and encourages them all now, I think year 2025 goal is extremely reasonable. Senator Salazar. Ms. Cischke, could you respond to that as well? Ms. Cischke. Yes. I think that we are prepared to put out more vehicles capable of running on E-85. And whether we get it right now in the short term from corn or later as–I agree with what our other panel members have said about cellulosic ethanol and there is great research that is happening today that will increase the production. So, again, we can produce vehicles that give us that flexibility. It is just that we need to start now to develop that infrastructure and ramp it up very quickly. And at the same time, we are looking at hydrogen as well as hybrids to help along that line for vehicle technology. But it has to be a system of vehicles, fuel, and then consumer behavior as well. Senator Salazar. Has Ford taken a position on S. 2025? Ms. Cischke. I do not think so. I am not familiar with that, no. Senator Salazar. Would you get some information to me on your review and analysis of the bill, please? Ms. Cischke. Yes, I will. Senator Salazar. And, Mr. Verrastro, same question. Mr. Verrastro. Senator Salazar, I think it is a great stretch target. I think it is overly ambitious. I would argue that American consumers want affordable, available, reliable, secure, and environmentally benign fuels. And depending on which one of those priorities you take, your approach is slightly different. And I would add the competitive factor. We cannot produce something or move the industry to something that is not competitive where the rest of the world is using a lesser expensive fuel without putting our industries at risk. That is the only caveat I would add. Senator Salazar. Mr. Lovins. Mr. Lovins. Senator, I think by 2025, oil use and imports in this country could be at 1970 levels and both heading down all led by business for profit. Let me just remind us all that from 1977 to 1985, the last time we paid attention to oil in this country, in those 8 years, GDP grew 27 percent. Oil use fell 17 percent. Oil imports fell 50 percent. Oil imports from the Persian Gulf fell 87 percent, and it would have been gone in one more year if we had kept that up. This broke OPEC’s pricing power for a decade because we could save oil faster than they could conveniently sell less oil. We are the Saudi Arabia of nega barrels and we can rerun that old play all over again. Senator Salazar. Thank you for your participation here today. Senator Thomas. Thank you very much. We have a vote going on, so we will have to–I want to thank you. I think this has been very interesting and useful in terms of the topic here, which is independence. I just have to say from my own standpoint that we have to also look a little closer. We are going to have to use coal in the interim as you accomplish these things that you all see far out. We are going to have to see new ways of recovering oil here. We have more resources than you act like we have if we can find new ways of doing it. Nuclear is going to be part of our system, I think, and I do not think there is any question about that. And conservation is something we can do rather quickly if we move to do it. So you had got great ideas. We look forward to working with you in the future. And thank you so much for being here. [Whereupon, at 11:17 a.m., the hearing was adjourned.]
[Subsequent to the hearing the following statement was received for the record:]
Statement of the American Petroleum Institute
API is a national trade association representing more than 400 companies involved in all aspects of the oil and natural gas industry, including exploration and production, refining, marketing and transportation, as well as the service companies that support our industry. Its mission is to advocate public policy in support of a strong, viable U.S. oil and natural gas industry essential to meet the energy needs of consumers in an efficient and environmentally responsible manner. API advocacy on public policy issues is based on the consensus of its members. We live in an energy interdependent world, and complete energy independence is probably unachievable and certainly undesirable. Even if it were achievable or nearly achievable, the costs to consumers and our economy for pursuing this goal would in all probability be enormous. Nevertheless, there is much we can and should do to strengthen our energy security. These measures, which will require changes in energy policy, must focus on increasing energy supplies, oil and natural gas and other conventional as well as alternative energy; reducing demand; and expanding and diversifying our energy infrastructure. By taking these steps we are likely to produce more of our own energy and reduce volatility in energy markets. For Congress to repeat the mistakes of the past by imposing new controls, new or expanded mandates, allocation schemes, new taxes on industry, or other obstacles would be counterproductive.
U.S. ENERGY SITUATION IN A GLOBAL MARKET
World oil demand reached unprecedented levels in 2005 and continues to be strong despite higher prices last year. Strong economic growth, particularly in China and the United States, has fueled a surge in oil demand. At the same time, the world’s oil production was not able to keep up with the strong growth in demand. World oil spare production capacity–crude that can be brought online quickly during a supply emergency or during surges in demand–is at its lowest level in 30 years. Current spare capacity is equal to only about 1 percent of world demand. The delicate supply/demand balance in the global crude oil market makes this market extremely sensitive to political and economic uncertainty, unusual weather conditions, and other factors. Over the past several years, we have seen how the market has reacted to such diverse developments as dollar depreciation, cold winters, the post-war insurgency in Iraq, hurricanes in the Gulf of Mexico, the Venezuelan oil workers’ strike in 2002-2003, uncertainty in the Russian oil patch, ongoing ethnic and civil strife in Nigeria’s key oil producing region, and decisions by OPEC. We currently import more than 60 percent of the crude oil and petroleum products we consume. American refiners pay the world price for crude and distributors pay the world price for imported petroleum products. U.S. oil companies don’t set crude oil prices. The world market does. Whether a barrel is produced in Texas or Saudi Arabia, it is sold on the world market, which is comprised of hundreds of thousands of buyers and sellers of crude oil from around the world. Complicating the overall U.S. fuel supply/demand situation are numerous contributing factors. Passage of the new Energy Policy Act has led to a new renewable fuels standard, the elimination of the reformulated gasoline oxygen requirement in May, and the expected rapid phase out of MTBE use in gasoline. In addition, ultra-low sulfur diesel will be introduced starting June 1. The industry is working hard to meet these new requirements, but they are major transitions and will present a challenge.
MEETING U.S. ENERGY CHALLENGES
The Energy Policy Act of 2005 signals a first step in a much-needed effort to enhance energy security and ensure the reliable delivery of affordable energy to consumers. Nevertheless, much remains to be done. We can no longer afford to place off limits vast areas of the Eastern Gulf of Mexico, off the Atlantic and Pacific coasts, and offshore Alaska. Similarly, we cannot afford to deny Americans consumers the benefits that will come from opening the Arctic National Wildlife Refuge and from improving and expediting approval processes for developing the substantial resources on federal, multi-use lands in the West. In fact, we do have an abundance of competitive domestic oil and gas resources in the U.S. According to the latest published estimates, there are more than 131 billion barrels of oil and more than 1000 TCF of natural gas remaining to be discovered in the United States. Much of these oil and gas resources–78 percent of the remaining to be discovered oil and 62 percent of the gas–are expected to be found beneath federal lands and coastal waters. The amount here is enough oil to power 55 million cars for 30 years and heat 24 million homes for 30 years. And there is enough natural gas to heat 60 million homes that use natural gas for 120 years. Federal restrictions on leasing put significant volumes of these resources off limits, while post-lease restrictions on operations effectively preclude development of both federal and non-federal resources. Addressing these restrictions is critical. And, while we must focus on producing more energy here at home, we do not have the luxury of ignoring the global energy situation. In the world of energy, the U.S. operates in a global marketplace. What others do in that market matters greatly. For this country to secure energy for our economy, government policies must create a level playing field for U.S. companies to ensure international supply competitiveness. With the net effect of current U.S. policy serving to decrease U.S. oil and gas production and to increase our reliance on imports, this international competitiveness point is vital. In fact, it is a matter of national security. An important, related issue is natural gas, which fuels our economy–not only heating and cooling homes and businesses but also generating electricity. It is used by a wide array of industries– fertilizer and agriculture; food packaging; pulp and paper; rubber; cement; glass; aluminum, iron and steel; and chemicals and plastics. And, natural gas is an essential feedstock for many of the products used in our daily lives–clothing, carpets, sports equipment, pharmaceuticals and medical equipment, computers, and auto parts. Only four to five years ago, natural gas prices were in the $2 to $3 per million Btu (MMBtu) range. Recently, prices have settled in the $6-7 per MMBtu range, after reaching record levels in December 2005 of $14-15 per MMBtu. Higher natural gas prices have taken their toll–more than 2.8 million U.S. manufacturing jobs have been lost since 2000, and chemical companies closed 70 facilities in the year 2004 alone and have tagged at least 40 more for shutdown. Unlike oil, natural gas imports in the form of liquefied natural gas (LNG) are limited by the lack of import terminals. There are only five operating in the United States. A number of additional terminals have been proposed but many have run into not-in-my-backyard opponents and complex permitting requirements. While natural gas imports from Canada have been important, Canada’s own needs are growing. Expanding our ability to tap into global natural gas supplies is essential. The National Petroleum Council (NPC) study, “Balancing Natural Gas Policy: Fueling the Demands of A Growing Economy” (2003), highlighted the significant costs associated with current policies–such as access restrictions on the Outer Continental Shelf and process impediments to development in the West–that impede the development of America’s abundant natural gas resources. The NPC estimated that continuing on our current policy path could result in $300 billion more in consumer costs over 20 years. Beyond easing the way for greater development of oil and natural gas, we must also address those public policies that inhibit refinery capacity expansion. The U.S. refining industry has been expanding a little more than 1 percent per year over the past decade–the equivalent of a mid-size refinery being built each year. In order to create the opportunity for increasing the growth of U.S. refining capacity, government policies are needed to create a climate more conducive to investments in the refining industry. In addition, many of the steps the federal government could take to help the refinery capacity situation are covered in the December 2004 National Petroleum Council (NPC) study, Observations on Petroleum Product Supply–A Supplement to the NPC Reports “U.S. Petroleum Product Supply–Inventory Dynamics, 1998” and “U.S. Petroleum Refining–Assuring the Adequacy and Affordability of Cleaner Fuels, 2000.” The NPC study suggested that the federal government should take steps to streamline the permitting process to ensure the timely review of federal, state and local permits to expand capacity at existing refineries. For example, new-source review (NSR) requirements of the Clean Air Act need to be reformed to clarify what triggers these reviews. Some refineries may be able to increase capacity with relatively minor adjustments, but are unsure if the entire facility’s permit review would be triggered–a burdensome and time-consuming process. In addition to the administrative issues deterring new refining capacity investments, there are financial constraints as well. Attracting capital for new refining capacity has been difficult with refining rates of return historically averaging well below the average for S&P Industrials. Over the 10-year 1995-2004 period, the return on investment for the refining and marketing sector was 7.7 percent or less than half as much as the 13.9 percent for S&P Industrials. In only two years between 1977 and 2004 did the average return of refiners exceed the average for the S&P Industrials. While taking these factors into account, it is important to remember that the oil and natural gas industry operates in a global marketplace. Many oil and gas companies are global companies, whose U.S. investment decisions compete not only with decisions as to how to allocate capital investments in the U.S. among various sectors of the industry, but also with competing demands and investment needs overseas. In a global marketplace, companies will make the best economic investment decisions in order to bring affordable petroleum products to consumers. Imports may be the more economical option than new U.S. refineries, but that is a decision to be left to the global marketplace. Government policies must encourage, not interfere with, the global marketplace.
ALTERNATIVE ENERGY
Alternative energy has much potential, but it is not likely to become a substantial let alone dominant part of the market for many decades. While the U.S. EIA forecasts a 50-percent increase in renewable energy consumption between 2004 and 2025, it also forecasts that the renewable energy share of total U.S. energy consumption will rise from 6 percent to only 7 percent during that period. There is a misperception by some about the time and costs involved in any transition to the next generation of fuels. Consider what would be involved in replacing the dominant role of oil with a substitute like hydrogen or solar power. Most experts agree that such a transition would require dramatic advances in technology and massive capital investments–and take several decades to accomplish, if at all. The United States–and the world–cannot afford to leave the Age of Oil before realistic alternatives are fully in place. It is important to remember that man left the Stone Age not because he ran out of stones. And, when we someday leave the Age of Oil, it will not be because we will have run out of oil. Rather, oil will be replaced by alternatives that are proven more reliable, more versatile, and more cost-competitive than oil. This does not mean that our industry is narrowly focused on oil and natural gas alone. In fact, our companies have long been pioneers in developing alternative sources of energy. Permit me to cite several examples:
BP is one of the world’s largest producers of photovoltaic solar cells; Chevron is the world’s largest developer of geothermal energy; Our industry is the largest producer and user of hydrogen; ExxonMobil, BP, Chevron, Shell and ConocoPhillips are key players in government/industry hydrogen fuel and vehicle partnerships, such as the DOE FreedomCar and Fuel Partnership and the California Fuel Cell Partnership; and Shell is one of the top players in the worldwide wind industry.
Our companies intend to meet the energy needs of industrial and retail consumers well into the future, and they compete fiercely with one another and others for the opportunity to do so. The companies’ research and development efforts are continuing in the search for the most competitive, efficient, and economical energy technologies. Indeed, thanks to our industry’s technology and refiner flexibility and investment, an array of alternative fuels is already included in our companies’ product slates. For example, we in the United States now consume as much ethanol as Brazil, the world’s long-time champion producer of ethanol. Very soon, we will overtake them. However, we need to keep in mind that no energy alternative is a panacea. Each has its plusses and minuses, but they can each play an important role. For example, based on various studies, the energy savings from corn-based ethanol are moderate–3 to 20 percent–because production from corn requires significant energy input. And, judging from this past year, ethanol is higher-priced than gasoline and, measured on a BTU basis, considerably more expensive. In addition, some have estimated that the total amount of ethanol that could be produced by converting the entire 2005 U.S. corn crop into ethanol would be about 31.1 billion gallons–an amount equal to just 22.2 percent of U.S. gasoline consumption last year. API’s member companies feel there is a very bright future for a full range of alternatives. But, we do not want to be a party to any “over-promise and under-perform” commitment. We have to be realistic, including the need to exercise full due diligence and appropriate risk management methodologies. We need only look at the auto industry and consumer experience with diesels in the 1970s to see that wishful thinking, absent merit, can end up hurting everyone.
THE CHIMERA OF ENERGY INDEPENDENCE
While oil is essential to fuel economic growth, its supply is volatile, subject to short-term interruptions as well as longer-term variation in the rate of supply development. As a consequence, any imbalances carry with them substantial economic costs and give rise to concern over “oil security.” In the past, these prospects led to government attempts to preserve U.S. “energy independence” via a number of policies designed to insulate the U.S. from world markets. Some are now calling for a repeat of this experience. However, such past efforts were abysmal failures, which aggravated rather than solved these problems, before being quickly abandoned. Today a return to such policies would be even more futile. Most experts agree that sustaining even modest economic growth worldwide for the next several decades will require massive new investments in oil and gas. The world energy markets are inherently global, and no single country can exempt itself from the interdependencies of that market. Geographical differences in the location of supply and demand will continue to expand trade. Differences in resource ownership and access to capital and technology will require increasing cooperation between private international oil companies (IOCs) and the state owned national companies (NOCs). The consuming and producing countries share a mutual interest in this expansion, and in avoiding volatility. In fact, these interdependencies generate a web of mutual interests between producers and consumers, which can provide a basis for reducing the security problem. While there is no assurance that cooperation in expanding supplies over the next several decades will succeed, it is certain that the cost of failing to do so will be enormous. What is the oil security problem? Given the key role of oil to economic growth, and the heavy concentration of oil supply in the Persian Gulf region, the oil security problem came to be articulated in the 50s and 60s as the vulnerability of Western economic growth to events that might interrupt such supply. These fears actually materialized in 1973 as a group of oil exporting countries attempted to influence U.S. foreign policy via an oil embargo, and a transfer of control over the oil assets in those countries from the major international oil companies (IOCs) to a group of state owned national oil companies (NOCs). While the actual reduction in supply was small and temporary, the reduction in the rate of supply growth was of longer-term significance. Prices rose sharply in 1973, triggering a recession and a reduction in economic growth throughout the remainder of the 70s. This damage was repeated in 1979 when the Iranian revolution triggered another supply disruption, followed by another recession. The episode clearly illustrated Western vulnerability to economic damage from supply inadequacy, and the potential for such damage to compromise the independence of U.S. foreign policy, which remains the essence of the oil security problem. The initial U.S. response to the events of the 70s was a futile attempt to insulate itself from the global oil market. Price controls, product allocation schemes, and subsidies to alternative fuels were attempted in the name of protecting U.S. “energy independence.” In rapid succession, each of these interventions failed to reduce dependence and, in some cases increased vulnerability.\1\ By 1980, all were abandoned in favor of reliance on markets and prices to guide the patterns of oil use and volume of oil traded. Today, in response to recent increases in world oil prices, some are again calling for government intervention to promote energy independence. But such a pursuit today would be even more futile than it was in the 70s, for several reasons. First is the fact that the U.S. resource base (consisting of 3% of world reserves) will not support it. The U.S. Department of Energy estimates that sustaining modest economic growth will require about a 20% expansion of U.S. oil supplies by 2020, even allowing for improvements in energy efficiency and significant growth in alternatives. With domestic production declining, imports must rise, reaching 68% of consumption by 2020. Even if reversal of these trends were feasible, it would be futile to pursue such independence in a global market, since all participants face the same price, regardless of their level of imports. Consequently, a change in U.S. import dependence or a shift in bilateral trade relationships with a particular area may do nothing to change either the price or composition of global supply, thus leaving both U.S. and global vulnerability unchanged. Given that energy independence has proven neither feasible nor desirable, our only options involve managing the risks faced by participation in this market. ________________ \1\ For instance, by holding prices at below world market levels, U.S. policy actually encouraged a level of oil use higher than that which would have occurred without such controls. ________________ We have learned to manage vulnerability to short-term interruptions. We have made progress in this area. While U.S. import dependence has generally increased since 1980, vulnerability to short- term interruptions has not. The world has weathered several major interruptions since 1980, such as the invasion of Kuwait in 1990 and the invasion of Iraq in 2003, neither of which produced economic damage of either the magnitude or the duration of those in the 70s. In part, this is attributable to measures adopted to manage such risks, by the building of strategic stocks, the promotion of free trade and investment, and the development of traditional diplomatic and military instruments to secure that trade. In part, it is attributable to favorable market or political trends, such as the decline in the share of oil in GDP and the increased access to potentially productive lands as a result of the breakup of the Soviet Union. But primarily it was due to the fact that OPEC since 1980 has had available a large volume of excess capacity, which it has generally used to offset any such shortfalls. There are new challenges ahead. First is the sheer magnitude of the prospective growth in supply likely to be required to sustain modest global economic growth. A variety of recent forecasts by the International Energy Agency, the U.S. Department of Energy, and the OPEC Secretariat estimate that sustaining a 3% rate of annual growth in the global economy over the period to 2020 will require an expansion of between 24 and 28 mmbd in global oil supplies. (The projection also assumes improvements in energy efficiency and greater use of alternative energy sources.) Satisfying this demand will require an enormous development effort on the part of both OPEC and non-OPEC suppliers. Interdependence is a fundamental characteristic of the emerging market environment. The first interdependence is that of trade, stemming from the geographical dispersion of supply and demand. Consumption growth will become increasingly concentrated in the developing countries over time, primarily in Asia, while supply will become increasingly concentrated in the Middle East, West Africa and Russia. The second form of interdependence arises between resource owners and producing companies. This interdependence arises from the separation that occurred in the 70s between the resource owners (host governments) and the producers (IOCs). As a result of this separation, currently only about 6% of the world’s reserves are actually fully accessible to equity participation by the IOC’s. About another 12% is accessible under terms negotiated with the NOC’s, leaving 77% under exclusive control of the NOCs. At first glance, both dependencies may be viewed as favoring the producing country or company, but such an interpretation does not withstand scrutiny. That is, a trading relationship is clearly a mutual dependence, with both parties hoping to gain from the transaction. The consumer faces risks of uncertain supply; the producer faces risks of uncertain demand. There may be an appearance of greater risk to consumers, since their costs are realized in the short run. Generally, the oil exporting country faces the risk of demand erosion that may occur more gradually, but ultimately poses larger risks. For instance, oil export revenues comprise 38% of Saudi Arabia’s GDP, while oil import costs comprise 1.5% of U.S. GDP. Likewise, a cooperative arrangement between NOCs and IOCs is built on voluntary agreements premised on mutual acceptance of risk for mutual gain. The IOC’s have the capital and technology to develop the resource, but have few of their own. The NOCs have the resource, but often are hard pressed for the capital or the technology to develop it.\2\ ________________ \2\ A 2003 study by Wood Mackenzie found that the only OPEC country that has been able to develop significant new capacity without direct IOC participation has been Saudi Arabia. ________________ While the producer and consumer countries, as well as the NOCs and IOCs, face fundamental differences of interest with their trading or operating partners, they also face a mutual interest in the orderly development of a market within which they can achieve their mutual goals. It is a fundamental error to characterize the security problem as the exclusive province of the consumer countries resulting from repeated hostile actions by producing countries. Only the 1973 embargo can be so characterized. Ironically, each of the other interruptions was attributable either to conflicts among producer countries or embargoes imposed by consuming countries. Moreover, in dealing with the short run supply interruptions since 1980, it has been producer actions, rather than the use of strategic stocks or other emergency measures by the consuming countries, that have played the greatest role in limiting the economic damage associated with each disruption. Perhaps the greatest challenge to future security is presented by the disappearance of excess capacity within OPEC. Its use provided both a source of surge capacity that reduced the impact of short run interruptions and a source of new supply to accommodate demand growth over time for nearly two decades. From the standpoint of the dual security problem–replacing supply lost to short-term interruptions and providing for long-term capacity growth, it provided the bulk of the world’s protection. In a very real sense, however, world supply has reached a crossroads. In this setting, additional reliance may be placed on other protective measures such as strategic stocks to replace supply lost to short-term disruption, and to free trade and investment to develop the interdependence to assure adequate long run growth. While it is by no means certain that adequate investment and new supplies will be forthcoming, it is inevitable that failure to do so will have costs. The IMF estimates that a $5 per barrel increase in price could reduce world GDP as much as $100 billion annually. The magnitude of these potential losses suggests the enormous value of finding a basis for cooperation in such expansion.
CONCLUSION
We hope that people will better understand that, in today’s global energy marketplace, U.S. “energy independence” is impossible. We hope they come to see that, instead, “energy interdependence” is essential. We hope consumers will come to recognize that their interests are best served when we can source fuels from multiple providers located both in the U.S. and throughout the world. Sourcing flexibility is one of our most powerful energy security tools. We also want others to understand that we can operate only where governments permit us to do so. If we are prevented from exploring for and producing oil and natural gas here at home in the United States, we must look elsewhere in the world to get the energy the nation needs. If the government elects to keep us from attractive oil and natural gas production opportunities in the U.S., and burdens us from competing fairly abroad, our foreign competitors–national oil companies, heavily supported and, at times, subsidized by their governments–could move more aggressively into energy markets here in the U.S. Clearly, the nation needs to work together–industrial and retail consumers, energy companies and government–to address the energy challenges we all face. In looking at these challenges, it’s easy to see the glass as half empty, when, in fact, it is half full. America’s oil and natural gas producers and suppliers have the technology, the efficiency, the infrastructure savvy, and the desire to compete anywhere on a level playing field with their competitors. We need commonsense energy policies that provide access to conventional energy supplies, encourage energy efficiency, and promote continued development of new energy technologies.
APPENDIX
Responses to Additional Questions
Rocky Mountain Institute, Snowmass, CO, April 6, 2006. Senator Pete V. Domenici, Committee on Energy and Natural Resources, U.S. Senate, Washington, DC. Dear Senator Domenici: I appreciate the opportunity to have testified before you and your Committee colleagues on 7 March 2006 on the goal of energy independence. While some of my ideas may have been unfamiliar, I hope that they were stimulating and will be taken in the independent and constructive spirit in which they were meant. The degree of consensus within the panel of witnesses was certainly encouraging. Since I was abroad for two weeks when your 13 March letter with questions for the record arrived, your staff kindly gave me leave to reply a week later than your suggested 27 March date. My response is attached. I’m sorry that in September 2004, when we were launching Winning the Oil Endgame at NDU, RFF, CSIS, CFR, and other Washington venues, your schedule reportedly did not permit you to take the proffered brief (although Senator Bingaman and some staff were able to do so, and I also did a prebrief for staff from both sides of both Houses). It typically takes about an hour to explain our study’s main findings to a knowledgeable audience, so its depth can’t be conveyed in two minutes, as I attempted in the 7 March hearing. But should you and your colleagues wish a fuller exposition, I’d be glad to try to oblige on a future trip to Washington. My work with DoD typically brings me to town every few months. Alternatively, it’s easy to schedule a brief and discussion at a mutually convenient time via our near-broadcast-quality Internet videoconference apparatus. If my colleagues and I can be of further service to the Committee, please don’t hesitate to let me know. Cordially, Amory B. Lovins, CEO.
Responses of Amory Lovins to Questions From Senator Domenici
Question 1. In your written testimony you state that the elimination of all oil (including domestic) in our economy by the 2040’s is an attainable and worthy goal. You state that this will revitalize the economy and is welcomed by business and military leaders. In your view what is the government’s role in reaching this goal? Won’t the market dictate this result fit is economically possible and profitable?
Answer.
Winning the Oil Endgame synthesized a national oil solution explicitly built around competitive-strategy business cases for the car, truck, plane, and oil industries and around military requirements. The business and military logics are so compelling that I believe they will ultimately prevail, and that the Nation’s transition beyond oil will be led by business for profit. But if public policy supported rather than distorted the business logic, oil use would be eliminated faster and with higher confidence. Thus I believe government should steer, not row, and that it’s vital to steer in the right direction. Regrettably, current Federal policy has only limited relevance to eliminating oil dependence, and much of its content that is relevant is unhelpful. Most of the public policy initiatives that are both relevant and helpful are coming from the States. Basing Federal policy on sound market principles and “best buys first” would be a propitious change from recent tendencies. So would a clear focus on oil, rather than confusing oil with electricity (please see my response below to Senator Bunning’s question #1). Question 2. How do you respond to those, like me, who say that an economy run entirely without oil by the 2040’s is quite difficult to believe?
Answer.
First, I would respectfully invite you to examine the analysis we presented on 20 September 2004 in Winning the Oil Endgame and its Technical Annexes, all posted free at www.oilendgame.com. More than 150,000 copies have been downloaded and our findings have been intensively scrutinized within industry, but my knowledge, no material flaw in its facts, logic, or conclusions has been found. Indeed, many technology analysts in the energy industries and their leading consultancies have reached similar conclusions. Next, I would remind you that on a similar timescale of decades, our Nation has made such major energy transitions before–for example, away from directly burned coal, town gas, and coal oil. Economic history is full of such technology-led, market-driven substitutions. Particularly striking is the market response to what Phil Gramm called America’s first “major energy crisis” (“The Energy Crisis in Perspective,” Wall St. J, 30 Nov. 1973, p. 8) when the almost universal illuminant–whale oil–became too costly. Winning the Oil Endgame documents how, in the nine years before Drake struck oil in Pennsylvania in 1859, over five-sixths of that illuminant market went to competitors, chiefly coal gas and town gas, to which the whalers hadn’t paid attention: they were astounded to run out of customers before they ran out of whales. Around 1850, whaling was the fifth biggest American industry; a few decades later it was nearly gone, reduced to begging for Federal subsidies on national-security grounds: its real revenues fell by tenfold in a half-century. (See Davis, Gallman, & Gleiter, In Pursuit of Leviathan, U. of Chicago Press, 1997.) Oil feels rather like this today: a mighty industry that hasn’t paid enough attention to fast-moving competitors. America has spent decades quietly accumulating a huge backlog of powerful ways to save or replace oil, but until RMI’s 2004 study, nobody had added them up. When we did, we found that that saving or displacing all the oil the U.S. uses would cost about one-fourth as much as buying it at today’s price. I think that as you have a chance to read our study, you’ll find it less surprising and more compelling–as its Foreward authors (Secretary George Shultz and Sir Mark Moody-Stuart) and the authors of the comments on its back cover, such as Bud McFarlane and Bill Martin, have done. Third, the transitional speeds suggested or assumed in our analysis are firmly rooted in historical experience, both in aggregate and in specific sectors, such as the decades-long automotive transition summarized on pp. 180ff. Our analysis assumed the vehicle-fleet stocks and sales through 2025 used in EIA’s January 2004 Reference Case, adopted higher efficiencies based on detailed technical and economic analysis, and for the crucial light-vehicle sector, applied a consumer choice model that matches the DOE/ORNL model within a few percent. Our suggested policy tweaks would speed up by a few years the “takeoff point” in the logistic S-curves found throughout the literature on technological succession. Our industrial and building oil and gas savings are consistent in size, cost, and speed with those in the Five Labs study (which, based on our extensive consulting experience, we consider very conservative). Our adoption scenarios for biofuels and natural-gas savings are consistent with NAS/NRC and other standard sources. I think you’ll find no surprises in these analytic components; their sum may seem startling only because it hadn’t previously been coherently synthesized. As a reality check, our analysis assumed that oil will be saved about two-fifths slower than occurred in 1977-85, when America last paid attention to oil. In those eight years, U.S. oil intensity– barrels consumed per dollar of real GDP–fell at an average rate of 5.2%/y. At that rate, it’d fall by 88% in 40 years. However, our scenario achieves half its oil displacement by substituting saved natural gas and advanced biofuels for oil–a greater ratio of supply substitution to end-use efficiency gains than occurred historically. And it’s not important whether every last bit of oil use is wrung out; the point is to make oil unimportant, hence no longer a security threat nor a major cause of conflict. Other helpful analogies might be the 59% reduction in U.S. water intensity during 1950-2000, or the >50% reduction in oil intensity since 1975. Hardly anyone noticed. The more diverse the means of such savings or substitutions, the more market actors can adopt them (more like buying cellphones than like building cathedrals), the shorter their technical lead times, and the more desirable they are, the faster the transition can be. Fourth, I respect free enterprise’s dynamism and American industry’s ability to innovate. In the 1920s, U.S. automakers took six years to switch from wood to steel autobodies. At the start of World War II, it took six months to switch from making four million cars a year to making zero cars, but much of the materiel–tanks, jeeps, planes, munitions–that won the war. Of course, that was via a real mobilization, which I’m not calling for (though perhaps I should be). But the U.S. auto industry’s parlous state cries out for rapid and dramatic technical innovation just to ensure that the business survives; incrementalism won’t beat Toyota. Many industry leaders are starting to understand this. In aerospace, I believe Boeing already has. Similarly rapid change is underway in heavy trucks, where Wal- Mart, based on our analysis, has set a goal of improving its new trucks’ fuel efficiency by 25% next year and by 100% within nine years. America no longer maintains a strategic stockpile of gutta percha– though she did until, as I recall, the 1990s. I believe that under the inexorable pressure of technological change and market competition, the younger people in your hearing room will live to see the day when the Strategic Petroleum Reserve is abolished as a similarly quaint anachronism. Question 3. You say that your goals are attainable if government would simply provide the financial incentives. How do [you] respond to those who point out the vast financial investment that government has made and is still making in energy technology, when you say that not enough is being done?
Answer.
My testimony did not call for “financial incentives” nor even for increased Federal energy R&D, and would cost the Treasury zero. But if asked, first I’d say that most R&D has been and still is misallocated to favored technologies that are already mature or show no hope of becoming competitive. The money seems to be allocated more by porkbarrel politics than by risk-adjusted public return. Second, total federal energy R&D is far too small for its actual and rhetorical priority. Prof. Dan Kammen at UC Berkeley reckons (Issues in Sci. & Tech., Fall 2005, pp. 84-88) that private-sector U.S. energy R&D totals less than the R&D budget of a single large biotech company like Amgen or Genentech, and that inadequate and uneven Federal funding is driving private investors away too. I’d add that the Federal government is doing far too much to distort private markets, deliberately causing huge misallocations of private capital. I’d love to see a thorough, transparent, and defensible compilation of Federal energy subsidies–unlike EIA’s partial ones (http://earthtrack.net/earthtrack/index.asp? page_id=201&catid=73). My Institute did the first thorough analysis of Federal energy subsidies, summarized in “Hiding the True Costs of Energy Sources,” Wall St. J., 17 Sept. 1985, p. 28. A partial list 17 kinds of tax breaks, net program outlays from 21 agencies’ budgets, and cheaper capital from eight agencies’ loans and guarantees–exceeded $46 billion in FY84, varying by more than 200x per unit of energy saved or supplied by the different technologies. For example, 65% of the subsidies went to electricity, which was 13% of delivered energy, reducing its apparent price by about a fifth: that’s >11x the subsidy per BTU of direct fossil fuels, and at least 48x the subsidy per BTU that energy efficiency got. Nuclear power in FY84 got 34% of the subsidies (excluding Price-Anderson) but delivered 1.9% of the energy; each of its subsidy dollars delivered 1/80th as much as a dollar of subsidies to renewables and efficiency. The latest analyses by the top contemporary independent scholar in this field, Doug Koplow (www.earthtrack.net), confirm that Federal energy subsidies are still large and probably even more distortive. There is little point developing new technologies if such massive market interventions favoring rivals continue to suppress their adoption.
Responses of Amory Lovins to Questions From Senator Murkowski
Question 1. Coming from a state that has the lion’s share of gas hydrate potential, what is the likelihood of gas hydrate production both on shore and under the seafloor coming into its own within the next two decades? It is said that America has a 1,000 year energy supply of hydrates out there waiting to be tapped. Should we be focusing more on developing that resource?
Answer.
No. Alaska’s onshore methane hydrates may bubble out of the thawing tundra on their own, causing a global climate disaster. I haven’t seen a convincing argument that onshore or offshore methane hydrates can be extracted without a substantial risk of major uncontrolled releases of methane. Lacking such grounds for confidence that the operation could avoid making our planet more like Venus, I hope the hydrates stay right where they are. And we don’t need them if, more cheaply, we use energy in a way that saves money. Question 2. DOE last year issued a report that indicated we should be able to coax up to 40 billion barrels of additional conventional oil from aging oil fields by injecting carbon dioxide into the fields to squeeze out more oil. How important is more widespread use of CO2 likely to prove to be to aid shorter-term energy production, especially since the same technology CO2 injection–results in sequestering carbon from the environment, cutting greenhouse gas emissions?
Answer.
CO2 injection is an important and mature means of enhanced oil recovery, which I welcome. Whether the CO2 then remains in the reservoir depends on many geological and operational details. The industry is intensively examining this and other enhanced-recovery techniques for its whole production portfolio, but most details are proprietary. Though I’ve consulted for oil majors for 33 years, I’m not aware of an independent assessment, using public data, that would support a meaningful response to your request . Question 3. We all know that America is the Saudi Arabia of coal. My state alone has about 15% of the planet’s coal reserves, 160 billion short tons. I am really interested in pushing coal gasification to produce coal without emissions and to help sequester carbon. What can we do on top of what we did in last years Energy Bill, to further clean coal technology and production economics?
Answer.
Coal gasification is a feasible but costly way to produce gas or liquids. It is quite carbon-intensive as normally conceived. However, researchers like Prof. Robert H. Williams at Princeton, and many in industry worldwide, are exploring possible methods that include carbon sequestration. Williams claims, not implausibly, sequestration costs 1 cents/kWh or less, which would seem usefully cheap. I would hope that proposals like his, which uses solid membranes for the H2 separation, would receive due attention. However, all carbon-sequestered “clean coal” innovations are in my view a fourth- best approach, after energy efficiency, renewables, and combined-heat- and-power (co-, tri-, and polygeneration), so I’d give it a lower overall priority in energy R&D than it currently has. Having a lot of coal is in my view a less important reason to use it than whether it can provide energy services at least cost. R&D should be driven by cost-effectiveness, not resource bases. Question 4. If we do everything that we think we can do in terms of fuel efficiency, stimulating production of conventional fuels and alternative fuels from wind, geothermal, biomass, solar and ocean current energy and also further nuclear, do we have the ability to be truly energy independent by 2025?
Answer.
Winning the Oil Endgame provided a detailed roadmap for reducing 2025 U.S. oil use from EIA’s Jan. 2004 Reference Case forecast of 28.1 Mbbl/d to 20.4 Mbbl/d by capturing 55% of the efficiency potential whose average cost is $12/bbl (2000 $), then substituting 5.7 Mbbl/d of biofuels/biomaterials/biolubricants and 1.6 Mbbl/d of price- independent saved natural gas. That cuts net demand 54%, to 13.0 Mbbl/ d. EIA’s 2025 domestic production of 7.8 Mbbl/d leaves 5.2 Mbbl/d to come from any combination of:
continued imports of oil from Canada and/or Mexico, ethanol from Brazil, etc. more efficiency (at one-fifth of today’s oil price, maybe we should buy more–or faster, since 7.0 Mbbl/d of efficiency wouldn’t yet be captured by 2025) substituting the rest of the saved natural gas for the 5.2- Mbbl/d “balance” term optionally turning that saved gas into hydrogen, whose more efficient end-use would permit it to displace that “balance” term plus the 7.8 Mbbl/d of forecast domestic oil output (with efficient light vehicles and an integrated deployment strategy, per pp. 227-242 of our study, this would be the most profitable use of the saved gas, competing robustly with our 2025 benchmark of $26/bbl RAC in 2000 $; but even without H2, our approach saves $70b/y vs. $26/bbl oil); optionally supplementing or supplanting that hydrogen source with others; e.g., just Dakotas windpower could competitively produce -50 million tonnes of hydrogen per year–enough to run cost-effectively, at our levels of vehicle efficiency, every highway vehicle in the United States. Note that our least-cost off oil strategy doesn’t need most of the energy resources you’re positing, and your nuclear suggestion is uneconomic (n. 10 of my testimony).
By law, EIA’s Jan. 2004 forecast of 7.8 Mbbl/d of domestic oil output in 2025 excludes ANWR as not yet permitted. (I also believe the oil majors will continue in their opinion that its risk/reward ratio makes it one of the least attractive prospects in their global port- folios; neither higher oil prices nor new E&P technologies favor ANWR drilling unless they advantage ANWR against the rest of the portfolio, and I see no evidence they do or can.) As you’ll have gathered from my testimony, however, I share Mr. Woolsey’s view, expressed in our written testimonies on 7 March 2006, that this is the correct national- security outcome because of what he rightly called the “devastating” potential for attack on TAPS or the facilities at either end of it. Kindly see note 5 in my written testimony, especially the detailed documentation cited just before note 6, for details of why Mr. Woolsey and I both consider this longstanding vulnerability inherent, unfixable, and a show-stopper for the whole ANWR venture. I appreciate your understandable concern for Alaska’s revenues, but based on my work long ago for the State of Alaska, I think this internal budgetary problem can be addressed without endangering national security.
Responses of Amory Lovins to Questions From Senator Bunning
Question 1. Many of you focus on biodiesel and transportation fuels. But coal is our most abundant domestic fossil fuel and it accounts for half of our electricity generation. The Energy Information Administration predicts coal will continue to be the centerpiece of our energy production for the next 25 years. Do you think we could lessen our dependence on imports by using clean coal power and nuclear energy to replace the natural gas and oil that currently goes to the electricity production?
Answer.
No, coal and nuclear generation of electricity have virtually nothing to do with displacing oil, which is the nub of the Nation’s energy security problem. Less than 3% of U.S. electricity is made from oil (over 90% of which is gooey bottom-of-the-barrel residual oil, not distillate), and less than 2% of U.S. oil (again nearly all resid) makes electricity. Both these quantities are declining. (worldwide they’re only 7% and falling.) The only importantly oil- dependent U.S. electricity systems are in Hawai’i, whose Republican Governor Lingle and main utility are solving this problem at least cost via a least-cost mix of efficiency and renewables. The U.S. and most other countries already substituted coal and nuclear power for oil- fired electricity generation in the 1970s and 1980s, and they can’t do so again. Even the enormous coal-and-nuclear push in that era caused only 27% of U.S. savings of resid, or 18% of total oil savings, during 1977-85. Since transportation currently uses 70% of U.S. oil, we must look there for most of the oil savings. This is even truer for the future, since in EIA’s 2004 forecast, 55% of the projected growth in U.S. oil use was just for SUVs and other light trucks. It’s easier to imagine expanded coal or nuclear power generation replacing the natural gas that still produces one-sixth of America’s electricity. But this is uneconomic and impractical, because nuclear and most coal plants, being capital-intensive, are run rather steadily (as nuclear plants must be anyway for technical reasons), whereas most gas-fired plants run rather infrequently. And there’s a far cheaper way to save natural gas: pp. 112-122 of Winning the Oil Endgame explains how efficient use of gas and gas-fired electricity can save half of U.S. natural gas at an average cost of $0.88 per million BTU (2000 $). The main obstacle is that 48 states penalize utilities for cutting customers’ bills, and reward them only for selling more energy. These findings, summarized in n. 12 of my testimony, are now being expanded by further study at RMI. I expect this deeper examination to reinforce our initial findings that efficient use of natural gas, both directly and (especially) by saving gas-fired electricity, is a hugely important gap in the Federal energy agenda. Question 2. I have been impressed with new Coal-to-Liquids technology that can turn coal into a synthetic liquid fuel. Other parts of the world, like South Africa, have been using this technology for decades. I know there are several pilot facilities here in America, but what do we need to do to push this industry into full commercial-scale operations?
Answer.
I’m familiar with the technology, having recently helped redesign a $5b Fischer-Tropsch plant. It’s inherently costly, $50,000- 70,000 per daily barrel–even more so with additional measures to reduce its high CO2 releases. As noted in my response to Chairman Domenici’s question #3, I think the Federal government is already doing more than is sensible to help this expensive option get to market, but much less than is sensible to level the playing-field for the far cheaper competitors–now fighting against far bigger subsidies given to their uneconomic rivals–suggested in our least-cost analysis in Winning the Oil Endgame. Many of these cheaper competitors are, like coal, a Kentucky resource whose exploitation could bring great benefits to your State. For example, North Carolina is aggressively exploring a half dozen crops that look promising for producing cellulosic ethanol; many of them would make good tobacco replacements. Question 3. In some parts of the world–and a few places in Western Kentucky–people drive their cars and trucks on a blend of fuel that is 85% ethanol. That means only of the fuel is based on oil. Some of you on the panel have mentioned that the best case scenario for biodiesel is that it will only replace 10% of gasoline used for transportation. What are the limiting factors? Can the government help address problems like infrastructure and efficiency?
Answer.
Biodiesel doesn’t displace gasoline; it displaces diesel fuel, which chiefly runs heavy trucks. Ethanol displaces mainly gasoline, used by almost all U.S. cars (though diesels may become popular, as in Europe, if they can pass ever-tighter fine-particulates standards). Biodiesel also looks a lot costlier than ethanol, which is why it accounts for only 1% of the advanced biofuels in our Winning the Oil Endgame scenario; the rest is ethanol, mainly from woody, weedy plants like switchgrass, poplar, and crop/forestry wastes. Like most analysts, I think the potential for cellulosic ethanol– not corn ethanol, which may be what you have in mind–to replace gasoline is far higher than you mention. Our analysis, consistent with most others including the Administration’s, found that nearly 4 million bbl/d of oil-equivalent ethanol can be produced as advanced biofuels, without needing cropland, at short-run marginal costs below $26/bbl (EIA’s Jan. 2004 forecast of world oil price in 2025; the current forecast is much higher). And since Winning the Oil Endgame showed how to triple the efficiency of cars, trucks, and planes–without compromised attributes, not-yet-invented technology, taxes, subsidies, mandates, or new Federal laws, but with direct economic paybacks of 1-2 years–that biofuel would then support three times more vehicle-miles. In all, the cost-effective biofuels could displace one-fifth of total forecast oil use, efficient use one-half, and saved natural gas the rest. Question 4. In your testimony before this Committee you state that: Both energy independence and its purpose, energy security, rest on three pillars:
- Making domestic energy infrastructure, notably electric and gas grids, resilient. 2. Phasing out, not expanding, vulnerable facilities and unreliable fuel source[s] 3. Ultimately eliminating reliance on oil from any source.
Do you have any suggestions about specific legislation that could be adopted by Congress to at least begin the process of implementing any of your recommendations?
Answer.
Yes. As explained above in my response to Chairman Domenici’s question #1, the strategy described in Winning the Oil Endgame doesn’t require any new Federal laws; the transition would be driven by business logic; and the changes in public policy that would help support that business logic could all be administrative or at a State level. Pages 169-226 of our study describe numerous State and Federal actions that would help accelerate this business-led transition beyond oil. For example, our analysis suggests size- and revenue- neutral feebates (pp. 186-190), low-income scrap-and-replace car financing (which could greatly help poor rural areas while creating a new million-car-a-year market for Detroit: pp. 191-197), smart government fleet procurement (pp. 197-198), “Golden Carrots” and technology procurement (pp. 199-200), “Platinum Carrot” innovation incentives (pp. 201-203), support for automotive retooling and retraining at no net cost to Treasury (pp. 203-204), military and civilian science and technology initiatives (pp. 204-206), further reforms of light-vehicle efficiency regulation (pp. 206-207–happily, NHTSA has since adopted our key recommendation to base future light- truck efficiency standards on size, not weight), a DARPA fly-off of the
10 competing cellulosic-ethanol conversion processes to cut a decade off their commercial scaleup (p. 208), reforming and redirecting agricultural subsidies (p. 208), encouraging biofuels and other bioproducts, especially by reforming USDA rules (p. 209), requiring or encouraging fuel-flexible and total-flex vehicles and their infrastructure (pp. 209-210), modernizing and harmonizing heavy-truck standards and policies (p. 211), leveling the playing-field between aviation and surface transportation fuels and for hub-and-spokes vs. point-to-point aviation business models (p. 212), reforming transportation policy and system integration (pp. 212-214), encouraging more efficient buildings (p. 215), and rewarding utilities for cutting our bills rather than for selling us more energy (p. 215). Corresponding suggestions are on pp. 216-220 for State policy (most of the suggested Federal actions should be piloted first in State-level of regional experiments), p. 220 for non-biofuel renewables, and pp. 221 for military energy efficiency. (DoD is emerging as the most forward- leaning Federal agency in helping to lead the Nation off oil–which is as it should be, given oil’s centrality to national security.) And on pp. 265ff, our analysis suggests that the Federal actions we propose would reduce, not raise, the budget deficit. Since we wrote that study in 2004, I’ve added a few more suggestions: requiring agencies like GSA and DESC to write long-term contracts for biofuel blends like E85 (e.g., up to 30% of GSA’s fuel requirements), since a major impediment to financing advanced-biofuels plants is the lack of such contracts; expanding the Sec. 1511 renewable-fuel loan guarantee in the 2005 Energy Policy Act to allow more than 50 projects rather than just 4; lengthening biofuels’ credits to at least a decade to fit financing for their production scaleup; and encouraging automakers to make Brazilian- (and soon Swedish-) style total-flex vehicles that can use any fuel on the fly, from 100% ethanol to 100% gasoline, thus eliminating captive customers and exerting more price discipline on all producers.
Responses of Amory Lovins to Questions From Senator Bingaman
Question 1. Your study winning the Oil Game analyzes how to eliminate U.S. oil use by 2040. What policies do you recommend we adopt that could reduce the amount of oil we use in the transportation sector within the next 5 to 10 years? What concrete steps can you suggest?
Answer.
Please see my response to Sen. Bunning’s question #3. By far the most important actions would be size- and revenue-neutral automotive feebates (pp. 186-190 of our study), heavy-truck regulatory reform (p. 210), the DARPA cellulosic-ethanol process flyoff (p. 208), and, at a State level with Federal encouragement, utility decoupling and shared savings (p. 215) as the key to saving natural gas, directly and indirectly, so we can substitute it for oil. If it’s possible to stop mandating and subsidizing sprawl, or otherwise to advance the smart-growth agenda, that too would bear huge longer-term dividends by reducing vehicle-miles travelled, although land-use was bounded out of our study. Question 2. In your (oral) testimony you noted that there did not need to be any change to federal law or regulation; however in your written testimony (in footnote 7) you say that “FERC doesn’t let resilient options compete. " Do changes need to be made to FERC regulations in order for renewable generation, distributed generation and new transmission technologies to be competitive? Such rules as energy imbalance penalties, interconnection rules for small generators, etc., appear to prevent these technologies from being competitive. Are there other rules that inhibit development and if so how should they be changed?
Answer.
Yes, yes, and yes. Thank you for noting this important point. Although, as noted in my response to Sen. Bunning’s question #1, electricity reforms can save almost no oil, they are extremely important to creating a resilient national energy system–including the ability to get power to filling stations so customers can pump gas! (The industry has stupidly redesigned its pumpheads without the old handcrank socket; as in Florida recently, a prolonged power outage therefore grounds the surface transportation system too.) FERC is the last bastion of central planning in the Federal Government, and last year gained new authority to site supply-side resources, or override state and local objections to them, without having to consider cheaper alternatives, ranging from end-use efficiency and demand response to micropower. This will probably result in further construction of vulnerable, terrorist-magnet, and uneconomic LNG terminals, with potentially catastrophic consequences for nearby communities and increased financial risks for investors. It also has such perverse effects as I saw recently in Vermont: a northern transmission project in the Burlington area is considered a “reliability resource” by the regional power pool, so its costs are spread over all of New England, but a 10x cheaper demand-side or distributed-generation solution isn’t considered a “reliability resource”–even though it has the same or better reliability outcomes–so Vermonters would have to bear its whole cost themselves. I’m particularly concerned that FERC is making America’s power system more prone to regional blackouts by continuing to push larger, longer bulk power flows through more and bigger transmission lines, rather than allowing or, preferably, requiring fair competition (whether market or administrative) by demand-side and distributed options so as to achieve a least-cost system solution. It’s not clear that FERC’s Commissioners or Staff adequately understand the reliability, resilience, national-security, and economic value of these alternatives, although the proposed addition of the very knowledgeable Commissioner Jon Wellinghoff of Nevada is encouraging. FERC should better integrate its electricity and gas policies. For example, the approaches our study suggests for saving peak electricity, thereby freeing up a great deal of cheap gas from very inefficient simple-cycle peakers, would also displace much of the generating and transmission capacity FERC is licensing, as well as costly local distribution capacity. Another desirable focus for FERC’s attention would be ensuring that as utilities automate distribution systems, their topology should be made bidirectional, so that distribution shifts from a tree structure (distributing centrally generated electrons to dispersed customers) to a web structure (gracefully handling power flows any which way). This is largely a State regulatory matter, but Federal standards would probably help, and State attention to this issue could be encouraged in many ways. Still another area for FERC reform would remove the transmission roadblock facing wind developers, especially in and near the Dakotas. In essence, the incumbent lignite operators in that region aren’t allowing fair transmission access, and FERC has not yet intervened to promote it, so a cheap, climate-safe, domestic resource exceeding 300 GWe just on tribal lands in the Dakotas remains virtually unexploited. Broadly, I think State Commissions should follow Texas’s example (under then PUCT Chairman Pat Woods’ and Governor Bush’s leadership) of allowing distributed generators to “plug and play” freely: if the inverter meets IEEE 1547, UL, and local building code requirements, no other approval or procedure should be required. Federal policy should encourage this outcome uniformly, and should encourage State Commissions to remove artificial constraints as to feed-in generators’ unit size, the symmetry of TOU vs. flat-rate payments vs. charges, and other accounting arrangements to ensure a level playing-field for distributed resources. Federal policy should give no preference to big over small or to supply-side over demand-side resources; all should compete fairly as a central principle of Federal energy policy. A detailed agenda for both Federal and State electricity reforms is at pp. 310-347 in my 2002 Economist book of the year Small Is Profitable: The Hidden Economic Benefits of Making Electrical Resources the Right Size (available from www.smallisprofitable.org). Many of the same recommendations apply to retail natural gas systems. Question 3. Your testimony lists as a high priority making domestic energy infrastructure, notably electric and gas grids, resilient. Your suggestions for making the electric grid more resilient include depending less on central station power plants and long distance transmission by depending more on distributed generation. Would this not, to the extent that micro-turbines are fueled by natural gas, put more demand on the gas infrastructure?
Answer.
It would often reduce the required gas flows to the distal ends of the distribution system to run distributed generators, because their cogeneration design (together with the greater building and factory efficiencies that should meanwhile be installed anyhow) would tend to reduce gas consumption by furnaces, boilers, and central gas- fired generators. For the same reason, total gas consumption would generally go down, not up. For example, some years ago my team designed a 92%-efficient gas-fired microturbine polygeneration system for a large Midwestern office-and-laboratory complex. This would obviously use less gas than the boilers and power plants it replaced. Of course, efficiency and renewables also have a major role. And LBNL has found a U.S. potential approaching 100 GWe for cogeneration based on waste heat currently being discarded because of needless institutional barriers. Such a project with a less-than-one-year payback can remain unbuilt because the incumbent monopsonist refuses to let the intending developer sell electricity across the street or over the fence to a willing buyer. Question 4. What can we learn from your green building project with TI that can be applied to our quest for better energy security?
Answer.
The basic lesson is that integrative design has kept a thousand high-tech jobs in Texas that would otherwise have gone to Asia, just by redesigning a new Texas Instruments microchip fabrication plant (chip fab) that costs 30% less to build while saving a fifth of its energy and a third of its water. The plant is expected to open in April 2006 and has attracted wide attention, partly via Tom Friedman’s 18 Jan. 2006 New York Times column on the TI/RMI collaboration that produced this result. As TI’s designers adopt further proposed innovations that weren’t thoroughly tested in time for this project, I’d expect that their next chip fab could well save over half its energy and cost even less to build. Those innovations include onsite power production that could keep the plant running even if the grid went down, and could probably even export power to the rest of the community at need. Not only can many of the efficiency techniques from this project inform others, both new and retrofit (including the big fab in Albuquerque); they, and the whole-system thinking they embody, can also be applied to a wide range of other industries. In 22 sectors so far, my team has found energy savings typically around 30-60% in retrofits paying back in a few years, and 40-90% in new facilities typically with reduced capital cost. It’s not rocket science just good whole-system engineering. These empirical savings far exceed the size and undercut the cost of efficiency projections in government studies. That gap represents a risk to supply-side investors, who may build for demand that turns out not to exist just as the U.S. recently did with 200 GWe of combined- cycle gas plants. Indeed, all the policy and investment errors that caused the painful energy-markets crash of the mid-1980s are now being repeated, so in a few years, we may see that very bad movie all over again.
Responses of Amory Lovins to Questions From Senator Wyden
Question 1. The Administration’s FY2007 budget request seeks $942- million for the Advanced Energy Initiative, $1.18-billion for energy efficiency and renewables and about ten times that amount for various nuclear energy programs. Is any of this going to do much of anything to address what President Bush calls our “national oil addiction” anytime soon?
Answer.
While I applaud the President’s use of this phrase, and broadly agree that “the best way to break this addiction is through technology,” I’m sorry to say that the answer to your question is no. U.S. oil use, and market expectations of it, will remain high, creating upward pressure on oil prices, until there is fundamental improvement in oil-using efficiency, chiefly in the vehicles that use 70% of the oil, and until we get serious about rapid scaleup of alternative mobility fuels, chiefly cellulosic ethanol. I have studied the White House Fact Sheet on the Advanced Energy Initiative with some puzzlement. The stated purpose is “to help break America’s dependence on foreign source of energy.” This can only mean oil: the U.S. does not import coal, uranium is in surplus, and natural gas imports are small (although Administration policy is to increase them by severalfold, creating a new dependence). However, the section on “diversifying energy sources” is all about electricity, which, as explained in my response above to Senator Bunning’s question #1, has almost nothing to do with oil. This confusion between oil and electricity, conflating them both into “energy,” bemuses energy experts the world over who assume that the responsible U.S. officials must understand these fundamentals; yet such jumbled formulations persist. Perhaps the White House also doesn’t know that nuclear expansion would worsen climate change by buying less solution per dollar (nn. 10-11 in my written testimony). Some of the Advanced Energy Initiative is reasonable; for example, restoring U.S. leadership in large-format advanced lithium batteries would be a good idea, and there is some promising technological basis for hoping it could happen. Hybrid and fuelcell cars are worthy, and plug-in hybrids may be (please see my response below to Senator Feinstein’s question #4), but they’d all work better and cost less if combined with an apparently missing element advanced materials that eliminate half the car’s weight and fuel use, improve its safety, and don’t raise its production cost. When the Freedom Car initiative was announced in 2002, I told a senior DOE official that a small firm I chair had already developed in 2000, with two European Tier Ones, a complete virtual design–production-costed and manufacturable–for the car that his program meant to spend the next decade developing [please see n. 16 of my written testimony]. He replied: “Well, then we’d better not try to help you, because we’d just slow you down.” That might be true, but the capital market for such ventures collapsed just as we came to it in 2000, so the car remains unbuilt. Had it been built timely, Detroit would now have a lot more strategic options than it does, including a path to cut many years off the deployment of fuel- cell cars: whichever automaker goes ultralight first also wins the fuel-cell race, a strategic prize. The renewable-electricity parts of the Advanced Energy Initiative, like increased photovoltaics R&D, are desirable but unrelated to oil. Also, better PV materials, though useful, are less important than better application of existing PVs, and helping the market recognize “distributed benefits” (www.smallisprofitable.org). For example, the Fact Sheet refers to a future possibility of “zero energy” homes (I’ve lived in one since 1984), and seems not to recognize that this year or next year, the world will install PV capacity exceeding nuclear construction starts in the same year. A decade ago, the U.S. had nearly half the global PV market, but now has just 8%, because Federal policies drove activity overseas, from whence we must now buy our hardware. Japan now has over 50% market share, thanks to coherent and farsighted policy consistently pursued. Japan is now eliminating its PV subsidies because their pump-priming task is done, years earlier than expected. The $5M increase in wind R&D could slightly increase windpower’s ability to displace natural gas fungible for oil, and low-speed- optimized machines are important for many parts of the U.S. Yet the main windpower issues are in deployment: e.g., past (and possibly future) Congressional stop-go policies that have repeatedly bankrupted the domestic wind industry, Federal and state policies that don’t allow wind-power fair access to existing transmission lines, misguided opposition to wind off-shore Nantucket, and Federal encouragement of short-term commodity markets to the detriment of the long-term fixed- price contracts that could let wind and other renewables capture their
2 cents/kWh value premium for avoiding fuel-price volatility. In contrast, the President’s increase in cellulosic-ethanol funding is both relevant and welcome, as is the higher priority implied by his 6-year development goal. However, I haven’t dug into the budgetary details. Sometimes such initiatives only repackage and shuffle existing budgets, taking money from other good efforts to fund the new one. And I hope the Congress will note that much of the recent troubles at NREL–not a place one should be trying to divert or demoralize during an energy crisis–arose from 15% of its budget’s being, in effect, hijacked by Congressional earmarks. If NREL is to do its job and retain its excellent people, such raids must cease. As leading venture capitalist Vinod Khosla notes, the main constraint today to scaling up cellulosic ethanol production is capital: entrepreneurs with competing processes must each convince venture capitalists to finance their own projects in the face of uncertainty about whether another one might be better. That’s why Winning the Oil Endgame suggested a DARPA fly-off of the best 10 processes: just spend $1billion to build one of each kind of plant and publish the results, cutting perhaps a decade off the commercialization cycle and freeing up the entrepreneurs to do their best. Question. How much do we need to spend to make a difference? Is there anything that can be implemented in the next few years to start changing course?
Answer.
I don’t think we need to spend more (although more well- targeted energy R&D would certainly be valuable), but we definitely need to spend smarter. The lion’s share of both current and new energy R&D funding is going, as usual, to the least promising but most politically powerful technologies–coal and nuclear–that can by their nature contribute virtually nothing to getting America off oil. This and the ill-conceived subsidies in last year’s Energy Policy Act don’t simply divert Federal funds from best buys; they also leverage untold sums of private capital into nonsolutions. These mistaken Federal energy priorities in the 1980s, in practical effect, created today’s oil crisis because of what they didn’t do and what they dissuaded private investors from doing. Today’s repetition of this policy error is setting the stage for another, longer, worse oil crisis. As to near-term implementation: Senator Snowe asked my colleague Mr. Odd-Even Bustnes to prepare a memo on this very question. That memo of 30 September 2005 showed how to save 5-9% of U.S. oil use within one year without significant cost or disruption. It has been sent to Senators Domenici and Bingaman, and my office would be glad to share it more widely if desired. Now that the President has raised the notion of “oil addiction,” I hope he’ll clarify why for drug addiction, he recommends cutting off the supply, while for oil addiction, he favors increasing the supply. In both cases, demand-side understanding and emphasis seem more promising. Question 2. The Japanese have been on a steady course to conserve energy and reduce their dependence on imported energy while their GDP continues to grow. They’re turning down their thermostats and shutting off their idling car and truck engines to save energy. Opinion polls show that more than 75% of Japan’s citizens view energy conservation as a personal responsibility. Many are willing to shell out extra cash for efficient appliances and office equipment. Do you think that Americans can gain energy independence without feeling a little pain? Are American consumers willing to accept some financial pain for energy independence gain?
Answer.
Yes and yes (though they prefer profits, which are equally available). I think most Americans hunger for leaders who engage their patriotic personal involvement in a great national project to shed our oil burden. Winning the Oil Endgame showed how to do this through entrepreneurship and innovation rather than through cost, pain, or sacrifice. But those interested–and there are many–in changing careless habits should be welcomed too, because markets work better when they’re mindful. Just please don’t confuse efficiency (which is widely called “conservation” in the Pacific Northwest but nowhere else in the country) with curtailment (which is what many Americans from other regions think “conservation” means): they should be discussed separately and in unambiguous language, not interchangeably. Having spent six weeks of the past year in Japan, I’ve been struck by that society’s resurgence of technical, not just behavioral, energy savings. For example, Toyota has cut CO2 emissions per car produced by 15% during 2002-05; Honda has cut its CO2 emissions in Japan by 24% below the 1990 level and targets 30% by 2010 while raising average fuel economy 31% during 1995-2005; Nissan expects by 2007 to emit 10% less CO2 than it did in 2000; Kirin, to emit at last 25% less CO2 in 2007 than in 1990; Ricoh, to emit 12% less CO2 in 2010 than in 1990; and many more. New national standards aim to cut electricity use 30% from 1997 levels for refrigerators (the best Matsushita 2005 model uses 160 kWh/y, about three-fifths less than the U.S. 2001 Federal standard), 16% for TVs, 83% for PCs, 14% for air conditioners, etc., and all these can go much lower still. But while these innovations, executed with customary Japanese speed and quality, will undoubtedly hone Japan’s competitive edge in world markets, there’s far more to do, because Japanese cars are becoming nearly as inefficient as ours (inefficient SUVs are rapidly proliferating) and Japanese buildings are generally quite inefficient. The President of Tokyo University, one of Japan’s top engineers, recently told me that he believes Japan can profitably triple her existing aggregate energy efficiency. I’m sure he’s right and that gives American businesses the greater challenge of hitting a moving target.
Responses of Amory Lovins to Questions From Senator Feinstein
Question 1. In your opinion, what is the most important step that the United States could take today to help reduce our dependence on oil?
Answer.
Triple the efficiency of cars, trucks, and planes–with better safety, uncompromised comfort and performance, and 1-2-year paybacks–by properly applying today’s best technologies for ultralight materials, ultralow aerodynamic drag (and, for highway vehicles, rolling resistance), and advanced propulsion. The most important single policy to encourage this leapfrog in cars and light trucks would be State, regional, or ultimately Federal feebates that, within each size class, broaden the price spread between less and more efficient models by charging a fee on the former and using the proceeds to pay rebates on the latter. Winning the Oil Endgame described a fuller agenda for both the technical and the policy elements of these breakthroughs for cars, trucks, and planes–and how those industries’ competitive imperatives demand such dramatic developments. Question 2. What are some ways that you believe we can make oil play a less critical role in the American economy?
Answer.
America now uses half as much oil as in 1975 to produce a dollar of GDP. This doubled oil productivity has proven enormously profitable. So will redoubling it, at an average cost of only $12–one- fifth what we now pay for a barrel of oil. Natural gas, which can then be directly or indirectly substituted for oil, can be saved even faster and with enormous financial benefit: saving half the gas will cost roughly 1/15th of its recent price, and the peak electrical savings that are the most important gas-saver are typically better than free (because they’re more than paid for by their capacity value). Question 3. What do you believe are the largest barriers to the entry of new vehicle technology into the market?
Answer.
These barriers are chiefly cultural (within the auto industry) rather than technical or economic. They include:
the incorrect assumption that more efficient cars must be less affordable, roomy, peppy, stylish, safe, or otherwise desirable than inefficient cars–i.e., that engineers are slaves to a theoretical economic assumption about diminishing returns (an assumption daily violated by engineers designing computer electronics, and easily falsifiable for cars too); the industry’s tendency to base strategic decisions on accounting, not economic, principles–on treating obsolete manufacturing capacity as unamortized assets rather than as sunk costs; the industry’s habit of thinking of costs per pound or per part rather than per car; a stovepiped, dis-integrated, and highly risk-averse design process; and the peculiar labor, distribution, management, and other rigidities of this extraordinarily ponderous and complex industry.
It’s not easy to fix any of these problems, but they must and will all ultimately be fixed, because U.S. automakers are about to be deluged in a tsunami of Schumpeterian destruction. Relentless competition will change either the managers’ minds or the managers, whichever happens first. Similar but less daunting barriers apply to basic innovation in aviation and in trucking–both already well ahead of automaking. The heavy-truck efficiency revolution being led by Wal-Mart is especially encouraging, as are certain aspects of Boeing’s 787 program. (Isn’t it odd that this platform has a higher mass fraction of advanced polymer composites than does the Joint Strike Fighter?) And I’m gratified by the Pentagon’s increasing focus on radically reducing fuel-logistics footprint in theater: if seriously implemented, this could create the industrial base that can lead the civilian vehicle industries off oil, just as DoD research transformed the civilian economy by inventing for military purposes the Internet, GPS, and the jet-engine and chipmaking industries–all foundations of America’s and especially California’s economy. Question 4. Would it make sense to focus the nation’s technological energy on rapidly developing and commercializing plug-in hybrids that could both take energy from the electric grid at night, when electricity is practically free, and then hopefully give energy back to the grid during the day when electricity use is the greatest? If so, what could the Federal government do to help promote plug-in hybrids?
Answer.
Rocky Mountain Institute is currently conducting the first independent assessment of this technology. It would be premature for me to comment until that work is done, probably this summer. Then we’ll know whether it’s a good idea, and if so, under what conditions. And regardless of propulsion, ultralighting is the most important automotive innovation. Question 5. If we move in the direction of cellulosic ethanol/ biofuels, how possible will it be to replicate that in the developing world?
Answer.
Very possible, but it’s vital that in all countries, this be done in an environmentally and socially sustainable way–unlike some recent destruction of tropical forests to make way for palm-oil plantations to produce biodiesel. Even more important is to share and greatly accelerate developing countries’ adoption of advanced end-use efficiency in all sectors. Question 6. What is your view of the effectiveness of the Strategic Petroleum Reserve (SPR) as an energy security tool in its current form? In your opinion, are there changes that could be made to the SPR to make it a more beneficial tool for the United States?
Answer.
SPR is useful, though I’ve heard disturbing recent reports about its ability to sustain maximum output, and I remain concerned about the vulnerability of its centralized facilities to disruption by hurricanes or terrorism. I’d prefer greater emphasis on distributed stockpiles of refined products rather than crude oil, rotated as needed to guard against deterioration. The oil system used to have much larger product stockpiles close to its customers than it does today, because beancounters have wrung out inventory as mere carrying-cost overhead, sapping its societal value for private gain. Europe is generally ahead in this regard; many governments require market actors, both suppliers and major customers, to carry refined-product stocks that are already in the form and at the place where they’d be needed by final customers. With so many simultaneous disruptions in the world oil system, and strong incentive to cause more, I think the case for such distributed product stocks (duly protected against attack) is now unassailable. So is the even more powerful case for efficient use of oil. This gives the most bounce per buck by stretching existing stocks and buying more time to mend what’s broken or improvise substitutes. I made this case in our Pentagon study Brittle Power: Energy Strategy for National Security in 1981 (n. 4 of my written testimony), to which Mr. Woolsey and Admiral Tom Moorer wrote the Foreword. The case is far stronger today. Indeed, that Brittle Power’s findings remain so virtually unchanged since 1981 particularly the facility- vulnerability findings to which Senator Murkowski referred in her opening question at the hearing–seems to me a devastating indictment of the policy process. The grave security problems I identified 27 years ago in our Nation’s energy infrastructure should have been fixed, but instead, most of them have been worsened. These self-inflicted vulnerabilities are an attractive nuisance for Al Qa’eda, and we should at least stop multiplying them. Current Federal energy policy perpetuates American’s expanding oil dependence, because it ranges from modest support (advanced biofuels) to inaction (natural-gas and electric efficiency) to opposition (seriously improving light-vehicle efficiency). The resulting oil dependence funds both sides of the war, impugns U.S. moral standing, has bailed out the nearly empty Iranian and Saudi treasuries, has created (in effect) such leaders as Ahmadinejad, Chavez, El-Bashir, and Putin, systematically distorts foreign policy and postures, poisons foreign attitudes, weakens competitiveness, and enhances vulnerability and fragility. Meanwhile, Federal policy strongly favors overcentralized system architecture, as seen in Katrina’s damage and in bigger, more frequent regional blackouts. It creates terrorist targets, from LNG and nuclear facilities to Iraqi infrastructure. Its centerpiece, ANWR drilling, would create an all-American Strait of Hormuz in a world that already has one such chokepoint too many. It lavishly supports expansion of nuclear power and reverses the Ford- Cheney reprocessing moratorium, thus worsening proliferation. On top of that, it sacrifices what’s left of the nonproliferation regime, painfully built over a half century, to support the nuclear bureaucracy that makes 3% of India’s electricity, while ignoring the vastly greater and cheaper potential to improve the peaceful 97%. (India, by the way, has more windpower capacity than nuclear capacity, and in 2004 was the world’s #3 installer of windpower.) These seem to me undesirable outcomes for a government committed to enhancing national security. Such policies and outcomes are also, in general, contrary to free- market principles, and often inimical to the principles of federalism, States’ rights, and human rights. In short, the most comprehensive threat to national energy security today is national energy policy. This Committee should reexamine its approach, and stop energy policy from undercutting DoD’s mission.
Responses of Amory Lovins to Questions From Senator Menendez
Question 1. Could the panel comment on what technologies are available now that could be used to improve the fuel economy of passenger cars, light trucks, and SUVs?
Answer.
About 27% of projected light-vehicle fuel in 2025 can be saved (most of it much sooner) by putting in all cars a long list of well-proven, on-the-market technologies that are now used in some cars. Our analysis, following the 2001 NAS/NRC report, found that such incremental improvements would repay its cost in a year at a retail gasoline price of $1.43/gallon (2000 $), or nearer a half year at today’s fuel price. Such independent analysts as DeCicco, Ross, and Argonne National Laboratory’s Feng An have been meticulously documenting this potential for more than a decade. There is no excuse for inaction. Indeed, all such cost-effective potential is mandated by Federal law to be reflected in CAFE standards, yet only a small fraction of it actually is. (I’d prefer to make CAFE standards irrelevant via feebates that improve efficiency far more than standards require; but the current policy of ignoring the law seems to me bad public policy.) However, these traditional assessments seriously understate the modem efficiency potential. Sixty-nine percent of the gasoline that EIA projects to be used by light vehicles in 2025 could be saved with a three-year payback at $1.43/gal, or two years at today’s fuel price, by the ultralight, ultra-low-drag-and-rolling-resistance, hybrid-electric combination described on pp. 44-73 of Winning the Oil Endgame. (The NAS/NRC panel refused to be briefed on this approach, and assumed that hybrid-electric propulsion, which had entered the market four years earlier, was too far off to matter over its 10-year study horizon. They were wrong. If all 2025 light vehicles were only as efficient as the best hybrids now in dealers’ showrooms, they’d save twice as much oil as the U.S. now imports from the Persian Gulf.) Advanced composites, using new cost-effective manufacturing methods mentioned in my testimony, are one route to ultralighting, but if they proved unready for prime time, then ultralight steel autobodies could achieve about four-fifths of the same fuel saving with nearly as good economics. The market will choose which materials win. If aggressively pursued, automakers could start ramping up production of ultralight, doubled- efficiency cars (tripled-efficiency if hybrids) as early as MY2011. The policy framework can strongly influence how quickly these technologies, whether incremental or leapfrog, are marketed and bought. A comprehensive portfolio of innovative Federal and State policy initiatives is presented at pp. 178-219 of Winning the Oil Endgame. In addition, our memo last September for Senator Snowe (please see my response to Senator Wyden’s question #1) suggests some short-term measures that together could save at least 5-9% of U.S. oil consumption: Roughly 4-8% of U.S. gasoline or 2-4% of crude oil could be quickly saved by:
reducing speed limits for all non-Class 8 vehicles to 60 mph in zones now above this limit under Federal (and if possible State) jurisdiction changing EPA rules so that HOV lanes and preferential parking now available only to Alternative Fuel Vehicles are also available to hybrid and all-electric vehicles (EPA’s inaction on this is frustrating many States that wish to make this change) giving so-called double-tax-credit to State and local nonprofit vehicle buyers such as public safety agencies for adopting high-efficiency hybrids authorizing all citizens to deduct mass transit costs on IRS Schedule A providing for universal approval of “parking cash-out” (as long practiced in Southern California) and perhaps requiring it for large employers for a few years, extending the Federal tax credit for AFVs, hybrids, and all-electric vehicles to far more than the current 60,000 per manufacturer eliminating continuing loopholes in CAFE rules clarifying that NHTSA does have authority to extend to cars its 23 August 2005 proposed decision to base future light-truck CAFE rules on size, not weight
Roughly 12-18% of diesel fuel could be rapidly saved by heavy-truck reforms proposed in Winning the Oil Endgame and in our memo for Senator Snowe (please see my response above to Senator Wyden’s question #1). Roughly 4-6% of gasoline and diesel fuel could be promptly saved by:
immediately switching all Federal civilian (and nontactical military) road vehicle procurement to the top 5%, or at worst 10%, of efficiency in their subclass saving 3% through proper tire inflation, including rental and commercial fleets as well as individual owners exerting Federal pressure to improve traffic-light timing on major urban streets and to speed adoption of electronic tolling (with careful controls to protect personal privacy) and of “urban box” congestion charges encouraging proper engine tuning and air-filter replacement, as well as EPA’s other gas mileage tips having NHTSA clarify that manufacturers and sellers of hybrid cars are allowed to advise buyers how to drive them for optimal efficiency (thus reversing the false impression, spread chiefly by Consumer’s Reports, that hybrids are inherently much less efficient than they actually are if properly driven)
Finally, DoD initiatives to make military-platform (and -facility) energy efficiency a high priority–in doctrine, requirements-writing, acquisition, design pedagogy and practice, operations, and reward systems–should be strongly encouraged. This is indirectly very relevant to your question about civilian light vehicles, because, as mentioned above in my response to Senator Feinstein’s question #3, targeted military science and technology investments in ultralight materials and their low-cost manufacturing could create the advanced- materials industrial cluster that is the most important single manufacturing innovation for getting off oil. Emerging DoD leadership on this issue is commendable and is vital to national security. ______
Responses of Susan Cischke to Questions From Senator Domenici
Question 1. You mention that there are presently only about 600 fueling stations in the U.S. capable of dispensing E85. How would you suggest that the lack of ethanol capable fueling venues be expanded?
Answer.
To promote energy security initiatives, priority must be focused on addressing infrastructure deficiencies for alternative fuels. For today’s most promising and readily available alternative fuel, E85, a key near-term goal is to increase the number of E85 retail stations from 600 to at least 10% of existing gasoline retail stations in Midwest markets. Because there are approximately 170,000 retail gasoline stations in the U.S., participation by independent fuel providers, as well as major fuel providers will be required. The following federal legislative initiatives can help grow the ethanol infrastructure needed to greatly expand the use of the fuel.
FEDERAL OPPORTUNITIES FOR INFRASTRUCTURE GROWTH:
a) Dramatically increase incentives for retail fuel providers to promote E85 by expanding the current alternative fuel infrastructure tax credit from 30% to 100% for two years. Increasing the tax credit from 30% to 100% for a limited period of time (e.g. two years) would provide an immediate incentive for fuel providers to accelerate their plans to install fuel pumps capable of using E85. A simple conversion of an existing pump/tank can be done for as little as $3,000. b) Provide a multiplier and early-compliance credits for fuel providers under the federal Renewable Fuel Standard (Energy Policy Act of 2005) to incentivize E85 fuel sales (for example, 2.5 gallons RFS credit should be given for each gallon of E85 sold). c) Initiate a feasibility study on the costs and roadblocks to ensure that 10% of all U.S. retail gasoline stations provide E85 or other renewable fuels (such as bio-diesel / hydrogen) available to consumers by 2010. Potential exceptions for small retailers could be included. d) Pursue appropriation funding (annual budget bills / Farm Bill) for infrastructure corridor funding, expanded Clean Cities grants, customer awareness campaigns (including notices to existing FFV customers and fuel cap labels):
i. Increase Clean Cities appropriation funding for infrastructure support–currently only $1 million/year 1 ii. Add infrastructure funding provisions to the 2007 Farm Bill–$50 million/year for 5 years (equivalent to 1,500 new pumps/tanks or 10,000 pump conversions per year) Question 2. You suggest an “integrated approach” to foster advances in fuels as well as vehicle technology. Can you please elaborate on this?
Answer.
We need to view vehicles and fuels as a single system: vehicle + fuel + driver. By integrated approach, we mean a partnership of all of the corresponding stakeholders which includes the automotive industry, the fuel industry, government and consumers. The combined efforts of such an approach are the most economically efficient means of achieving our common goal of reducing our energy dependence. We at Ford are excited about the potential role of renewable fuels. However, the fact is that without the whole-hearted involvement of the fuel industry, we cannot move forward far enough or fast enough. We obviously need key partners like the oil industry to invest in developing and marketing renewable fuels like E85–and we need it to do so now and rapidly. We fully support government incentives to encourage the industry or others to accelerate this investment. There is a great deal that policy makers can do at all levels as well. We would like to see more R&D support for vehicle technologies and renewable fuels. Government incentives for advanced technology vehicles and E85 infrastructure can accelerate the introduction of these vehicles and fuels into the marketplace. Government must play a critical role to promote U.S. innovation and can do so by expanding and focusing R&D tax credits for a broad range of energy efficient technologies. We would also like to see greater investment in improved road traffic management infrastructure in order to reduce congestion and save fuel. Question 3. What examples from Ford’s experience in Europe might be translated into domestic policies?
Answer.
In December 2005, the European Commission issued a report on a competitive automotive regulatory system for the 21st century (CARS 21). Ford and the other member companies of the European Automobile Manufacturers Association (ACEA) support the analysis and conclusions of CARS 21. For example, to maximize the potential for road transport CO2 emissions reduction, CARS21 strongly endorses applying an integrated approach involving vehicle manufacturers, oil/ fuel suppliers, repairers, customers/drivers and public authorities. The integrated approach aims at producing clear and quantifiable reductions in CO2 through a range. of options (e.g. vehicle technology, alternative fuels, taxation, eco-driving, gear shift indicators, consumer information and labeling, consumer behavior and congestion avoidance). Question 4. Why was the idea of improving the miles per gallon of sports utility vehicles by 25% by 2005 abandoned by Ford Motors?
Answer.
We acknowledged in 2003 that we would not meet our goal of improving SUV fuel economy by 25 percent by 2005 for a variety of market-demand, technology, and investment reasons. Ford is committed to improving the fuel economy of all of our vehicles. We’ve broadened our passenger car offerings to include models that provide greater fuel economy. We’ve launched the industry’s first full hybrid SUV, and announced plans to increase annual production capacity of hybrid vehicles moving toward 250,000 annually by 2010. We’ve introduced technologies such as six-speed transmissions that deliver fuel efficiency benefits. In addition, we are pursuing commercial applications across a range of advanced technologies, including hybrids, clean diesels, hydrogen internal combustion engines and fuel cells. Clearly, there’s more work to be done, but as these developments illustrate, Ford remains focused on innovating in these areas so we can deliver to consumers the fuel economy they demand. Question 5. In your testimony, you state that, “Even further down the road, hydrogen powered fuel cells appear to be another promising technology for delivering sustainable transportation.” Please explain–how far down the road do you mean?
Answer.
We expect commercially viable FCVs to begin arriving in the market no earlier than the middle of the next decade–most likely even later. Hydrogen fuel cell vehicles are seen by Ford and the industry as a long-term alternative transportation solution. They are clean and efficient, with zero tailpipe emissions, and use a renewable fuel source. Although FCVs are in development today, much work remains to meet the functionality, durability, and affordability demands of automotive consumers. In 2005, Ford delivered customer-ready Focus FCVs for use in demonstration fleets in Canada, the United States, and Germany. We expect to get data and feedback from these demonstration fleets that will help us develop commercially viable FCVs for the future. Question 6. How do you respond to the growing chorus of people who believe that raising CAFE standards will reduce our dependence on foreign sources of oil and should be a policy advanced by our government?
Answer.
Automobile fuel economy has been mandated via the CAFE program for about 30 years. Most industry and government experts agree that the program has not been an effective way to reduce petroleum consumption, and that it has had dramatic competitive and economic impacts. For one thing, it takes a long time for the vehicle fleet to turn over. New CAFE standards take time to implement, and their effects take even more time to make their way through the vehicle fleet. Another problem is that higher fuel economy simply makes it cheaper for people to drive more. Vehicle miles traveled have increased substantially over the life of the CAFE program and tend to overwhelm improvements in fuel economy. Addressing our dependence on foreign oil must include taking steps to reduce vehicle miles traveled. We support working with the technical and safety experts at NHTSA to set standards at maximum feasible levels and to reform the CAFE system. We also support market-driven incentives for advanced technology vehicles to increase their presence in the marketplace and the greater use of low-carbon, renewable fuels as a way to decrease the use of fossil fuels. Automakers are already producing more than 100 models that achieve 30 mpg or more on the highway; however, the consumer demand for these vehicle models is low.
Responses of Susan Cischke to Questions From Senator Murkowski
Question 1. DOE last year issued a report that indicated we should be able to coax up to 40 billion barrels of additional conventional oil from aging oil fields by injecting carbon dioxide into the fields to squeeze out more oil. How important is more widespread use of CO2 likely to prove to be to aid shorter-term energy production, especially since the same technology–CO2 injection–results in sequestering carbon from the environment, cutting greenhouse gas emissions?
Answer.
Ford does not claim special expertise with respect to CO2 injection and other oil recovery technologies. This is an excellent question for the oil industry. Question 2. Coal Gasification: We all know that America is the Saudi Arabia of coal. My state alone has about 15% of the planet’s coal reserves, 160 billion short tons. I am really interested in pushing coal gasification to produce coal without emissions and to help sequester carbon. What can we do on top of what we did in last year’s Energy Bill, to further clean coal technology and production economics?
Answer.
Coal gasification, followed by synthesis to liquids that are suitable for transportation fuels, is a known technology. These are large plants with substantial investment, and their long-term commercial operation must be certain. A related technology, recovery of remote natural gas with synthesis to liquid fuels (Gas-to-Liquids, GTL) is now considered economical in select cases, and several large GTL plants are now planned for Qatar, with diesel fuel to be supplied to Europe, where diesel demand now exceeds supply. Gasification of coal (Coal-to-Liquids, CTL) adds a substantial processing step compared with natural gas as the resource. So the overall efficiency of CTL will be less than GTL, with a corresponding increase in CO2 as a byproduct. The GTL path will be an issue for total CO2 emissions unless carbon capture and sequestration is implemented with the GTL plant. Carbon capture and sequestration trial projects are proceeding with good success. The three key steps needed to proceed with commercial operation of GTL and CTL are:
- Economic projections that these processes will be competitive with petroleum fuels during the lifespan of the plant and will support the investment required. 2. Determine how carbon capture and sequestration should be implemented on a necessary scale and with reasonable economics, so that these processes have a neutral to positive impact on Greenhouse Gasses. 3. Economic studies of CTL coupled with sequestration to ascertain the cost and potential market incentives to assure the economic viability of the approach.
Question 3. If we do everything that we think we can do in terms of fuel efficiency, stimulating production of conventional fuels and alternative fuels from wind, geothermal, biomass, solar and ocean current energy and also further nuclear, do we have the ability to be truly energy independent by 2025?
Answer.
Becoming “more” energy independent depends on whether economic and financial policies and technology advances make alternative forms of energy more economically viable. For example, the U.S. Department of Energy (DOE) and the U.S. Department of Agriculture (USDA) conducted a study that concluded that there is sufficient U.S. biomass feedstock to displace 30 percent of the country’s present petroleum consumption by 2030. Whether or not this is a viable scenario depends on the economic practicability of a large-scale biorefinery industry. Becoming “truly” energy independent by 2025 may be a difficult goal.
Responses of Susan Cischke to Questions From Senator Bunning
Question 1. Many of you focus on biodiesel and transportation fuels. But coal is our most abundant domestic fossil fuel and it accounts for half of our electricity generation. The Energy Information Administration predicts coal will continue to be the centerpiece of our energy production for the next 25 years. Do you think we could lessen our dependence on imports by using clean coal power and nuclear energy to replace the natural gas and oil that currently goes to the electricity production?
Answer.
Yes. See also our response to question #2 (below). Question 2. I have been impressed with new Coal-to-Liquids technology that can turn coal into a synthetic liquid fuel. Other parts of the world, like South Africa, have been using this technology for decades. I know there are several pilot facilities here in America, but what do we need to do to push this industry into full commercial-scale operations?
Answer.
Coal gasification, followed by synthesis to liquids that are suitable for transportation fuels, is a known technology. These are large plants with substantial investment, and their long-term commercial operation must be certain. A related technology, recovery of remote natural gas with synthesis to liquid fuels (Gas-to-Liquids, GTL) is now considered economical in select cases, and several large GTL plants are now planned for Qatar, with diesel fuel to be supplied to Europe, where diesel demand now exceeds supply. Gasification of coal (Coal-to-Liquids, CTL) adds a substantial processing step compared with natural gas as the resource. So the overall efficiency of CTL will be less than GTL, with a corresponding increase in CO2 as a byproduct. The GTL path will be an issue for total CO2 emissions unless carbon capture and sequestration is implemented with the GTL plant. Carbon capture and sequestration trial projects are proceeding with good success. The three key steps needed to proceed with commercial operation of GTL and CTL are:
- Economic projections that these processes will be competitive with petroleum fuels during the lifespan of the plant and will support the investment required. 2. Determine how carbon capture and sequestration should be implemented on a necessary scale and with reasonable economics, so that these processes have a neutral to positive impact on Greenhouse Gasses. 3. Economic studies of CTL coupled with sequestration to ascertain the cost and potential market incentives to assure the economic viability of the approach.
Question 3. In some parts of the world–and a few places in Western Kentucky–people drive their cars and trucks on a blend of fuel that is 85% ethanol. That means only 15% of the fuel is based on oil. Some of you on the panel have mentioned that the best case scenario for biodiesel is that it will only replace 10% of gasoline used for transportation. What are the limiting factors? Can the government help address problems like infrastructure and efficiency?
Answer.
To be clear, the 10% replacement scenario is with respect to biofuels, not biodiesel. Like ethanol, biodiesel is one example of a biofuel. Ethanol can replace gasoline in both low levels in gasoline as E10 (ten percent ethanol in gasoline) which can be used in all gasoline vehicles or in higher levels of E85 (70 to 85% ethanol, as required for vehicle operation in cold temperatures) for use in flexible fuel vehicles. The 2005 Energy Policy Act has already made progress toward increasing replacement fuels by setting goals for ethanol and biodiesel in the Renewable Fuels Standard and promoting the development of production of ethanol from cellulose with research funds and incentives. These cellulosic sources for ethanol include corn stover (the stalks and residue left over after harvest), grain straw, switchgrass, quick-growing tree varieties, or municipal waste. Although the Energy Policy Act is an excellent start, more can and must be done to grow E85 infrastructure at an accelerated pace to take advantage of the nearly 6 million FFVs on road today as well as those of the future. We have a number of specific suggestions on how government can accelerate the growth of fueling infrastructure. Please see our response to the next question below. Question 4. Do you have any suggestions about specific legislation that could be adopted by Congress to at least begin the process of implementing any of your recommendations?
Answer.
To promote energy security initiatives, priority must be focused on addressing infrastructure deficiencies for alternative fuels. For today’s most promising and readily available alternative fuel, E85, a key near-term goal is to increase the number of E85 retail stations from 600 to at least 10% of existing gasoline retail stations in Midwest markets. Because there are approximately 170,000 retail gasoline stations in the U.S., participation by independent fuel providers, as well as major fuel providers will be required. The following federal legislative initiatives can help grow the ethanol infrastructure needed to greatly expand the use of the fuel.
FEDERAL OPPORTUNITIES FOR INFRASTRUCTURE GROWTH:
a) Dramatically increase incentives for retail fuel providers to promote E85 by expanding the current alternative fuel infrastructure tax credit from 30% to 100% for two years. Increasing the tax credit from 30% to 100% for a limited period of time (e.g. two years) would provide an immediate incentive for fuel providers to accelerate their plans to install fuel pumps capable of using E85. A simple conversion of an existing pump/tank can be done for as little as $3,000. b) Provide a multiplier and early-compliance credits for fuel providers under the federal Renewable Fuel Standard (Energy Policy Act of 2005) to incentivize E85 fuel sales (for example, 2.5 gallons RFS credit should be given for each gallon of E85 sold). c) Initiate a feasibility study on the costs and roadblocks to ensure that 10% of all U.S. retail gasoline stations provide E85 or other renewable fuels (such as bio-diesel / hydrogen) available to consumers by 2010. Potential exceptions for small retailers could be included. d) Pursue appropriation funding (annual budget bills / Farm Bill) for infrastructure corridor funding, expanded Clean Cities grants, customer awareness campaigns (including notices to existing FFV customers and fuel cap labels): i. Increase Clean Cities appropriation funding for infrastructure support–currently only $1 million/year. ii. Add infrastructure funding provisions to the 2007 Farm Bill–$50 million/year for 5 years (equivalent to 1,500 new pumps/tanks or 10,000 pump conversions per year). additional opportunities: a) Expand existing consumer-based tax credits for advanced vehicle technologies to include $250 per vehicle for E85 flexible fuel vehicles. Question 5. In your testimony you discuss the need for an Integrated Approach to the energy problems facing our nation. You state that there is a “great deal that policymakers can do” to help address the energy crisis. You suggest additional governmental incentives for advanced technology vehicles and E85 infrastructure and “expanding and focusing R&D tax credits for a broad range of energy efficient technologies.”
Answer.
That is correct. There is an enormous amount that we can achieve if we act together in an integrated manner. A good example of the need for more integrated action would be the case of flexible fuel vehicles. Congress wanted to increase the use of alternative fuels in motor vehicles, but there is always the chicken-and-egg problem of what comes first–the vehicles or the fuels. Congress addressed the first part of the chicken-and-egg problem by building incentives into the CAFE law for the production of dual-fueled vehicles. Thanks to this provision, manufacturers have produced nearly 6 million FFVs capable of running on ethanol over the last decade. However, the second part of the chicken-and-egg problem has not been adequately addressed–the issue of infrastructure for ethanol fuel. Too many owners of duel- fueled vehicles have no E85 refueling station in their vicinity. If the duel-fueled vehicle program had been followed by legislation incentivizing or encouraging the development of E85 infrastructure, we could already have made some headway in reducing our dependence on foreign oil.
Responses of Susan Cischke to Questions From Senator Bingaman
Question 1. Your testimony indicates that Europe is moving forward in using an Integrated Approach involving all stakeholders to address energy challenges in the transportation sector, including the fuel industry. Have the Europeans come up with any ideas that should be applied in the U.S.? Is climate change mitigation part of Europe’s integrated approach?
Answer.
In December 2005, the European Commission issued a report on a competitive automotive regulatory system for the 21st century (CARS 21). Ford and the other member companies of the European Automobile Manufacturers Association (ACEA) support the analysis and conclusions of CARS 21. For example, to maximize the potential for road transport CO2 emissions reduction, CARS21 strongly endorses applying an integrated approach involving vehicle manufacturers, oil/ fuel suppliers, repairers, customers/drivers and public authorities. The integrated approach aims at producing clear and quantifiable reductions in CO2 through a range of options (e.g. vehicle technology, alternative fuels, taxation, eco-driving, gear shift indicators, consumer information and labeling, consumer behavior and congestion avoidance). CARS 21. also calls for the creation by the Commission of a stakeholder “working group on the integrated approach to reduce CO2 emissions from light-duty vehicles” under the European Climate Change Programme. Question 2. How many hybrid vehicles did Ford produce in 2005? What percentage does this represent of the overall fleet? How many hybrids will Ford produce in 2010? What percentage is this forecast to be of the overall fleet?
Answer.
Ford’s U.S. HEV volume for 2005 model year was 10,715 units at 0.6% of the light truck fleet. In 2006, the volume of HEVs has almost doubled. Ford has already announced plans to expand our global capacity to build hybrid electric vehicles to 250,000 units per year by 2010. This represents almost 4% of Ford’s current global volume, depending on consumer demand. Question 3. How many flex-fueled (E85 capable) vehicles did Ford produce in 2005? What percentage does this represent of the overall fleet? How many flex-fueled will Ford produce in 2010? What percentage is this forecast to be of the overall fleet?
Answer.
Ford’s U.S. E85 FFV volume for the 2005 model year was 201,028 units for the combined car and truck fleet or 7% of the fleet. The annual volume of FFVs for the last five years is about 250,000 units a year or around 9% of our light duty vehicle volume. Question 4. How long would it take to double Ford’s production of flexible fueled vehicles (assuming demand was there)?
Answer.
By the end of this year, Ford will have already put nearly 2,000,000 Flexible Fuel Vehicles on the nation’s roads. However, applying technologies too broadly, too fast, and too soon (even those already on other vehicle lines in the fleet) can result in poor performance and ultimately customer rejection of promising technologies. Ford’s typical engineering practices require that new technologies be phased into production over several years such that there is a cycle of manufacturing and customer service experience in the field. In the case of E85 FFVs, this experience has been limited due to the lack of fuel availability. Moreover, because ethanol is a unique fuel with unique properties, these vehicles require unique hardware and engineering. For example, fuel tanks with low permeation characteristics are required. It also requires a special fuel pump and fuel lines to deliver the fuel to the engine. Unique injectors introduce the fuel into the engine where special calibrations programmed into the on-board computer determine how much ethanol is in the fuel and how best to set spark timing and fuel flow to ensure the engine operates properly and meets emission standards on all ethanol and gasoline mixtures. Because there is more than one fuel calibration within an FFV, costly development and certification testing is doubled. Many of the FFV parts and processes are patented by Ford and are the result of innovative ideas by our best engineers, and we’re proud of them. The bottom line . . . making an FFV is a significant investment for auto manufacturers. Question 5. How long would it take to double Ford’s production of hybrid vehicles (assuming demand was there)?
Answer.
Ford has already announced plans to expand our capacity ten fold to build hybrid electric vehicles to 250,000 units per year by 2010, based on consumer demand. In 2008, Ford plans to introduce the Ford Fusion and the Mercury Milan with a hybrid powertrain. Ford plans to offer hybrid versions of the Ford Five Hundred and Mercury Montego full-size sedans, and the Ford Edge and Lincoln MKX crossovers by the end of the decade. As in the previous answer, applying technologies too broadly, too fast, and too soon (even those already on other vehicle lines in the fleet) can result in poor performance and ultimately customer rejection of promising technologies. Ford’s typical engineering practices require that new technologies be phased into production over several years such that there is a cycle of manufacturing and customer service experience in the field. Question 6. Is Ford planning to produce plug-in hybrids for the U.S. market? What is the projected forecast (timeframe) for this?
Answer.
Ford does not currently produce plug-in hybrids. While we do not disclose future product plans, we continue to investigate a range of advanced technologies, including hybrids, clean diesels, hydrogen internal combustion engines and fuel cells. In the case of plug-in hybrids, there are benefits and disadvantages to be considered. Question 7. Mr. Lovins and Mr. Woolsey mentioned the efficiency benefits of constructing vehicles with light-weight carbon composites. Do you agree? When does Ford think this technology will be ready for the market?
Answer.
Ford is already using light-weight materials in its products. One example is the aluminium-intensive 2004 Jaguar XJ. The XJ’s all-aluminum body is 40 percent lighter yet 60 percent stiffer than its predecessor, translating into overall weight savings of 200 kilograms. As a result, the XJ is delivering segment-leading fuel economy and lower emissions. Mr. Woolsey testified that light weight materials also use a different manufacturing process to achieve comparable costs. This requires significant capital investment, development, and design–it is not simply a substitution of parts. Even if possible, these new materials and processes would take decades to phase in.
Responses of Susan Cischke to Questions From Senator Wyden
Question 1. I understand that EPA is in the process of recalculating the fuel economy ratings that they assign to different makes and models of cars and trucks, and these new ratings will show vehicles are getting about 10 percent fewer miles per gallon on the road than advertised. Yet the Corporate Average Fuel Economy (CAFE) standards that auto manufacturers have to meet won’t be changed. Don’t you think that this sets up a double standard? The new EPA ratings will tell consumers one thing about their car’s fuel economy, while car manufacturers will continue to say something different to the government when they report on their compliance with CAFE standards.
Answer.
No. This really is two different issues. First of all, CAFE standards are changing. NHTSA just finished its current CAFE rulemaking covering 2008-2011 model year light trucks that increases the CAFE requirements for light trucks for seven consecutive years–from 20.7 mpg in 2004 to over 24 mpg by 2011. In addition, vans and SUVs up to 10,000 lbs. GVW are now included for the first time ever. This represents the most aggressive increase in the CAFE standards for these vehicles in the history of the program. For 2008-11 alone, NHTSA estimates that over 10.7 billion gallons of gasoline will be saved over the useful life of the vehicles produced in these model years. Second, when Congress enacted the CAFE law in the 1970s, the standards were based on a certain set of test procedures and calculations. Congress realized that changes to the test procedures and calculations could affect the stringency of the standards just as much as changes to the standards themselves. For that reason, Congress provided that if the methodology for measuring fuel economy was changed, adjustment factors must also be incorporated to ensure that the new methodology was equivalent in stringency to the original methodology. This was necessary to ensure an even playing field from year to year, and it prevents “hidden” changes to the standards. With respect to the CAFE data, the federal government recently noted that “. . . these values are not intended to be used by the public for consumer information, as the government’s best estimate of the fuel economy the public will actually achieve. Instead, the manufacturer fleet fuel economy values are used to determine compliance with the applicable average fuel economy standards.” \1\
\1\ Federal Register/Vol. 68, No. 198/October 14, 2003/page 59234.
Question 2. Don’t you think that auto manufacturers should be required to meet new CAFE standards using the new EPA testing and rating methods? If not, how do you justify allowing auto companies to have one standard for what they tell consumers is their cars’ fuel economy and another, inaccurate standard they use to meet CAFE requirements?
Answer.
See response to question #1 above. The EPA ratings give consumers a reference to compare vehicle A to vehicle B under the exact same conditions which simulate one type of driving cycle. Consumers’ driving styles are unique and variable, so their real world fuel economy may differ from the EPA values. Question 3. [For Panel] The Administration’s FY 2007 budget request seeks $942-million for the Advanced Energy Initiative, $1.18-billion for energy efficiency and renewables and about ten times that amount for various nuclear energy programs. Is any of this going to do much of anything to address what President Bush calls our “national oil addiction” anytime soon? How much do we need to spend to make a difference? Is there anything that can be implemented in the next few years to start changing course?
Answer.
We believe that our nation must establish long-term energy policies and the resolve to remain committed to those policies to successfully reduce our energy dependence. Both near and long-term policies are needed to effect the transition. In the near term, energy sources like renewable fuels offer us a clear pathway to immediate reductions in fossil fuel use. Ethanol is in the market now as both El0 and E85, and growth of that market, while currently ramping up, will be heavily dependent on the government’s commitment to support expanding the infrastructure for this alternative to imported oil. In the longer- term, advanced renewable fuels, including cellulosic ethanol and biodiesel, hold promise of even greater energy efficiencies, but government support by way of incentivization of research and development will be crucial to bring those fuels to fruition. On the far horizon, super advanced technologies like hydrogen powered fuel cells may offer a better solution, but these technologies and fuels will be extremely expensive to develop and will be successful only with the government’s support along with public/private partnerships that will lead to their successful implementation. Question 4. The Japanese have been on a steady course to conserve energy and reduce their dependence on imported energy while their GDP continues to grow. They’re turning down their thermostats and shutting off their idling car and truck engines to save energy. Opinion polls show that more than 75% of Japan’s citizens view energy conservation as a personal responsibility. Many are willing to shell out extra cash for efficient appliances and office equipment. Do you think that Americans can gain energy independence without feeling a little pain? Are American consumers willing to accept some financial pain for energy independence gain?
Answer.
Yes, we believe consumers will have to make some adjustments. Events over the past year, including Hurricane Katrina, the war in Iraq, and threats to overseas refinery operations have combined to sensitize U.S. consumers to the increasing costs of energy. Energy price increases affect consumers’ lives daily through escalating transportation and home heating costs, and eventually in the price of all goods. Still, gasoline prices in the U.S. are not aligned with the rest of the world. Europe and Japan, for example, have much stronger price signals as well as the cultural differences that drive behavior to conserve. American consumers have a certain “rugged individualism” about them that demands no compromises when it comes to their lifestyle. This differs from the European and Japanese cultures. We tend to believe that we can “have it all” through technology without lifestyle adjustment–a belief that will not be easy to change. Therefore, we need to consider ways to incentivize consumers to create a “pull” or shift toward increasing energy conservation. That being said, consumers in the U.S. are beginning to respond to higher transportation costs by altering their daily driving habits, and are reassessing non-essential trips such as vacations. This will lead to a reduction in vehicle miles traveled–a critical factor in conserving fuel. Consumers are also increasingly interested in advanced, fuel efficient technologies including hybrid electric vehicles, flexible fuel vehicles, and diesels which are available today. Whether these will be “permanent” changes depends on how the energy markets respond going forward.
Responses of Susan Cischke to Questions From Senator Johnson
Question 1. How many FFVs is Ford scheduled to produce over the next 5 years? What are your immediate plans for 2006 and 2007?
Answer.
U.S. E85 FFV volume for the 2005 model year was 201,028 units for the combined car and truck fleet or 7% of the fleet. The volume of FFVs for the last five years is about 250,000 units a year or about 9% of our light duty vehicle volume. We continue to produce FFVs (E-85) on a high volume basis on select models. The F-150, Crown Victoria, Mercury Grand Marquis and Lincoln Town Car are new for 2006. We will have the capacity to produce approximately 250,000 ethanol vehicles in 2006. Question 2. What would it take for Ford to convert substantially all new vehicles to FFVs and when could this begin?
Answer.
Applying technologies too fast, too soon (even those already on other vehicle lines in the fleet) can result in poor performance and ultimately customer rejection of promising technologies. Ford’s typical engineering practices require that new technologies be phased into production over several years such that there is a cycle of manufacturing and customer service experience in the field. In the case of E85 FFVs, this experience has been limited due to the lack of fuel availability. With the recent rise in gasoline prices, coupled with new federal incentives to increase the use of ethanol, it is more attractive than ever for fueling providers to invest in E85 infrastructure. Moreover, because ethanol is a unique fuel with unique properties, these vehicles require unique hardware and engineering. For example, fuel tanks with low permeation characteristics are required. It also requires a special fuel pump and fuel lines to deliver the fuel to the engine. Unique injectors introduce the fuel into the engine where special calibrations programmed into the on-board computer determine how much ethanol is in the fuel and how best to set spark timing and fuel flow to ensure the engine operates properly and meets emission standards on all ethanol and gasoline mixtures. Because there is more than one fuel calibration within an FFV, costly development and certification testing is doubled. Many of the FFV parts and processes are patented by Ford and are the result of innovative ideas by our best engineers, and we’re proud of them. The bottom line . . . making an FFV is a significant investment for auto manufacturers. Question 3. Ethanol contains fewer BTUs than gasoline. In a traditional FFV, this results in approximately 20% loss in MPG when the vehicle is running on E85 as compared to gasoline. Given the high price of gas, it is still cheaper to run an FFV on E85 than regular gasoline. I understand, however, that the technology exists to increase miles per gallon when run on E85. We know that the SAAB 9-5 is able to get equal or better mileage when using E85 as compared to gasoline. I understand that this is done through the use of a turbo charger. As I understand it, a turbo charger is able to increase the compression of the engine to transfer E85’s higher octane (105 compared to 89 in regular gasoline) to better full efficiency. As you are aware, the current FFV CAFE program is under fire by some because of its negative impact on CAFE standards. It would appear to me that introducing this technology into more FFVs would make sense. Is Ford looking to introduce the turbo charger technology or any other technology into any new vehicles to increase mileage for FFVs running on E85 as compared to gasoline? What is the incremental cost of adding turbo changes to vehicles? What could be done to help you introduce this technology into more vehicles?
Answer.
It is certainly true that use of higher octane fuel would allow an increase in compression ratio, which will increase engine efficiency. So a dedicated E85 vehicle could be designed to have higher efficiency than our current FFVs with somewhat higher fuel economy. However, the point of the Flexible Fuel Vehicle is its flexibility to use both gasoline and E85. Under these conditions, when the fuel being used can change from tankful to tankful, the engine must be able to operate properly and without damage on either fuel. If the vehicle can be dedicated to use E85 only, then we can take these steps. For example, our ethanol vehicles in Brazil can be dedicated to operate only on ethanol and use higher compression ratios, but we do not have the extensive ethanol distribution in the U.S. that would enable such a specialty vehicle. Even with a dedicated E85 vehicle, the fuel economy improvement would only offset a portion of the energy content difference in the fuels, so full equivalence in miles per gallon would require other differences in the vehicles being compared. Reducing the engine size and adding the turbocharger to recover performance is another approach that can take advantage of the high octane of ethanol, but as suggested, the turbocharger is expensive and is generally used on specialty performance vehicles. The same issue, however, remains: that necessary use of gasoline some of the time prevents full optimum design for dedicated E85. Therefore, while a portion of the fuel economy can be recovered with such engine changes, this is only possible in situations where the vehicle will operate exclusively on E85. Until E85 is available at most U.S. retail fueling stations, FFVs must be designed to operate on ethanol and gasoline, and will incorporate engine designs to handle both fuels. Question 4. You introduced your Escape FFV Hybrid concept car at the Washington Auto Show in January. I commend you for this initiative. When can we expect to see this vehicle available to the public? What roadblocks do you have in front of you in order to make this a reality and what can we do to help?
Answer.
The Escape Hybrid E85 is a research vehicle that holds the potential to further expand the appeal of ethanol-capable vehicles. But even though the volume of ethanol-capable vehicles continues to grow rapidly, there are less than 600 E85 fueling stations in the U.S.–and that’s out of over 170,000 retail gasoline fueling stations nationwide. For ethanol to compete as a motor fuel in the transport sector, we need strong, long-term focus on policies that increase U.S. ethanol production and accelerate E85 infrastructure development. Question 5. You announced a partnership with VeraSun Energy, the nation’s second largest ethanol producer located in my home state of South Dakota. (Might consider having the Washington Post ad where Bill Ford is recognizing their partnership.) I commend you for reaching out to the ethanol industry. Can you tell me how this relationship is developing and what you look to achieve?
Answer.
We announced our partnership with VeraSun last November and are pleased to report that we are making important progress. In December 2005, VeraSun opened a new 110,000,000 gallon ethanol plant in Ft. Dodge, Iowa. In conjunction with the plant opening, Ford and VeraSun also announced four new E85 retail sites in the area; which began offering E85 this January. The bigger news is the recent announcement that Ford and VeraSun will be working together to create the nation’s first “Ethanol Corridor” across Missouri and Illinois. Station sites are now being selected in locations that will allow a FFV driver to travel from Kansas City, MO to Chicago, IL using only E85. We are very excited about this project and our efforts to make E85 more readily available to FFV owners who choose to fill their vehicles with a fuel that enables the U.S. to reduce its dependence on imported oil.
Responses of Susan Cischke to Questions From Senator Feinstein
Question 1. In your opinion, what is the most important step that the United States could take today to help reduce our dependence on oil?
Answer.
There is no single step that is most important. Our nation’s energy challenges must be addressed with an integrated approach–a partnership of all stakeholders that includes the automotive and fuel industries, government, and end users. We must all accept that the long-term challenges needed to move us closer to energy independence can be solved only through the collaborative efforts of all stakeholders. Consistent implementation of an integrated approach will allow us to achieve much more in a shorter timeframe and at a significantly lower cost than if each stakeholder were to unilaterally pursue its own agenda. There is an enormous amount we can achieve if we act in harmony towards the same common goals. We are clearly excited about the potential role of renewable fuels. However, the fact is that without the whole-hearted involvement of the fuel industry, we cannot move forward far enough or fast enough. We need key partners like the oil industry to invest in developing and marketing renewable fuels like E85. We support government incentives to encourage the industry or others to accelerate this investment. There is a great deal that policy makers can do at all levels as well. We would like to see more R&D support for vehicle technologies and renewable fuels. Government incentives for advanced technology vehicles and E85 infrastructure can accelerate the introduction of these vehicles and fuels into the marketplace. Government must play a critical role to promote U.S. innovation and can do so by expanding and focusing R&D tax credits for a broad range of energy efficient technologies. We would also like to see greater investment in improved road traffic management infrastructure in order to reduce congestion and save fuel. Government can also educate the public on how to drive in an energy efficient manner. In the end, it will ultimately be the size of the car fleet, and consumers’ choices of vehicles, the number of miles they drive, and how they drive that will determine how much motor fuel we consume. A person who drives in an energy-conscious way–by avoiding excessive idling, unnecessary bursts of acceleration and anticipating braking–can enjoy much better fuel consumption, today. Government can play a key role to raise public awareness. Question 2. What are some ways that you believe we can make oil play a less critical role in the American economy?
Answer.
We believe there are many opportunities for the U.S. to reduce the amount of oil we use in transportation today. Advanced alternative technologies including flexible fuel vehicles, hybrid electric vehicles, fuel cell vehicles, advanced diesel vehicles, and others can all play a part in reducing the amount of petroleum used in the U.S. by either displacing petroleum or by achieving breakthrough improvements in fuel efficiency. These technologies either exist or are under development by the auto industry. Renewable fuels such as biodiesel and ethanol blends of El0 and E85 directly displace petroleum and should be considered an essential part of transportation fueling going forward. Drivers can also reduce the amount of petroleum they use by adopting driving styles that are more fuel efficient. “Eco-driving”– operating a vehicle in a more environmentally responsible manner–can achieve up to a 25% improvement in fuel economy. Question 3. What do you believe are the largest barriers to the entry of new vehicle technology into the market?
Answer.
We are working to accelerate the commercial application of all areas of advanced vehicle technologies, including hybrids, flexible fuel vehicles, advanced clean diesels, hydrogen-powered internal combustion engines and fuel cell vehicles. As you can imagine, the R&D investment that goes with all of this work is a very big number– certainly in the billions, not the millions–and it will only grow in the future. Government has a role to play in overcoming cost barriers to new technology implementation. See answer to Question # 1 above. Question 4. Would it make sense to focus the nation’s technological energy on rapidly developing and commercializing plug-in hybrids that could both take energy from the electric grid at night, when electricity is practically free, and then hopefully give energy back to the grid during the day when electricity use is the greatest? If so, what could the Federal government do to help promote plug-in hybrids?
Answer.
We believe that a portfolio approach is the best way to offer consumers a range of products that meet their specific needs and circumstances. That is why at Ford, we are moving ahead with a range of technological solutions simultaneously. We know that when customers consider purchasing a vehicle, they are concerned with numerous attributes including price, quality, safety, performance, comfort and utility. There is simply no single solution or “silver bullet.” As we have said, government incentives for advanced technology vehicles and fueling infrastructure development can accelerate the introduction of these vehicles and fuels into the marketplace. Government must play a critical role to promote U.S. innovation and can do so by expanding and focusing R&D tax credits for a broad range of energy efficient technologies. It is possible that plug-in hybrids could play a future role, although there is much more research and development to be done to determine if these vehicles can in fact provide the benefits that supporters widely claim. The environmental and energy factors for the source of electricity used to charge plug-in hybrids will have to be considered very carefully before any conclusion can be drawn about the benefits of this technology. Question 5. What percentage of the total Ford fleet will the 250,000 hybrids represent?
Answer.
Ford’s commitment to increase global hybrid production capacity ten-fold, to approximately 250,000 units annually by 2010, could represent almost 4% of Ford’s current global volume (based on consumer demand). Question 6. How many flex-fueled vehicles does Ford sell in Brazil?
Answer.
Ford began selling vehicles that operate on alcohol (“E93”) in 1979 as Brazil’s ethanol program was implemented. In 1985, Brazil began to produce an “E22” ethanol/gasoline blend. Ford has produced vehicles capable of running on either of those two blends using dedicated engine designs. In 2004 Ford began to market flexible fuel vehicles in Brazil that can operate on either blend or mixes of the two (over 40,000 units to date). In total, since the start of these programs, Ford has produced nearly 3,000,000 units with the ability to operate on ethanol.
Responses of Susan Cischke to Questions From Senator Menendez
Question 1. Could you comment on what technologies are available now that could be used to improve the fuel economy of passenger cars, light trucks, and SUVs?
Answer.
Globally, Ford is incorporating fuel-efficient technologies such as five- and six-speed transmissions, electronic power-assisted steering, variable cam timing, greater use of light-weight materials and improvements in aerodynamics. We introduced our first hybrid vehicle, the Escape Hybrid, in 2004. We are also investing in new vehicle segments as a strategy to improve fuel efficiency. We continue to expand our offerings of cars and “crossovers” in North America– vehicles that combine the features of cars and SUVs while generally achieving better fuel economy than traditional SUVs. Continued implementation of actions such as these will be necessary to comply with NHTSA’s newly-promulgated light truck standards, which represent a significant challenge for Ford. The fact that a given technology is available on a particular product does not mean that it can be instantly applied to all products. Some technologies, such as hybrid electric powertrains, require an enormous investment of financial and engineering resources, as well as considerable development time to integrate into a new vehicle platform. It is not possible to deploy such technologies across a wide range of vehicles in a short period of time. Moreover, applying technologies too fast, too soon throughout the vehicle fleet can result in poor performance and ultimately customer rejection of promising technologies. Ford’s typical engineering practices require that new technologies be phased into production gradually in order to gain experience with consumer acceptance and customer service issues before expanding the availability of the technology. Question 2. Could you tell me how much more it costs, on average, to produce a flexible-fueled vehicle over an equivalent one that is not an FFV?
Answer.
It is estimated that Ford and the industry have invested over a billion dollars to produce the more than five million flexible- fueled vehicles that are on the road today. Currently, FFV capability on Ford vehicles costs between $100 and $200 depending on the model, but this has been an option offered at no additional cost to Ford customers. The added cost is driven by many factors. First of all, because ethanol is a unique fuel with unique properties, these vehicles require unique hardware and engineering. For example, fuel tanks with low permeation characteristics are required. It also requires a special fuel pump and fuel lines to deliver the fuel to the engine. Unique injectors introduce the fuel into the engine where special calibrations programmed into the on-board computer determine how much ethanol is in the fuel and how best to set spark timing and fuel flow to ensure the engine operates properly and meets emission standards on all ethanol and gasoline mixtures. Because there is more than one fuel calibration within an FFV, costly development and certification testing is doubled. Many of the FFV parts and processes are patented by Ford and are the result of innovative ideas by our best engineers, and we’re proud of them. The bottom line . . . making an FFV is a significant investment for auto manufacturers. In order to continue to make FFVs a value proposition for consumers, we fully support government incentives to further accelerate investment in developing and marketing an E85 infrastructure. Question 3. Would Ford support replacing the current CAFE credit for producing dual-fuel vehicles with a system that provided credits based on the actual amount of ethanol used?
Answer.
No. First of all, it would be impractical to incorporate a fuel usage approach into the CAFE program, because manufacturers must plan for CAFE compliance years in advance, and they cannot plan to a moving target. Second, and even more importantly, the purpose of the dual-fuel incentives is to create a market that will accelerate the development of alternative fuel sources. Ford and other automakers have responded by producing more than five million alternative fuel vehicles and have absorbed significant costs to provide FFVs, most at no additional cost to consumers. And we see customer interest growing. The focus now needs to turn to increasing the availability of ethanol through infrastructure development. ______
Responses of R. James Woolsey to Questions From Senator Domenici
Question 1. You have spoken on a number of occasions about the security threats with respect to potential disruptions to foreign energy infrastructure and thus to our own energy security. As you look out on the areas from which we import, where are the potential threats located and what are the resulting potential price spikes?
Answer.
I believe the most dangerous are in the Middle East, due to the high (appx. 2/3) share of the world’s proven reserves of oil being located there, the processing infrastructure, and the ease of access for terrorist groups. I would put Saudi Arabia’s processing facilities in Northeastern Saudi Arabia front and center. A successful attack there could send oil well over $100/bbl for months. Question 2. What are your views on the possibilities of oil shale and other unconventional resources replacing much of our foreign dependence? What kind of timetable would you put on that?
Answer.
Oil shale is especially promising because of the large volume of oil contained therein in the Western U.S. (several Saudi Arabias-worth). I have no good estimate of the time required to develop, but although development could begin relatively soon it would probably take a number of years to reach substantial volume. Question 3. Is energy self-sufficiency a positive goal worth pursuing? Do you think some recent improvements have been made in shifting our reliance to allies such as Canada, for example?
Answer.
I believe that, for the U.S., the issue is not so much energy self-sufficiency as our overall dependence on oil. Most of our natural gas comes from Canada and, given the diversity of sources, moving toward importing some LNG from elsewhere does not seem to me to raise the kinds of issues for us that oil does. This is especially so given the promise of IGCC coal together with CO2 sequestration, quite possibly in deep saline aquifers. There is basically one world-wide market for oil so we do little by shifting the locus of our purchases–the objective should be to move to replace conventional oil with relatively inexpensive fuels from widely- available and inexpensive feedstocks and to require as little change in the infrastructure as possible. I would thus emphasize replacing oil with off-peak electricity (plug-in hybrids), ethanol (increasingly cellulosic), methanol, and diesel derived from agricultural and other wastes. Question 4. In your view, what are the most immediate steps we can take to reduce oil prices?
Answer.
Little will work in the very short run. We should instead focus on the steps set out in answer to Q3, supra, and even consider a floor for oil around $35/bbl or so so that the Saudis cannot increase production from their reserves, drop the price below the cost of alternatives, and undercut the alternatives’ development–as occurred in 1985 and again in the late 90’s. In order to have alternatives to oil we probably need to ensure that the price cannot be temporarily dropped too far. Question 5. What are the most immediate steps we can take to reduce our reliance on foreign sources of oil?
Answer.
See answer to Q3, supra: move toward plug-in hybrids, ethanol (esp. cellulosic), methanol, and diesel from agricultural and other waste. Question 6. In the State of the Union speech, President Bush set the goal of cutting reliance on Middle East oil 75% by 2025. Is this a worthy goal? An attainable goal? And, if so, what is the most effective way to achieve this goal?
Answer.
I believe a somewhat more ambitious goal is reasonable: by a combination of fuel efficiency and alternative fuel development and commercialization, I believe producing 25% of our transportation fuel from alternative fuels by 2025 is plausible, perhaps more. Question 7. Do you think that conservation is a significant component to energy policy? What is the most effective way to convince the public that it is?
Answer.
Yes, but the most attractive form of conservation is one that will let people continue to use the size cars they need for the purposes they require. One excellent idea is to move quickly toward producing vehicles from the same type of carbon composites that are now used for Formula 1 racers. Since these are more than ten times as crash-resistant as steel and weigh half as much or less, one can separate safety from size and have safe small vehicles that are extremely fuel efficient, or, for those who need large vehicles these can be much lighter and thus much more fuel efficient as well. Question 8. Please comment on your views on raising CAFE standards.
Answer.
I believe that such is reasonable, but would be willing to replace them with incentives for plug-in hybrids, carbon-composite vehicles, and alternative fuels. Question 9. What additional steps need to be taken to develop fuel cell technology?
Answer.
We are spending far too much today on this far-out technology. The National Energy Policy Commission found in 2004 that there would be no substantial effect on oil use from automotive hydrogen fuel cells for 20 years. This is in part because of the expense of fuel cells and in part because of the massive changes to the energy infrastructure that their use would entail. The vast majority of the funds now devoted to automotive hydrogen fuel cells should be transferred to uses for which there will be a much earlier benefit. Question 10. Do you view increasing our domestic supply of oil and gas as a necessary part of achieving what you have called, “energy security”?
Answer.
See answer to Q3, supra. Question 11. Please comment specifically on the impact that the biofuels provisions in the recently passed Energy Policy Act will have on reducing reliance on foreign oil and strengthening energy security.
Answer.
I believe that substantially greater encouragement for commercialization is needed in order for the impact to be timely, along the lines of the legislation introduced by Senators Lieberman, Brownback, and others (S. 2025).
Responses of R. James Woolsey to Questions From Senator Murkowski
Question 1. Coming from a state that has the lion’s share of gas hydrate potential, what is the likelihood of gas hydrate production both on shore and under the seafloor coming into its own within the next two decades? It is said that America has a 1,000 year energy supply of hydrates out there waiting to be tapped. Should we be focusing more on developing that resource?
Answer.
I have read only a bit on this interesting issue–the current estimates are on the order of 21,000 trillion cubic meters, or about 100 times our current proven gas reserves. My understanding is that very large R&D investments will be necessary before these can be regarded as an affordable source, however. I would classify these as a fascinating and potentially important but distant energy source. Question 2. DOE last year issued a report that indicated we should be able to coax up to 40 billion barrels of additional conventional oil from aging oil fields by injecting carbon dioxide into the fields to squeeze out more oil. How important is more widespread use of CO2 likely to prove to be to aid shorter-term energy production, especially since the same technology–CO2 injection–results in sequestering carbon from the environment, cutting greenhouse gas emissions?
Answer.
This is certainly not a negligible total–it is about 25% more than the world’s annual oil production today. If CO2 sequestration is shown to be successful for the long term when it is injected into wells, this could be a very valuable step. Over the long run I believe CO2 sequestration will require its being inserted into deep saline aquifers, however. Question 3. Coal Gasification: We all know that America is the Saudi Arabia of coal. My state alone has about 15% of the planet’s coal reserves, 160 billion short tons. I am really interested in pushing coal gasification to produce coal without emissions and to help sequester carbon. What can we do on top of what we did in last year’s Energy Bill, to further clean coal technology and production economics?
Answer.
The key problem, as I understand it, is that IGCC coal with carbon sequestration is still more expensive by perhaps 25% or more than just burning coal with pollution abatement but not CO2 capture and sequestration. In my view once the technology of sequestration is sufficiently proven we should move, through federal financial incentives, to remove this difference. A mandatory carbon cap-and-trade system would be a good method to provide the needed incentives to move us in this direction. Question 4. If we do everything that we think we can do in terms of fuel efficiency, stimulating production of conventional fuels and alternative fuels from wind, geothermal, biomass, solar and ocean current energy and also further nuclear, do we have the ability to be truly energy independent by 2025?
Answer.
Although in the 1970’s some 20 per cent of our electricity was produced from oil, today only 2-3% is. Thus our methods of producing electricity, while important for a number of reasons, are largely unrelated to our dependence on oil, about 2/3 of which is used for transportation and the rest for industrial and heating uses. Wind, geothermal, solar, ocean current, and nuclear energy all have the major advantage (with hydro) of not contributing to global warming gas emissions. As noted above, since our principal foreign source of electricity-producing feedstocks is natural gas from Canada, I do not believe that the decisions about electricity production should be driven by the question of foreign sources. Oil, however, is a different matter–still, the key issue (since there is basically one world-wide market for oil) is how can we reduce our reliance on conventional oil overall. The best near-term options here, I believe, are to move toward: plug-in hybrids so that inexpensive off-peak electricity can be used for transportation; ethanol (especially cellulosic); methanol; diesel from agricultural and other wastes; and construction of vehicles out of carbon composites, supra. Such steps could, I believe, move us toward producing 25% or more of our transportation fuels from alternative sources by 2025. Together with our domestic oil production and other fuel efficiency steps we could conceivably come close to importing no oil around 2025 or a few years later.
Responses of R. James Woolsey to Questions From Senator Bunning
Question 1. Many of you focus on biodiesel and transportation fuels. But coal is our most abundant domestic fossil fuel and it accounts for half of our electricity generation. The Energy Information Administration predicts coal will continue to be the centerpiece of our energy production for the next 25 years. Do you think we could lessen our dependence on imports by using clean coal power and nuclear energy to replace the natural gas and oil that currently goes to the electricity production?
Answer.
IGCC coal with carbon sequestration is especially promising and nuclear energy has an important role as well in future electricity production. But only 2-3% of our electricity is now produced from oil so moving further in these directions for electricity production will have only a minimal effect on oil use or imports (until there are tens of millions of plug-in hybrid vehicles on the road). Most of our natural gas imports now come from Canada, which does not present a substantial risk in my view. Question 2. I have been impressed with new Coal-to-Liquids technology that can turn coal into a synthetic liquid fuel. Other parts of the world, like South Africa, have been using this technology for decades. I know there are several pilot facilities here in America, but what do we need to do to push this industry into full commercial-scale operations?
Answer.
My understanding is that environmental concerns and cost, in comparison with alternatives, are major hurdles to overcome, but as you suggest this technology has been improved in recent years and it deserves fair consideration. Question 3. In some parts of the world–and a few places in Western Kentucky–people drive their cars and trucks on a blend of fuel that is 85% ethanol. That means only 15% of the fuel is based on oil. Some of you on the panel have mentioned that the best case scenario for biodiesel is that it will only replace 10% of gasoline used for transportation. What are the limiting factors? Can the government help address problems like infrastructure and efficiency?
Answer.
Some types of biodiesel can be used only in mixtures of 10- 20% with ordinary diesel fuel. Other types of alternative diesel (called “renewable diesel” as distinct from “biodiesel” in the statutes) have no such problem, according to the report in late 2004 of the National Energy Policy Commission. Consultation with the Commission staff (www.energycommission.org) would provide a more complete answer. Question 4. In your testimony before this Committee you summarize your overall recommendations by stating that:
government policies in the United States and other oil- importing countries should: (1) encourage a shift to substantially more fuel-efficient vehicles within the existing transportation infrastructure, including promoting both battery development and a market for existing battery types for plug-in hybrid vehicles; and (2) encourage biofuels and other alternative and renewable fuels that can be produced from inexpensive and widely-available feedstocks–wherever possible from waste products.
Do you have any suggestions about specific legislation that could be adopted by Congress to at least begin the process of implementing any of your recommendations?
Answer.
S. 2025, introduced by Senators Lieberman and Brownback and a number of co-sponsors implements most of these suggestions.
Responses of R. James Woolsey to Questions From Senator Wyden
Question 1. Your testimony makes a compelling case why energy security should be a top national security priority. What do you suggest we do to make the case for the billion-dollar funding levels that we need for energy independence and security at a time when national priorities are focused on the war on terror?
Answer.
In my view reducing our dependence on conventional oil is an integral part of the war on terror. I believe we will be in this war for decades, much like the Cold War, and that one key to winning it is to cease funding the ideology of hatred that our enemies feed upon. We borrow $250 billion/year to import oil–an increasing share it will come from the Middle East as the years go on. The Saudis then, to take one example, provide around $4 billion/year to the Wahhabis who then use much of it to run, e.g., madrassas in Pakistan and elsewhere that teach this hatred. Indeed one could say that, other than the Civil War, this is the only war the U.S. has fought in which we pay for both sides. Question 2. In your written testimony, you say that estimates of the amount spent by the Saudis in the last 30 years spreading Wahhabi beliefs throughout the world vary from $70 billion to $100 billion and that some oil-rich families of the Greater Middle East fund terrorist groups directly. How can we persuade the Administration and Congress that this backdoor funding of terrorist with oil revenues, what I call the “terror tax” we pay on Middle East oil, is helping to fund terrorism and that cutting off this funding source should be part of the war on terror?
Answer.
To avoid these funds going to the Wahhabis and to avoid them and oil-rich families funding this ideological aspect of terrorism I believe we must move away from the use of conventional oil, and do so quickly and decisively. Our resolution, if clear and decisive, can have an effect on the psychology of this conflict even before our reduction in oil use is large. Question 3. Do you think that we should have an account in the DOD budget for energy security?
Answer.
DOD can play a major role in reducing its own use of conventional oil through the design of its platforms and the logistical arrangements at its facilities. It can also help move the civilian economy in useful directions by its purchases of conventional vehicles that are fuel-efficient (e.g. plug-in hybrids) and alternative fuels. I don’t know whether a separate account is the best way to increase this emphasis or not. Question 4. The Administration’s FY 2007 budget request seeks $942- million for the Advanced Energy Initiative, $1.18-billion for energy efficiency and renewables and about ten times that amount for various nuclear energy programs. Is any of this going to do much of anything to address what President Bush calls our “national oil, addiction” anytime soon?
Answer.
Nuclear energy may be one good way to produce electricity, especially because it does not emit global warming gases. But it is largely irrelevant to the question oil addiction because only 2-3% of our electricity comes from oil. Question 5. How much do we need to spend to make a difference? Is there anything that can be implemented in the next few years to start changing course?
Answer.
Yes, I believe that S. 2025, introduced by Senators Lieberman and Brownback and co-sponsored by a number of Senators would help move us promptly in the direction of efficient vehicles and alternative transportation fuels. Question 6. The Japanese have been on a steady course to conserve energy and reduce their dependence on imported energy while their GDP continues to grow. They’re turning down their thermostats and shutting off their idling car and truck engines to save energy. Opinion polls show that more than 75% of Japan’s citizens view energy conservation as a personal responsibility. Many are willing to shell out extra cash for efficient appliances and office equipment. Do you think that Americans can gain energy independence without feeling a little pain? Are American consumers willing to accept some financial pain for energy independence gain?
Answer.
I would hope so, but one interesting aspect of moving away from oil addiction is that many of the steps we need to take are relatively painless. We can have high-performance and even large vehicles, e.g., for those who need them–if they are plug-in hybrids and run on cheap off-peak electricity, as well as being Flexible Fuel Vehicles that carry E-85, methanol, or diesel made from waste in their tanks, and are constructed from carbon composites it is possible to have sports cars or SUVs that get many hundreds of miles per gallon (of conventional oil products).
Responses of R. James Woolsey to Questions From Senator Feinstein
Question 1. In your opinion, what is the most important step that the United States could take today to help reduce our dependence on oil?
Answer.
Provide incentives to move into commercial use quickly of transportation fuels that are either cheap and environmentally attractive today (i.e. off-peak electricity via plug-in hybrids) or that are predictably cheap and environmentally attractive (cellulosic ethanol and diesel from waste products). The less need for infrastructure change the better, but where necessary incentives for change (e.g. tax credits for E-85 pumps) should be part of the package. Question 2. What are some ways that you believe we can make oil play a less critical role in the American economy?
Answer.
In addition to the answer to Question 1, supra, encourage with loan guarantees or tax credits the saving of oil in other sectors–heavy trucking, heating, and industrial uses–and the substitution of other fuels, such as IGCC coal with carbon sequestration, biomass-derived products for industrial uses, etc. Question 3. What do you believe are the largest barriers to the entry of new vehicle technology into the market?
Answer.
Investment cost and uncertainty in the market. The latter may be mitigated by encouraging orders for new types of vehicles (e.g. plug-in hybrids) by fleet purchasers. Question 4. Would it make sense to focus the nation’s technological energy on rapidly developing and commercializing plug-in hybrids that could both take energy from the electric grid at night, when electricity is practically free, and then hopefully give energy back to the grid during the day when electricity use is the greatest? If so, what could the Federal government do to help promote plug-in hybrids?
Answer.
Most definitely. The vehicle-to-grid possibility can help reduce the need for new generating capacity for peak power and “regulation”. Federal regulatory encouragement of such steps could substantially hasten the adoption of plug-ins.
Response of R. James Woolsey to Question From Senator Menendez
Question 1. Could you comment on what technologies are available now that could be used to improve the fuel economy of passenger cars, light trucks, and SUVs?
Answer.
The most dramatic, I believe, would be the increased utilization of carbon composites for vehicle construction. Since these (now used in Formula 1 racing cars) are ten times more crash-resistant than steel they can provide substantial safety even for small vehicles. Since the weight is half or less that of steel vehicles, they would improve fuel efficiency by 100% or more. More such ideas are included in the excellent 2004 report by the Rocky Mountain Institute, “Winning the Oil End-game.” (www.rmi.org).
[Responses to the following questions were not received at the time this hearing went to press:]
Questions for Frank Verrastro From Senator Domenici
Question 1. In your written testimony you state that the rise in oil import levels over the next twenty years carries important infrastructure implications. Please explain what you mean by this. What in your view is the best way to address these potential problems? Question 2. Please comment on the effects of the 7.5 billion gallon ethanol mandate in the energy bill combined with the possibility of a moderate increase in CAFE standards and the opening of areas like 181 and ANWR. Would the combination of all of these policies significantly strengthen our energy security? Would they substantially reduce our dependence on foreign sources? Question 3. Please tell us your views on what a windfall profits tax would do to oil prices as well as its impact on our reliance on foreign sources. Question 4. In your written testimony you say that, “the Stone Age did not end because we ran out of rocks–something better came along. The Oil Age will similarly be overtaken when a better solution of a series of solutions emerge.” What do you think the most reasonable policies are to strengthen our energy security until the Oil Age is overtaken? In other words, where should our focuses lie and what have we been concentrating too much on? Question 5. At what price levels for oil do you think we will start to see a significant decrease in consumption?
Questions for Frank Verrastro From Senator Murkowski
Question 1. Coming from a state that has the lion’s share of gas hydrate potential, what is the likelihood of gas hydrate production both on shore and under the seafloor coming into its own within the next two decades? It is said that America has a 1,000 year energy supply of hydrates out there waiting to be tapped. Should we be focusing more on developing that resource? Question 2. DOE last year issued a report that indicated we should be able to coax up to 40 billion barrels of additional conventional oil from aging oil fields by injecting carbon dioxide into the fields to squeeze out more oil. How important is more widespread use of CO2 likely to prove to be to aid shorter-term energy production, especially since the same technology–CO2 injection–results in sequestering carbon from the environment, cutting greenhouse gas emissions? Question 3. Coal Gasification: We all know that America is the Saudi Arabia of coal. My state alone has about 15% of the planet’s coal reserves, 160 billion short tons. I am really interested in pushing coal gasification to produce coal without emissions and to help sequester carbon. What can we do on top of what we did in last year’s Energy Bill, to further clean coal technology and production economics? Question 4. If we do everything that we think we can do in terms of fuel efficiency, stimulating production of conventional fuels and alternative fuels from wind, geothermal, biomass, solar and ocean current energy and also further nuclear, do we have the ability to be truly energy independent by 2025?
Questions for Frank Verrastro From Senator Bunning
Question 1. Many of you focus on biodiesel and transportation fuels. But coal is our most abundant domestic fossil fuel and it accounts for half of our electricity generation. The Energy Information Administration predicts coal will continue to be the centerpiece of our energy production for the next 25 years. Do you think we could lessen our dependence on imports by using clean coal power and nuclear energy to replace the natural gas and oil that currently goes to the electricity production? Question 2. I have been impressed with new Coal-to-Liquids technology that can turn coal into a synthetic liquid fuel. Other parts of the world, like South Africa, have been using this technology for decades. I know there are several pilot facilities here in America, but what do we need to do to push this industry into full commercial-scale operations? Question 3. In some parts of the world–and a few places in Western Kentucky–people drive their cars and trucks on a blend of fuel that is 85% ethanol. That means only 15% of the fuel is based on oil. Some of you on the panel have mentioned that the best case scenario for biodiesel is that it will only replace 10% of gasoline used for transportation. What are the limiting factors? Can the government help address problems like infrastructure and efficiency? Question 4. On page 1 of your testimony before this Committee you list a variety of issues our nation must consider if it is to begin addressing the energy challenges we face. These include: i) stimulating additional supplies of conventional and traditionally non-conventional fuel sources, including renewables and alternatives; ii) improving energy efficiency and conservation efforts; iii) promoting research and development and deployment of useful technologies; iv) addressing infrastructure needs to facilitate the development of fuel choices and; v) pursuing the development of a more comprehensive energy development strategy. Question 5. Do you have any suggestions about specific legislation that could be adopted by Congress to at least begin the process of implementing any of your recommendations?
Questions for Frank Verrastro From Senator Bingaman
Question 1. Your testimony notes that the deployment of proven technologies in the auto fleet can over time make a substantial contribution to reducing transportation demand. Can you give us a few examples of what these “existing technologies” are that you are referring to? Question 2. What policies do you recommend we adopt that could help use existing technologies to reduce the amount of oil that we use in the transportation sector within the next 5 to 10 years? What concrete steps can you suggest? Question 3. Is there anything that we should do to encourage more multilateral cooperation in the international oil trading and investment market places to try to lessen governments’ pursuits of specific narrow interests?
Questions for Frank Verrastro From Senator Wyden
Question 1. As a recognized expert in international energy markets, and given your view that expanding domestic oil production alone won’t get us very far down the road towards energy independence, are there other countries that could be models for our national efforts? Question 2. I agree with your call to accelerate new energy technology deployment, especially those that cut transportation fuel demand. Critics complain that this puts the government in the business of picking winners and losers. In my view, we’re already dependent on the losers. How do you suggest that we do this so that we can be successful? Question 3. The Administration’s FY 2007 budget request seeks $942- million for the Advanced Energy Initiative, $1.18-billion for energy efficiency and renewables and about ten times that amount for various nuclear energy programs. Is any of this going to do much of anything to address what President Bush calls our “national oil addiction” anytime soon? How much do we need to spend to make a difference? Is there anything that can be implemented in the next few years to start changing course? Question 4. The Japanese have been on a steady course to conserve energy and reduce their dependence on imported energy while their GDP continues to grow. They’re turning down their thermostats and shutting off their idling car and truck engines to save energy. Opinion polls show that more than 75% of Japan’s citizens view energy conservation as a personal responsibility. Many are willing to shell out extra cash for efficient appliances and office equipment. Do you think that Americans can gain energy independence without feeling a little pain? Are American consumers willing to accept some financial pain for energy independence gain?
Questions for Frank Verrastro From Senator Feinstein
Question 1. In your opinion, what is the most important step that the United States could take today to help reduce our dependence on oil? Question 2. What are some ways that you believe we can make oil play a less critical role in the American economy? Question 3. What do you believe are the largest barriers to the entry of new vehicle technology into the market? Question 4. Would it make sense to focus the nation’s technological energy on rapidly developing and commercializing plug-in hybrids that could both take energy from the electric grid at night, when electricity is practically free, and then hopefully give energy back to the grid during the day when electricity use is the greatest? If so, what could the Federal government do to help promote plug-in hybrids?
Question for Frank Verrastro From Senator Domenici
Question 1. Could you comment on what technologies are available now that could be used to improve the fuel economy of passenger cars, light trucks, and SUVs?
ENERGY DIPLOMACY AND SECURITY
[Senate Prints 109-64] [From the U.S. Government Publishing Office]
109th Congress S. Prt. 2d Session COMMITTEE PRINT 109-64
===========================================================================
ENERGY DIPLOMACY AND SECURITY
A COMPILATION OF
STATEMENTS BY WITNESSES
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
One Hundred Ninth Congress
Second Session
June 2006
Printed for the use of the Committee on Foreign Relations
Available via World Wide Web: http://www.gpoaccess.gov/congress/ index.html
U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 2006
28-001 PDF
For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin LAMAR ALEXANDER, Tennessee BARBARA BOXER, California JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois MEL MARTINEZ, Florida Kenneth A. Myers, Jr., Staff Director Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
Page Letter of Introduction……………………………………. v
“U.S. Energy Security–A New Realism” speech delivered by Hon. Richard G. Lugar on March 13, 2006, at the Brookings Institution……………………………………………. vii
June 7, 2006
Hon. Richard G. Lugar, U.S. Senator from Indiana, Chairman, U.S. Senate Committee on Foreign Relations…………………….. 1
Hon. Joseph R. Biden, Jr., U.S. Senator from Delaware, Ranking Member, U.S. Senate Committee on Foreign Relations…………. 3
Hon. Alan Greenspan, President, Greenspan Associates LLC, Washington, DC…………………………………………. 6
May 16, 2006
Hon. Richard G. Lugar, U.S. Senator from Indiana, Chairman, U.S. Senate Committee on Foreign Relations…………………….. 11
Hon. Joseph R. Biden, Jr., U.S. Senator from Delaware, Ranking Member, U.S. Senate Committee on Foreign Relations…………. 13
Vinod Khosla, Partner, Khosla Ventures, Menlo Park, CA……….. 15
Jason S. Grumet, Executive Director, National Commission on Energy Policy, Washington, DC……………………………. 23
March 30, 2006
Hon. Richard G. Lugar, U.S. Senator from Indiana, Chairman, U.S. Senate Committee on Foreign Relations…………………….. 41
Hon. Joseph R. Biden, Jr., U.S. Senator from Delaware, Ranking Member, U.S. Senate Committee on Foreign Relations…………. 44
Milton R. Copulos, President, National Defense Council Foundation, Alexandria, VA………………………………. 46
Dr. Hillard Huntington, Executive Director, Energy Modeling Forum, Stanford University, Stanford, CA………………….. 53
Dr. Gary W. Yohe, John E. Andrus Professor of Economics, Wesleyan University, Middletown, CT………………………………. 57
November 30, 2005
Hon. Richard G. Lugar, U.S. Senator from Indiana, Chairman, U.S. Senate Committee on Foreign Relations…………………….. 63
Hon. James Schlesinger, Senior Advisor, Lehman Brothers, Washington, DC…………………………………………. 66
Hon. R. James Woolsey, Vice President, Booz Allen Hamilton, McClean, VA……………………………………………. 70
(iii)
LETTER OF INTRODUCTION
June 8, 2006. Dear Colleague: The Committee on Foreign Relations is continuing to hold a series of hearings examining the geopolitical consequences of global energy imbalances and U.S. dependence on energy imports. Given the growing importance of energy security in our foreign policy today and the prominence of energy in our ongoing policy debates, I believe it is important that these analyses be made available to the entire Senate. The current United States energy portfolio, and in particular our dependence on foreign oil, has widespread and dramatic impacts on our national security. On March 13, 2006, in a speech at the Brookings Institution, I outlined the scope of the challenge before us, including myriad threats to our national security and economic prosperity. Over the past few months, the Committee held several hearings focusing on these threats caused by our current dependence on oil. The Honorable Alan Greenspan, former Chairman of the Federal Reserve, testified on the subject of “Oil Dependence and Economic Risk” at a hearing on June 7, 2006, including the vulnerabilities of the current global oil market and the need for reducing the dominance of oil in our energy portfolio. On May 16, 2006, the Committee examined strategies to reduce our oil dependence at a hearing on “Energy Security and Oil Dependence.” Mr. Vinod Khosla, Partner of Khosla Associates, and Mr. Jason Grumet, Executive Director of the National Commission on Energy Policy offered testimony. A hearing on March 30, 2006, entitled “Hidden Costs of Oil” focused on understanding the full range of economic costs associated with U.S. oil dependence. Testimony was heard from Mr. Milton Copulos, President of the National Defense Council Foundation, Dr. Hillard Huntington, Executive Director of the Energy Modeling Forum at Stanford University, and Dr. Gary Yohe, John E. Andrus Professor of Economics at Wesleyan University. On November 16, 2005, The Honorable James Schlesinger, former Secretary of Defense, Secretary of Energy, and Director of Central Intelligence, and The Honorable R. James Woolsey, former Director of Central Intelligence, gave testimony on the severity of the challenges posed by energy security at a hearing entitled “High Costs of Crude: The New Currency of Foreign Policy.” I believe that the information contained in this print can be helpful in preparing Members for subsequent Senate debate on this issue of vital national security interest. Sincerely, Richard G. Lugar, Chairman, Senate Committee on Foreign Relations. U.S. Senate Foreign Relations Committee Chairman, Richard G. Lugar, addressed the Brookings Institution, March 13, 2006, on “U.S. Energy Security–A New Realism.”
It is a privilege to deliver the inaugural speech for the Brookings Institution’s 90th Anniversary Leadership Forum series. I have had the opportunity to come here to share my thoughts on a number of national security issues over the years, and your reception has always been generous. I appreciate very much receiving the invitation to speak from my good friend, Strobe Talbott, who has been a source of sound counsel for many years and who continues to provide outstanding national and international leadership. Last August, I represented President Bush on a diplomatic mission to North Africa. The President asked me to go to Algeria and Morocco to facilitate the release of the longest- held prisoners of war in the world–404 Moroccan soldiers, some of whom had been held since the 1970s by the Polisario Front operating out of Algeria. American diplomats had discussed their potential release, and General Jim Jones, Supreme Allied Commander Europe, had offered to transport the POWS home to their families in Morocco. After this humanitarian mission had been fulfilled, I had the opportunity, with the Administration’s blessing, to continue on to Libya for meetings with Libyan officials, including Muammar Qaddafi. While staying overnight in the Corinthia Hotel in Tripoli, overlooking the Mediterranean, I came face to face with a microcosm of the new reality of global economic life. It was impossible to walk around the hotel without meeting someone who was hoping to tap into Libya’s oil reserves. The hotel was populated with representatives from China, India, and Western oil companies who were in Libya to stake out drilling or refining options for every pool of oil that the government might make available. The world had come to the Corinthia Hotel to compete for the energy opportunities that were expected to develop with Libya’s hopeful return to the international mainstream. I relate this anecdote to underscore how rapidly the world is changing due to the expansion of energy demand. These conclaves of modern day oil prospectors can be found wherever there are proven energy supplies and a government willing to bargain. Indeed, my delegation also saw evidence of this in natural gas-rich Algeria. The Chinese and Indians, with one third of the world’s people between them, know that their economic future is directly tied to finding sufficient energy resources to sustain their rapid economic growth. They are negotiating with anyone willing to sell them an energy lifeline.
the shifting balance of realism
The gasoline price spikes following the Katrina and Rita hurricanes underscored for Americans the tenuousness of short- term energy supplies. But, as yet, there is not a full appreciation of our economic vulnerability or the competition that is already occurring throughout the world. In a remarkable moment during the State of the Union Address, President Bush caught the attention of the nation with five words: “America is addicted to oil.” Those five words probably generated more media commentary than all the rest of his remarks from that evening combined. I had an opportunity soon after the speech to talk to the President about energy, and he admitted that he had not anticipated the impact of that statement or that some commentators would find it incongruous. I believe he is genuine in wanting to devote more focus to pursuing alternative energy sources. But his Texas roots, his administration’s high-profile advocacy of opening up the Arctic National Wildlife Refuge to drilling, and other associations with the oil industry have created long-standing public impressions that the President is an oil-man who believes in the oil economy. Though not hostile to alternative energy sources, the Bush administration clearly downplayed their significance during the early part of his Presidency. Vice President Cheney, who oversaw Bush administration energy policy, stated on April 30, 2001, “Years down the road, alternative fuels may become a great deal more plentiful than they are today. But we are not yet in any position to stake our economy and our way of life on that possibility. For now, we must take the facts as they are. Whatever our hopes for developing alternative sources and for conserving energy–and that’s part of our plan–the reality is that fossil fuels provide virtually 100 percent of our transportation needs and an overwhelming share of our electricity requirements. For years down the road, this will continue to be true.” For decades, the energy debate in this country has pitted so-called pro-oil realists against idealistic advocates of alternative energy. The pro-oil commentators have attempted to discredit alternatives by saying they make up a tiny share of energy consumed and that dependence on oil is a choice of the marketplace. They assert that our government can and should do little to change this. They have implied that those who have bemoaned oil dependency do not understand that every energy alternative comes with its own problems and limitations. Lee Raymond, the former CEO of Exxon offered an example of this line of reasoning in 2005: “There are many alternative forms of energy that people talk about that may be interesting. But they are not consequential on the scale that will be needed, and they may never have a significant impact on the energy balance. To the extent that people focus too much on that–for example, on solar or wind . . .–what they are doing is diverting attention from the real issues. And 25 years from now, even with double-digit growth rates, they will still be less than 1 percent of the energy supplied to meet worldwide demand. I am more interested in staying focused on the 99 percent than the 1 percent.” Indeed, advocates of alternative energy must resist the rhetorical temptations to suggest that energy problems are easily solved. They are not. Relieving our dependence on oil in any meaningful way is going to take much greater investments of time, money, and political will. There is no silver bullet solution. But the difficulty of solving the problem does not make it any less necessary. The President’s State of the Union address indicates that he understands this. Whether or not one classifies America’s oil dependence as an addiction, the bottom line is that with less than 5 percent of the world’s population, the United States consumes 25 percent of its oil. If oil prices remain at $60 a barrel through 2006, we will spend about $320 billion on oil imports this year. Most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism. And demand for oil will increase far more rapidly than we expected just a few years ago. Within 25 years, the world will need 50 percent more energy than it does now. With these basics in mind, my message is that the balance of realism has passed from those who argue on behalf of oil and a laissez faire energy policy that relies on market evolution, to those who recognize that in the absence of a major reorientation in the way we get our energy, life in America is going to be much more difficult in the coming decades. No one who cares about U.S. foreign policy, national security, and long-term economic growth can afford to ignore what is happening in Iran, Russia, Venezuela, or in the lobby of the Corinthia Hotel in Tripoli. No one who is honestly assessing the decline of American leverage around the world due to our energy dependence can fail to see that energy is the albatross of U.S. national security. We have entered a different energy era that requires a much different response than in past decades. What is needed is an urgent national campaign led by a succession of Presidents and Congresses who will ensure that American ingenuity and resources are fully committed to this problem. We could take our time if this were merely a matter of accomplishing an industrial conversion to more cost effective technologies. Unfortunately, U.S. dependence on fossil fuels and their growing scarcity worldwide have already created conditions that are threatening our security and prosperity and undermining international stability. In the absence of revolutionary changes in energy policy, we are risking multiple disasters for our country that will constrain living standards, undermine our foreign policy goals, and leave us highly vulnerable to the machinations of rogue states. The majority of oil and natural gas in the world is not controlled by those who respect market forces. Geology and politics have created petro-superpowers that nearly monopolize the world’s oil supply. According to PFC Energy, foreign governments control up to 77 percent of the world’s oil reserves through their national oil companies. These governments set prices through their investment and production decisions, and they have wide latitude to shut off the taps for political reasons. I am not suggesting that markets won’t eventually come into play to move America away from its oil dependence. Eventually, because of scarcity, terrorist attacks, market shocks, and foreign manipulation, the high price of oil will lead to enormous investment in and political support for alternatives. Given enough time, overcoming oil dependence and imbalances is well within the scope of human, and indeed American, ingenuity. The problem is that such investment cannot happen overnight, and even if it did, it will take years or even decades to build supporting infrastructure and change behavior. In other words, by the time a sustained energy crisis fully motivates the market, we are likely to be well past the point where we can save ourselves. Our motivation will come too late and the resulting investment will come too slowly to prevent the severe economic and security consequences of our oil dependence. This is the very essence of a problem requiring government action. The first step is to admit how grave the problem is. Hopefully, we will look back on President Bush’s declaration that America is “addicted to oil” as a seminal moment in American history, when a U.S President said something contrary to expectations and thereby stimulated change. Like President Nixon using his anticommunist credentials to open up China or President Johnson using his Southern roots to help pave the way for the Civil Rights Act, President Bush’s standing as an oil man would lend special power to his advocacy, if he chose to initiate an all-out campaign for renewable energy sources.
six threats
As a national security problem, energy is unique in that the risks we face from this single condition are diverse and are intensifying simultaneously. In fact, our energy dependence creates at least six different threats that could directly or indirectly undermine American security and prosperity. Each of these threats could be the subject of its own speech, but today, I will provide an abbreviated review. First, as we have seen, oil supplies are vulnerable to natural disasters, wars, and terrorist attacks that can disrupt the lifeblood of the international economy. The entire nation felt the spike in prices caused by Hurricanes Katrina and Rita last year. But these shocks, which helped send the price of oil to $70 a barrel, were minor compared to what would occur if major oil processing facilities in Saudi Arabia were sabotaged. In late February, terrorists attempted such an attack. They penetrated the outer defenses of Saudi Arabia’s largest oil processing facility with car bombs before being repulsed. A successful terrorist attack–either through conventional ground assaults, suicide attacks with hijacked aircraft, terrorist inspired internal sabotage, or other means–would be devastating to the world economy. Al-Qaeda and other terrorist organizations have openly declared their intent to attack oil facilities to inflict pain on Western economies. Recently, we have also seen the shutdown of a fifth of Nigeria’s production by militants, and Iraq’s continuing struggle to expand its oil production capacity amidst terrorist attacks. The vulnerability of oil supplies is not a new concern. But the lack of spare oil production capacity is new. As recently as 4 years ago, spare production capacity exceeded world oil consumption by about 10 percent. As world demand for oil has rapidly increased in the last few years, spare capacity has declined to less than 2 percent. Thus, any major disruption of oil creates scarcity that will drive prices up. These circumstances require massive expenditures to preserve our oil lifeline. One conservative estimate puts U.S. oil-dedicated military expenditures in the Middle East at $50 billion year. Second, over time, even if oil and natural gas supplies are not disrupted in dramatic ways that produce local or global economic shocks, worldwide reserves are nevertheless diminishing. This is occurring within the context of explosive economic growth in China, India, Brazil, and many other nations. The demand for energy from these industrializing giants is creating unprecedented competition for oil and natural gas. Americans paid 17 percent more for energy in 2005 than in the previous year. That increase accounted for 40 percent of the rise in the consumer price index. Last November, we spent more than $24 billion on oil imports, accounting for more than a third of our trade deficit. To meet world oil demand, the International Energy Agency estimates a need for $17 trillion in investment, with the bulk going to the Middle East. But political and economic conditions may not let this investment happen. Even if some investment does occur and reserves prove to be much larger than anticipated, there is no guarantee that hostile governments will either choose to develop new capacity or make any new oil available to the United States. In the decades to come, price will not be the only issue. We will face the prospect that the world’s supply of oil may not be abundant and accessible enough to support continued economic growth in both the industrialized West and in large rapidly growing economies. As we approach the point where the world’s oil-hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict and threats of military action, than it already is. Third, the use of energy as an overt weapon by producing nations is not a theoretical threat of the future; it is happening now. Oil and natural gas are the currency through which energy-rich countries leverage their interests against import dependent nations such as ours. Iran has repeatedly threatened to cut off oil exports to selected nations if economic sanctions are imposed against it. Similarly Hugo Chavez in Venezuela has issued threats of an oil export embargo against the United States. In January, Ukrainians were confronted by a Russian threat to cut off natural gas exports in mid-winter if Ukraine did not submit to a four-fold price increase. Russia took action to deny some natural gas to Ukraine. The dispute led to sharp drops in gas supplies reaching European countries that depend on natural gas moving through Ukrainian pipelines from Russia. Russia charged that Ukraine was diverting gas intended for Austria, Italy, France, Hungary and other European nations. Eventually, the confrontation was resolved with a near doubling of the price of natural gas sold by Russia to Ukraine. In contrast, Russia did not inflict such a price increase on Belarus, considered by Moscow to be a good partner, compared to the pro-Western Ukrainian Government. The episode underscored the vulnerability of consumer nations to their energy suppliers. We are used to thinking in terms of conventional warfare between nations, but energy is becoming the weapon of choice for those who possess it. It may seem to be a less lethal weapon than military forces, but a natural gas shutdown to Ukraine in the middle of winter could cause death and economic loss on the scale of a military attack. Moreover, in such circumstances, nations would become desperate, increasing the chances of armed conflict and terrorism. The use of energy as a weapon might require NATO to review what alliance obligations would be in such cases. Fourth, even when energy is not used overtly as a weapon, energy imbalances are allowing regimes in countries that are rich in oil and natural gas to avoid democratic reforms and insulate themselves from international pressure and the aspirations of their own people. We are seeing Iran and Venezuela cultivate energy relationships with important nations that are in a position to block economic sanctions. For decades, we have watched Saudi Arabia and other gulf states use oil wealth to create domestic conditions that prevent movement toward democracy. In Russia and Nigeria, energy assets have offered opportunities for corruption. In many oil rich nations, oil wealth has done little for the people, while ensuring less reform, less democracy, fewer free market activities, and more enrichment of elites. Beyond the internal costs to these nations, we should recognize that we are transferring hundreds of billions of dollars each year to some of the least accountable regimes in the world. Some are using this money to invest abroad in terrorism, instability, or demagogic appeals to populism. At a time when the international community is attempting to persuade Iran to live up to its nonproliferation obligations, our economic leverage on that country has declined due to its burgeoning oil revenues. If one tracks the arc of Iran’s behavior over the last decade, its suppression of dissent, its support for terrorists, and its conflict with the West have increased in conjunction with its oil revenues, which soared by 30 percent in 2005. Sometimes observers comfort themselves with the thought that most U.S. imports come from friendly nations such as Canada and Mexico, rather than from Iran or other problematic countries. But oil is a globally priced commodity. Even if our dollars are not going directly to Iran, this does not mean that our staggering consumption of oil is not contributing to the price paid to Iran by other consumers. Fifth, the threat of climate change has been made worse by inefficient and unclean use of nonrenewable energy. In the long run this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability. There are no unilateral solutions to climate change. I have urged the Bush administration and my colleagues in Congress to return to a leadership role on the issue of climate change. I have advocated that the United States must be open to multilateral forums that attempt to achieve global solutions to the problem of greenhouse gases. Our scientific understanding of climate change has advanced significantly. We have better computer models, more measurements, and more evidence–from the shrinking polar caps to expanding tropical disease zones for plants and humans–that the problem is real and is caused by man-made emissions of greenhouse gases, including carbon dioxide from fossil fuels. Sixth, our efforts to stem terrorist recruitment and prevent terrorist cells and training grounds in the developing world are being undercut by the high costs of energy. The economic impact of high oil prices is far more burdensome in developing countries than in the developed world. Generally, developing countries are more dependent on imported oil, their industries are more energy intensive, and they use energy less efficiently. The United Nations Conference on Trade and Development estimates that non-OPEC developing nations spend 3.5 percent of their GDP or more on imported oil–roughly twice the percentage paid in the main OECD countries. World Bank research shows that a sustained oil-price increase of $10 per barrel will reduce GDP by an average of 1.47 percent in countries with a per- capita income of less than $300. Some of these countries would lose as much as 4 percent of GDP. This compares to an average loss of less than one half of one percent of GDP in OECD countries. Some nations, such as Nepal and the Democratic Republic of the Congo, would experience GDP losses from a sustained $10 increase in the price of a barrel of oil that are twice the amount of foreign assistance that they receive from the United States. Even a nation like Ethiopia, which receives the substantial sum of $134 million in U.S. assistance because it is a focus country of the President’s AIDs initiative, would see almost all of this offset by a $10 oil price increase. Last week I chaired a Senate Foreign Relations Committee hearing on the nomination of Randy Tobias to be the new Administrator for USAID. In this capacity he would oversee a large share of our foreign assistance budget, which now exceeds $20 billion per year. This budget is intended to meet our humanitarian goals, but its success is also directly linked to national security. But all of this effort and money, in essence, can be wiped out merely by an increase in the price of energy. Without a diversification of energy supplies that emphasizes environmentally friendly energy sources that are abundant in most developing countries, the national incomes of energy poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism. Each of these six threats from energy dependence is becoming more acute as time passes. Any of them could be the source of catastrophe. Any realistic American foreign policy must redeploy diplomatic, military, scientific, and economic resources toward solving the energy problem. The basic dilemma for U.S. energy policy is how can our Government speed up the transition to alternative renewable energy sources so that we can prevent irreparable harm to our nation or the world associated with these threats? The realist must ask: How can we shape our energy future before it shapes us in disastrous ways?
working toward energy security
American energy policy to date has suffered from two fundamental flaws. First, we have let two decades of relatively cheap oil and natural gas deepen our dependence on imports. An approach that focuses on research, while ignoring deployment of new fuels will not meet our national security challenge. The second flaw is that we have lacked a truly comprehensive energy policy with energy security as a strategic goal. American energy policy has been focused on a narrow definition of energy security that strived to ensure sufficient supplies at affordable prices. This has translated into policies promoting diversification in supplies of oil and natural gas, with little emphasis on energy alternatives. A policy that relies on a finite resource concentrated in a few countries is doomed to failure. Our long-term security and prosperity require sufficient, affordable, clean, reliable, and sustainable energy. A first component of energy security is to ensure sufficient supplies. Our energy intensity per unit of GDP has steadily decreased, but our energy consumption is still projected to increase by more than a third over the next 25 years. This demand scenario is not inevitable. Public policy can do more to promote efficiency while still growing the economy. Expanded programs to enhance energy efficiency in appliances, building construction, and industry are all necessary to keep our energy intensity declining. One third of our projected energy growth is in oil, a majority of which we have to import. I have cosponsored a bipartisan bill with Senators Bayh and Lieberman that would require federal agencies to implement a plan to reduce U.S. oil consumption by 10 million barrels a day by 2031. The legislation contains many provisions to enhance energy conservation–from tire efficiency to reduced school bus idling to light-weight materials research. Automakers have a central role to play in improving our oil efficiency. We are working to close the SUV CAFE standards loophole, and to get more hybrids and flex-fuel vehicles on the road. A fleet of hybrid, and future plug-in hybrids, that run on E-85 could reduce our oil use by 10 million barrels a day. The bill I have cosponsored removes the cap on the number of tax rebates for hybrid vehicles. It also fosters demand by requiring that 30 percent of the government auto fleet be hybrids and advanced diesels. With increased demand for fuel efficient cars, new manufacturing facilities will be built that provide jobs for Americans. In partnership with the American auto industry, we should provide a set of incentives that give them the opportunity to regain their strength and save jobs through innovation. This bill offers a 35-percent tax credit for automakers to retool their factories so that they can make fuel efficient, advanced technology vehicles. Affordability of energy supplies also remains a key goal for energy security. Crude oil still hovers around $60 a barrel, and last October’s price for natural gas was more than double what it had been in the previous year. These high energy prices increase inflation and inhibit future economic growth. Elevated oil and natural gas prices do have the benefit of making alternative fuels more competitive. With the end of 20 years of low oil and gas prices, investment in alternative fuels has surged. As more is invested, innovation in technology and production will drive prices down further. That is why it is so important to get the first cellulosic ethanol facilities up and running. The President said in his State of the Union Address that he wanted to make cellulosic ethanol “practical and competitive within 6 years.” In fact, one plant is ready to be built in Idaho, and many others could be built within the 6-year timeframe. I have asked the President to make sure that the loan guarantees that Congress authorized for cellulosic ethanol production are in place by this summer. As alternative fuels become more competitive, oil and gas producers have strong incentive to drop prices to kill the competition. Investors need to know that alternative energy initiatives will continue to be competitive. A revenue-neutral $35 per barrel price floor on oil would provide the security investors need. At this price, alternative fuels like cellulosic ethanol, shale and tar sands oil, and Fischer- Tropsch diesel could still compete with regular gasoline. Many analysts say that expensive oil is here to stay, but most energy investors are hesitant to take on that risk. A modest price floor for oil that we may never reach would provide a major stimulation for energy alternatives. Long-term energy security also requires the use of clean energy, a third component of energy security. As long as we continue to consume fuels that do not burn cleanly or cannot have their damaging gases sequestered, we will continue to pay environmental costs and will remain vulnerable to a climate change induced disaster. The Congress must pass legislation establishing a cap and trade mechanism. A cap and trade system would provide regulatory certainty, reward innovation to improve energy efficiency, and provide strong market incentives for clean renewable fuels. Any such system should give credit for carbon sequestration in coal-fired plants and allow farmers and foresters to sell credits for the carbon they sequester. I have introduced a resolution that calls for America to lead other nations to new agreements under the United Nations Framework Convention on Climate Change. Thanks to new technology, we can control many greenhouse gases with proactive, progrowth solutions, not just draconian limitations on economic activity. Industry and government alike recognize that progress on climate change can go hand in hand with progress on energy security, air pollution, and technology development. Even as we strive to reduce the prevalence of fossil fuel in our energy portfolio, pragmatism requires that we diversify to the greatest extent possible our sources of oil and natural gas. I have supported opening ANWR for exploration. While we continue to debate production there and on the outer continental shelf, we have to carefully consider both the security and economic benefits of more exploration, as well as the environmental costs. We must also ensure that we are not wasting fossil fuel resources in end-use that could be fueled by other means. I am encouraged by DuPont’s commitment to replacing petrochemicals with bio alternatives. This wise business choice leaves DuPont less vulnerable to price spikes than competitors who still rely exclusively on oil and gas. With natural gas prices high, there is now a shift to coal- fired electrical generation. New plants should favor coal, which we have in abundance, over natural gas. I continue to vigorously support the deployment of clean coal technology with carbon sequestration. We can also use coal to reduce our oil dependence. The energy bill included legislation I coauthored with Senator Obama authorizing $85 million for federal research into the production of coal-based transportation fuels. One of the technologies that will be encouraged by this program, the Fischer-Tropsch process, yields a diesel fuel that is compatible with existing vehicle technology. It is superior to oil-derived fuel with respect to performance and emissions. Another critical component of reliability is protection of the physical infrastructure and transit of our energy supplies. Terrorists have made clear their intentions to destroy refineries and pipelines worldwide. At home, in addition to power plants, ports, refineries, and platforms, we have 160,000 miles of oil pipelines. As the United States considers liquefied natural gas and nuclear facilities, we must be vigilant to the security implications. While diversity in supplies at home and abroad is necessary for more reliable energy in the coming decades, diversification of sources for oil and gas is an outdated strategy that will never bring energy security. Reserves are too concentrated and infrastructure too vulnerable. Real diversity can only be achieved by an energy portfolio dominated by sustainable energy, the final component of energy security. As we make policies to influence the composition of our future energy portfolio, we should strive to consume fewer hydrocarbons than we can produce domestically. This means more clean coal and renewable fuels of all types. I am encouraged that some states and municipalities are taking the initiative to increase their use of renewables. With Congressman Pete Visclosky, I am advocating a bill that will do that for Indiana. Our policies should be targeted to replace hydrocarbons with carbohydrates. Obviously this is not a short-term proposition, but we can off-set a significant portion of demand for oil by giving American consumers a real choice of automotive fuel. We must end oil’s near monopoly on the transportation sector, which accounts for 68 percent of American oil consumption. I believe that biofuels, combined with hybrid and other technologies, can begin to move us away from our extreme dependence on oil in the next decade. Corn-based ethanol is already providing many Midwesterners with a lower cost fuel option. Most of this is in a 10-percent ethanol mix, which is fully compatible with nearly all vehicles. I have recently called for my home State of Indiana to mandate that all gas stations in the state offer a 10-percent blend. Cellulosic ethanol, which is made of more abundant and less expensive biomass, is poised for commercial take-off. I am pleased the President now supports the ethanol research that began under my legislation in 2000. I have long championed a renewable fuels standard, and we finally passed a 7.5 billion gallon ethanol mandate in the 2005 energy bill. The bill I am cosponsoring with Senators Bayh and Lieberman will increase the proportion of ethanol from cellulose that will be in that mix. As our domestic ethanol industry strengthens and demand grows, we will have to revisit the tariff we put on ethanol imports. We do not want to trade oil import dependency for biofuel import dependency, but trade in alternative energy also creates jobs, provides new markets for our advance technology, and diversifies our own supply. In the end, I believe the United States is well positioned to produce ethanol at competitive rates. We have to make sure that consumers have access to E-85 ethanol. Already there are millions of E-85 capable vehicles on the road. I have introduced legislation that would require manufacturers to install flexible-fuel technology in all new cars in the next 10 years. This is an easy and cheap modification, which allows vehicles to run on a mixture of 85 percent ethanol and 15 percent gasoline, and will make their products more attractive to consumers. Next we have to make sure that consumers can buy the E-85 fuel. I’m pleased that many independent gas station owners are taking advantage of the tax credit for E-85 pump installation that we passed in the energy bill. I have cosponsored legislation that would back loans for even more E-85 pumps. The next challenge is to get E-85 distributed through the big gas station chains. I’ve asked the oil majors about this, and they have said that sufficient demand for E-85 does not exist. But demand will not develop for something that consumers do not have an option to buy. It is time for the oil companies to make E-85 available to the consumer. If these companies do not take advantage of the incentives Congress has provided, I would be in favor of legislation mandating that they install E-85 pumps in appropriate markets. There is still more work to be done to tilt our energy balance toward alternative fuels. That is why Senator Obama and I will soon introduce a new bill that will promote other means to move these fuels into additional markets and make them more widely available for consumers. Among many provisions, the Obama-Lugar bill would create an alternative diesel standard comparable to the renewable fuels standard that I helped put into the 2005 energy bill. It would also provide new incentives for the production of flexible fuel vehicles. We believe that U.S. national security will be served by more robust coordination of all the elements that contribute to energy security. Consequently, the bill also would establish the post of Director of Energy Security, who would answer to the President.
energy partnerships
As we pursue energy security at home, we must seek energy partnerships abroad. This week, I will introduce framework legislation that calls for a realignment of our diplomatic priorities to meet energy security challenges. Partnerships with foreign governments can help speed our conversion to real energy security, rebalance power in geopolitics, and open new markets for fuel technologies. The “Energy Diplomacy and Security Act” calls upon the Federal Government to expand international cooperation on energy issues. This bill will enhance international preparedness for major disruptions in oil supplies. A particular priority is to offer a formal coordination agreement with China and India as they develop strategic petroleum reserves. This will help draw them into the international system, providing supply reassurance, and thereby reducing potential for conflict. The bill would also stimulate regional partnerships in the Western Hemisphere. Most of our oil and virtually all of our gas imports come from this Hemisphere. The bill creates a Western Hemisphere Energy Forum modeled on the APEC energy working group. This would provide a badly needed mechanism for hemispheric energy cooperation and consultation. Finally, the bill calls for international partnerships with both energy producers and consumers. In addition to seeking new avenues of cooperation, the bill is intended to give focus to existing bilateral energy dialogues, which have lacked clear objectives and political backing. We must engage major oil and natural gas producers. We should advocate more transparency, improved investment climates, and greater infrastructure security. Oil exporting states wield power for which we must account. Not working with these states will lead to unproductive political showdowns and conflict. Even in challenging relationships such as Venezuela and Russia, we must explore how to improve our energy dialogue. Strategic energy partnerships with other major consuming countries are crucial for our national security. Energy security is a priority we hold in common with other import dependent countries, which constitute 85 percent of the world’s population. Strategic partnership for energy security with the world’s largest consumers will increase leverage in relation to petro-states. In November, I introduced S. 1950, a bill that specifically targets India for enhanced cooperation on alternative energy sources, such as clean coal technology and biofuels. To close, I would like to express my optimism for the future. Our current energy balance is the result of industrial and consumption choices of the past. Despite our import dependence today, the United States is in a strong position to choose a different path, a path toward real energy security. Success would free future generations of Americans from the energy dilemma that threatens to compromise our security and prosperity. It could also lead to opportunities in many new industries that could reinvigorate our economy. These are problems that can be solved. We must act now. We must act together. Thank you. “OIL DEPENDENCE AND ECONOMIC RISK”
Wednesday, June 7, 2006
Opening Statement
HON. RICHARD G. LUGAR
U.S. Senator From Indiana,
Chairman, Senate Committee on Foreign Relations
The Foreign Relations Committee meets today to continue our examination of the geopolitical consequences of energy imbalances and U.S. dependence on energy imports. In previous hearings, we have focused on quantifying the costs of U.S. energy dependence and examining options for improving our energy security. We also have explored in detail how energy is shaping our relationships with other nations, including India, China, and the Persian Gulf states. Later this month, we will have hearings that look at energy in the context of our relationships with Latin America and Russia. Today, with the help of our esteemed witness, former Federal Reserve Chairman Alan Greenspan, we will have a unique opportunity to examine the economic effects of U.S. energy dependence. We are delighted that Chairman Greenspan has joined us today. He has given extraordinary service to our country over many years, and nobody speaks with greater authority on the U.S. economy. His presence here, for his first congressional testimony since leaving the Federal Reserve, is a testament to the economic importance he ascribes to solving our energy dilemma. The Foreign Relations Committee has devoted intense scrutiny to energy issues because we believe that America’s national security and economic well being depend on reducing our dependence on foreign oil and establishing more predictable, transparent, and cooperative relationships with both producer and consumer nations. To this end, I have introduced the Energy Diplomacy and Security Act. This bill would strengthen U.S. diplomatic capabilities related to energy and encourage greater international cooperation on energy security. As Secretary Rice stated before this committee, our diplomatic activities around the world are being “warped” by petro-politics. Important foreign policy goals–from accelerating progress in the developing world and expanding trade, to preventing weapons proliferation and promoting democratic reform–are being undermined by international energy imbalances that have weakened our foreign policy leverage, while strengthening the hand of oil-rich authoritarian governments. In a speech in March at the Brookings Institution, I outlined these dynamics in greater detail, and I ask those remarks be entered into the record. As recently as 4 years ago, spare production capacity exceeded world oil consumption by about 10 percent. As world demand for oil has rapidly increased in the last few years, spare capacity has declined to less than 2 percent. Any major disruption of oil creates scarcity that will drive prices up. Our vulnerability was made clear to Americans after the devastation of Hurricanes Katrina and Rita. But even as supplies rebounded from those disasters, we experienced a continued upward trend in oil prices. Events such as the civil unrest in Nigeria, uncertainty over Iran’s nuclear program, and worries over Venezuelan supply have kept the price of oil above $70 a barrel. Our capacity to deal with these energy vulnerabilities in a foreign policy context is shaped in part by the ability of our own economy to adjust to changing energy markets. Eventually, because of scarcity, terrorist threats, market shocks, and foreign manipulation, the high price of oil will lead to enormous investment in and political support for alternatives. The problem is that by the time sufficient motivation comes to markets, it may be too late to prevent the severe economic and security consequences of our oil dependence. Today, we will have the benefit of Chairman Greenspan’s insights into the risks of oil dependency to our economic prosperity. We are interested in a clearer picture of how current high energy prices are affecting our economy, how our economy may react to certain types of supply disruptions, and what steps we should take as a nation to reduce the economic risks of our energy vulnerability. We welcome Chairman Greenspan to the Foreign Relations Committee and thank him for lending his expertise to our ongoing inquiry.
Opening Statement
HON. JOSEPH R. BIDEN, JR.
U.S. Senator From Delaware,
Minority Leader, Senate Committee on Foreign Relations
Dr. Greenspan, welcome. Mr. Chairman, today’s headlines make clear just how important this hearing is. On one hand, we have concern about inflation–led by petroleum-based energy costs that increased at a 61-percent annual rate in the first quarter of this year. And on the other hand, we have our financial markets roiled by the worry that the Federal Reserve’s prescription– continuing a course of 15 straight rate increases–could put the brakes on an economy that may already be slowing down. We could not have clearer evidence of our country’s vulnerability to global oil prices. I am pleased to be working with you, Mr. Chairman, on this series of hearings on the cost of our dependence on imported oil, and to join you in our search for alternatives. Today we are privileged to have former Federal Reserve Chairman Alan Greenspan, who guided our Nation’s monetary policy for almost two decades, through a wide variety of domestic and international challenges, and through profound changes in our economy. No one in the world who spoke on economic affairs was more listened to than Alan Greenspan. Not always understood, but listened to. It is a little daunting to have before this committee not only someone of your stature, Dr. Greenspan, but someone who once warned an audience, “If I turn out to be particularly clear, you’ve probably misunderstood what I said.” Your pronouncements can still move markets, but I hope your new life in the private sector will allow you more freedom of speech than you enjoyed in your last job. We will need candor and clarity, if we are to understand and confront the challenges before us. The last time you appeared before this committee, we were facing the Peso crisis, the first wave of international financial crises in the late 1990s. The topic of today’s hearing presents threats of a similar magnitude to our economy, and to our security. Today we are concerned about fundamentals, about the fuels that make our economy run, and about threats to our economic security because we do not control access to those fuels. And we are looking for ways we can move to more secure sources in the near future. Our failure to set a national energy policy to reduce our consumption of oil has handcuffed our foreign policy and weakened us economically. Global oil consumption–especially with the extremely rapid modernization of countries like China and India–is growing faster than the discovery and development of new supplies. Supply has never been so tight relative to demand. We now live in a world that consumes 85 million barrels of oil every day. It’s an enormous amount. Meanwhile, worldwide spare production capacity has shrunk to just 2 percent of demand. And that means the slightest thing–a terrorist attack in Saudi Arabia, tough talk from Iran, violence in Nigeria, or even a bad storm in our own gulf region–can cause oil markets to panic. Here in the Foreign Relations Committee, we deal every day with the foreign policy implications of our dependence on imported fossil fuels. Most obviously, there are our complex relationships with what Michael Mandelbaum and others have called the “Axis of Oil,” the oil-rich regimes around the world. This dependence has a pernicious effect on our foreign policy. It literally helps to fuel the terrorism we are fighting, because some of the dollars we spend on crude oil wind up in the pockets of radicals. It limits our options and limits our leverage in dealing with national security threats, because oil rich countries can stand up to us, and oil dependent countries are afraid to stand with us. And it undercuts our hopes for advancing democracy and freedom, because repressive regimes, swimming in a sea of high-priced oil, can resist pressure to reform. To cite just one example, Iran’s most recent threats to disrupt oil exports–as a direct response to our attempts to deal with their nuclear ambitions–was immediately translated into an increase in oil prices–a jump to $73 a barrel. Not just economic forces, but political conflicts, drive this market. We are here today to hear from Dr. Greenspan about the economic impact of oil and gas prices. During his long tenure as Chairman of the Federal Reserve, oil and gas prices spiked dangerously several times. Dr. Greenspan has repeatedly warned us about the potential impact of those fundamental energy prices on inflation as they worked their way through the economy, as well as their potential to slow economic activity as consumers and producers moved limited dollars from other sectors to cover energy costs. In your last Monetary Report to Congress last year, Dr. Greenspan, you placed significant stress on the potential problems that could arise from the jump in energy prices. You reported then that the impact they could have on consumer spending–the hit to the average American’s pocketbook–would depend on how much incomes were growing. On that front, the news is not encouraging. The latest reports from the job market show yet another disappointingly small increase in the number of Americans finding work, and the persistence of very troubling stagnation in wages. Something is wrong, this far into an economic recovery, when the job picture is this weak. Wages are still flat–up just a penny an hour. That’s 40 cents for a 40-hour work week. And the cost of living– including the cost of gasoline, and everything made and transported with petroleum–continues to grow faster than incomes. The cost of gasoline went up over 2 cents a gallon last week. That’s over 40 cents more for a 20-gallon tank of gas. That means that higher prices for gasoline really hurt real families. Gas is pretty much a fixed cost for the average American family who can’t switch cars or move closer to work. For them, this is not an abstract discussion. Here is what the wall Street Journal wrote last Friday: “Rising Energy Costs Pinch Low-Income Shoppers.” Slow job growth, flat wages–American households are part of the context we need to understand the impact of oil prices. In the bigger picture, our dependence on foreign oil feeds a cycle of dependence on foreign lenders to finance it. Our trade deficit through March this year was $192 billion–that’s 6 percent of our economy. Thirty percent of that deficit–$65 billion–was the cost of our petroleum imports. That number could grow to $100 billion this year. To finance that trade deficit, we are borrowing from other countries. The supply of our debt will eventually outrun demand. As we are already seeing, that means a weaker dollar, making importing oil–and the thousands of other consumer goods from cars to computers–even more expensive. Until we do something about our dependence on imported oil we will not be in control of our economic security. We can restore our energy security by reducing our consumption of oil. We can make the most progress, in the shortest amount of time if we focus on the fuel we put in our cars and trucks. Seventy percent of the oil we consume is used in transportation. We can immediately begin reducing our oil consumption by switching to fuels we can grow at home and making better, more efficient use of the energy we consume. First we need to make sure we’re all driving good cars by increasing fuel efficiency and requiring that every car sold in the United States is a flexible-fuel vehicle or FFV–that can run on alternative fuel like E-85–an 85-percent ethanol fuel blend. Second, we need to make sure that we’re using good fuel by requiring that major oil companies add alternative fuel pumps to at least half of their gas stations. Finally, we need to put in place the market and infrastructure for alternative fuels so that as new, more advanced fuel technology–like cellulosic (switchgrass) ethanol–becomes widely available we have the cars and pumps for it ready to go. We have asked you here today to help us understand better the shape we are in today, and to draw on your experience to understand how we can manage the future. I look forward to your statement, Dr. Greenspan, and to a discussion of these and other issues before us. Thank you, Mr. Chairman.
ALAN GREENSPAN
Prepared Statement
HON. ALAN GREENSPAN
President, Greenspan Associates LLC, Washington, DC
BEFORE THE
U.S. Senate Committee on Foreign Relations
JUNE 7, 2006
Mr. Chairman, Senator Biden, and members of the committee, this morning I shall try to detail how the balance of world oil supply and demand has become so precarious that even small acts of sabotage or local insurrection have a significant impact on oil prices. American business, to date, has largely succeeded in finding productivity improvements that have contained energy costs. American households, however, are struggling with rising gasoline prices. Even before the devastating hurricanes of last summer, world oil markets had been subject to a degree of strain not experienced for a generation. Oil prices had been persistently edging higher since 2002 as increases in global oil consumption progressively absorbed the buffer of several million barrels a day in excess capacity that stood between production and demand. Today world oil production stands at about 85 million barrels a day, and little excess capacity remains. Just how much excess capacity, and of what quality oil, is a matter of debate. But no matter what the precise answer, the buffer between supply and demand is much too small to absorb shutdowns of even a small part of the world’s production. Moreover, growing threats of violence to oilfields, pipelines, storage facilities, and refineries, especially in the Middle East, have increased the private demand to hold oil inventories worldwide. Oil users judge they need to be prepared for the possibility that at some point a raid will succeed, with a devastating impact on supply. For most of the history of oil, its producers and consumers determined its price. Only those who could physically store large quantities of oil had the ability to trade. But important advances in finance have opened the market to a much larger number of participants. There has been a major upsurge in over- the-counter trading of oil futures and other commodity derivatives. Thus, when in the last couple of years it became apparent that the world’s oil industry was not investing enough to expand crude-oil production capacity quickly enough to meet rising demand, increasing numbers of hedge funds and other institutional investors began bidding for oil. They accumulated it in substantial net long positions in crude oil futures, largely in the over-the-counter market. These net long futures contracts, in effect, constituted a bet that oil prices would rise. The sellers of those contracts to investors, when all of the offsetting claims are considered, are of necessity the present owners of the billions of barrels of private inventories of oil held throughout the world–namely, the producers and consumers. Even though inventories of oil have risen significantly in recent years, persistent upward price movements have made it apparent that the rise in investors’ ownership claims to the world’s oil inventories has likely exceeded the inventory increase. This implies a reduction in the unencumbered inventory holdings of producers and consumers. In other words, some part of the oil in the world’s storage tanks and pipelines is spoken for by investors. The extent of the surge in participation by financial institutions in claims on real barrels of oil is reflected in the near tripling of the notional value of commodity derivatives (excluding precious metals) during the four quarters of 2005 reported by U.S. commercial banks. Most of those contracts are for oil. The accumulation of net long positions in oil on the New York Mercantile Exchange by noncommercial traders , which is to say by investors, has exhibited a similar pattern. The new participants, investors, and speculators, to the world’s $2 trillion a year oil market are hastening the adjustment process that has become so urgent with the virtual elimination of the world supply buffer. With the demand from the investment community, oil prices have moved up sooner than they would have otherwise. In addition, there has been a large increase in oil inventories. In response to higher prices, producers have increased production dramatically and some consumption has been scaled back. Even though crude oil productive capacity is still inadequate, it too has risen significantly over the past 2 years in response to price. Hypothetically, if we still had the 10 million barrels a day of spare capacity that existed two decades ago, neither surges in demand nor temporary shutdowns of output from violence, hurricanes, or unscheduled maintenance would be having much, if any, impact on price. Returning to such a level of spare capacity appears wholly out of reach for the foreseeable future, however. This is not because there is any shortage of oil in the ground. The problem is that aside from Saudi-Aramco, few, if any, of national oil companies which own most of the world’s proved oil reserves are investing enough of their surging cash flow to convert the reserves into crude oil productive capacity. Only Saudi-Aramco appears sufficiently concerned, at least publicly, that high oil prices will reduce the long-term demand for oil, which could significantly diminish the value of Saudi Arabia’s–or indeed, any country’s–oil reserves. Although outlays on productive capacity are rising, the significant proportion of oil revenues held as financial assets suggests that many governments perceive that the benefits of investing in additional capacity to meet rising world oil demand are limited. Moreover, much oil revenue has been diverted to meet the perceived high-priority needs of rapidly growing populations. Unless those policies, political institutions, and attitudes change, it is difficult to envision a rate of reinvestment by these economies adequate to meet rising world oil demand. Some members of the Organization of Petroleum Exporting Countries (OPEC) have recently announced expansion plans. But how firm such plans are, is difficult to judge. They and other nations have rebuffed offers by international oil companies to help tap their reserves. Opportunities to expand oil production elsewhere are limited to a few regions, notably the former Soviet Union. Besides feared shortfalls in crude oil capacity, the adequacy of world refining capacity has become worrisome as well. Over the past decade, crude oil production has risen faster than refining capacity. A continuation of this trend would soon make lack of refining capacity the binding constraint on growth in oil use. This may already be happening in certain grades of oil, given the growing mismatch between the heavier and more sour content of world crude oil production and the rising world demand for lighter, sweeter petroleum products. There is thus a special need to add adequate coking and desulphurization capacity to convert the average gravity and sulphur content of much of the world’s crude oil to the lighter and sweeter needs of product markets, which are increasingly dominated by transportation fuels that must meet ever more stringent environmental requirements. Yet the expansion and modernization of world refineries are lagging. For example, no new refinery has been built in the United States since 1976. The consequence of lagging modernization is reflected in a significant widening of the price spread between the higher priced light sweet crudes such as Brent which are easier to refine and the heavier crudes such as Maya, which are not. To be sure, refining capacity does continue to expand, albeit too gradually, and oil exploration and development is continuing, even in industrial countries. Conversion of the vast Athabasca oil sands reserves in Alberta to productive capacity, while slow, has made this unconventional source of oil highly competitive at current market prices. However, despite improved technology and high prices, additions to proved reserves in the developed world have not kept pace with production; so those reserves are being depleted. The history of world petroleum is one of a rapidly growing industry in which producers have sought to provide consumers with stable prices to foster the growth of demand. In the first decade of the 20th century, pricing power was firmly in the hands of Americans. Even after the breakup of the Standard Oil monopoly in 1911, pricing power remained with the United States–first with the U.S. oil companies and later with the Texas Railroad Commission, which would raise limits on output to suppress price spikes and cut output to prevent sharp price declines. Indeed, as late as the 1950s, crude oil production in the United States (more than 40 percent of which was in Texas) still accounted for more than half of the world total. In 1951, excess Texas crude was poured into the market to contain the impact on oil prices of the nationalization of Iranian oil. Excess American oil was again released to the market to counter the price pressures induced by the Suez crisis of 1956 and the Arab-Israeli war of 1967. American oil’s historical role ended in 1971, when rising world demand finally exceeded the excess crude oil capacity of the United States. At that point, the marginal pricing of oil abruptly shifted–at first to a few large Middle East producers and later to market forces broader than they, or anyone, can contain. To capitalize on their newly acquired pricing power in the early 1970s, many producing nations, especially in the Middle East, nationalized their oil companies. The full magnitude of the pricing power of the nationalized companies became evident in the aftermath of the oil embargo of 1973. During that period, posted crude oil prices at Ras Tanura, Saudi Arabia, rose to more than $11.00 per barrel, far above the $1.80 per barrel that had been unchanged from 1961 to 1970. The further surge in oil prices that accompanied the Iranian Revolution in 1979 eventually drove up prices to $39 per barrel by February 1981. That translates to $76 per barrel in today’s prices. The higher prices of the 1970s abruptly ended the extraordinary growth of U.S. and world consumption of oil and the increased intensity of its use which were hallmarks of the decades following World War II. Since the more than tenfold increase in crude oil prices between 1972 and 1981, world oil consumption per real dollar equivalent of global gross domestic product (GDP) has declined by approximately one-third. In the United States, between 1945 and 1973, consumption of petroleum products rose at a startling average annual rate of 4.5 percent, well in excess of growth of our real GDP. However, between 1973 and 2006, U.S. oil consumption grew, on average, at only .5 percent per year, far short of the rise in real GDP. In consequence, the ratio of U.S. oil consumption to GDP fell by half. Much of the decline in the ratio of oil use to real GDP in the United States has resulted from growth in the proportion of GDP composed of services, high-tech goods, and other less oil- intensive industries. The remainder of the decline is due to improved energy conservation: greater home insulation, better gasoline mileage, more efficient machinery, and streamlined production processes. These ongoing trends seem to have intensified of late with the sharp, recent increases in oil prices. To date, it is difficult to find serious erosion in world economic activity as a consequence of sharply higher oil prices. Indeed, we have just experienced one of the strongest global economic expansions since the end of World War II. The United States, especially, has been able to absorb the huge implicit tax of rising oil prices so far. However, recent data indicate we may finally be experiencing some impact. Clearly, if the current almost nonexistent supply buffer were significantly increased through a step-up in supply or a stepdown in consumption, oil prices would fall, perhaps sharply. This would likely occur even if there were no decrease in the threat to oil facilities from attacks or hurricanes. A large enough buffer could absorb such contingencies with modest impact on price. But for good reason, holders of claims to the existing private inventories of oil apparently do not foresee a likelihood of change sufficient to alter the current outlook. This does not mean that oil prices will necessarily move higher, however. All of the concerns about future contingencies are already discounted in today’s spot price. It will require a change in the outlook one way or the other to move crude oil prices. History tells us that will happen–often. The U.S. economy has been able to absorb the huge impact of rising oil prices with little consequence to date because it has become far more flexible over the past three decades owing to deregulation and globalization. Growing protectionism would undermine that flexibility and make our nation increasingly vulnerable to the vagaries of the oil market. Current oil prices over time should lower to some extent our worrisome dependence on petroleum. Still higher oil prices will inevitably move vehicle transportation to hybrids, and despite the inconvenience, plug-in hybrids. Corn ethanol, though valuable, can play only a limited role, because its ability to displace gasoline is modest at best. But cellulosic ethanol, should it fulfill its promise, would help to wean us of our petroleum dependence, as could clean coal and nuclear power. With those developments, oil in the years ahead will remain an important element of our energy future, but it need no longer be the dominant player. “ENERGY SECURITY AND OIL DEPENDENCE”
Tuesday, May 16, 2006
Opening Statement
HON. RICHARD G. LUGAR
U.S. Senator From Indiana,
Chairman, Senate Committee on Foreign Relations
The Foreign Relations Committee meets today to consider strategies for reducing dependence on oil. This dependence brings intolerable costs to American national security and economic well being. If oil averages just $60 a barrel this year, the import cost to the U.S. economy will be approximately $320 billion. This revenue stream emboldens difficult oil-rich regimes and enables them to entrench corruption and authoritarianism, fund anti-Western demagogic appeals, and support terrorism. As global oil demand increases and the world becomes more reliant on reserves concentrated in unstable regions, the likelihood of conflict over energy supplies will dramatically increase, and energy rich countries will have more opportunity to use their energy exports as weapons against energy poor nations. High prices over the past 10 months have demonstrated the vulnerability of supply. A global oil market tightened by under-investment in production and surging global demand has been aggravated by hurricanes, unrest in Nigeria, speculation about developments in Iran, weakened capacity in Venezuela, and terrorist activity in Iraq and elsewhere. In this environment, the price shock from a major supply disruption could cause a recession. Today, we will concentrate on how our government can speed up the transition to alternative sustainable energy sources. We are cognizant that despite past campaigns for energy independence and a constant improvement in energy intensity per GDP, we are more dependent on oil imports today than we were when President Nixon authorized “Project Independence” in 1973. Yet, I believe that we are turning a corner. The American public and elected officials are becoming more aware of the severe problems associated with energy dependence and are more willing to take aggressive action. The new realism of energy geopolitics requires us to abandon the notion that simply finding more oil will solve oil- driven threats to our national security. More than three- quarters of the world’s oil reserves are controlled by foreign governments. With global oil demand projected to rise from 83 million barrels a day to 120 million barrels per day by 2030, the security threats related to oil dependence will continue to intensify, unless we make dramatic changes in policy. Efforts to reduce oil consumption must focus on developing sustainable fuels and increasing efficiency. I am pleased that the first commercial scale cellulosic ethanol plant in the United States is ready for construction and that Americans are beginning to demand more fuel efficient vehicles. We must continue investing in advanced energy research, but threats to our national security require us to efficiently deploy the oil- saving technology that is available now. The benefits of reducing oil use at home will multiply when other countries also switch to alternative fuels and decrease the energy intensity of their economies. I have introduced S. 2435, the Energy Diplomacy and Security Act to reorient our diplomatic activities to give greater priority to energy matters. We need bold international partnerships to blunt the ability of producer states to use energy as a weapon, to increase our own security of supply, and to reduce the vulnerability of our economy to high oil prices. Today we will benefit from the views of two distinguished experts. We will ask them to identify the best options for reducing oil use through alternatives and efficiency gains. We will also seek their counsel on what government can do to accelerate the transition away from oil and how we can most effectively encourage helpful actions by the private sector and consumers. First, we will hear from Mr. Vinod Khosla, the founding partner of Khosla Ventures, a leading venture capital firm that has invested in many cutting edge energy technologies. A cofounder of Sun Microsystems, Mr. Khosla, is an influential voice on the viability of alternative energy sources. Next, we will hear from Mr. Jason Grumet, Executive Director of the National Commission on Energy Policy. In December 2004, the bipartisan commission released its recommendations for a long- term energy strategy. The report comprehensively examined numerous technologies and methods for increasing energy supplies, as well as for moderating energy demand. Prior to joining the Commission, Mr. Grumet served as Executive Director of Northeast States for Coordinated Air Use Management. We welcome our witnesses and look forward to their insights.
Opening Statement
HON. JOSEPH R. BIDEN, JR.
U.S. Senator From Delaware,
Minority Leader, Senate Committee on Foreign Relations
With gasoline at $3 a gallon, and with our most pressing foreign policy challenges centered in the oil-producing countries of the world, today’s hearing before the Foreign Relations Committee could not be more timely or more important. We heard a few weeks ago in this committee about the hidden costs of our dependence on foreign oil. The United States has just one-third of the world’s oil reserves, and less than 5 percent of its population, but we consume fully one-third of the global oil output. Over 60 percent of the world’s oil reserves are held in the Middle East, and as one of our witnesses points out today only 9 percent of world reserves are held in countries we would call “free.” We are dependent on oil, and that makes us dependent on countries with whom we will continue to have at best many differences and at worst open hostility. What Michael Mandelbaum has called “the axis of oil”–an axis that stretches from Russia to Iran to Venezuela to Saudi Arabia– will have as great an impact on our national security as the so-called “axis of evil.” That dependence means we pay a huge price militarily for access to a resource that we cannot do without. One estimate suggests we pay as much as $825 billion a year in security expenditures to project our influence and secure access to oil. Some part of every dollar we pay for imported oil finds its way into the hands of our sworn enemies. As some observers have put it, the war on terror is the first war in which we are paying for both sides in the conflict. Disruption to our economy from interruptions in supply can be huge, and will grow as our dependence grows. As Alan Greenspan has warned us, all economic downturns since the 1970s have been preceded by spikes in the price of oil. We pay a price environmentally for our dependence on oil, most profoundly in dealing with the repercussions of climate change, driven by our use of fossil fuels. There can no longer be any doubt that our dependence on oil is a critical problem, one that must be addressed. The sheer size of this problem is such that there will be no quick fix. Oil represents about 40 percent of our energy consumption and we import about 60 percent of the oil we use. Fully 70 percent of our transportation is dependent on oil. That statistic will not be transformed overnight. But there are other statistics that will not change, as well. China has accounted for fully 40 percent of the recent increase in global oil demand. It will put another 120 million vehicles on the road over the next 5 years. Along with India, and a reindustrializing Eastern Europe, that growth in global demand is not going to be reversed. The fit between global supply and demand today is extremely tight. Billions of dollars of new investment may keep pace with demand, but will do little to ease the price at the pump. And new supply, from conventional or unconventional sources of oil, will only hasten the process of climate change, and will simply delay our transition to the alternatives than can address our addiction to oil. What are our alternatives to oil? In the short term, ethanol from corn could be a first step away from our oil addiction, by providing a liquid fuel that is compatible with existing internal combustion engines that power our cars, trucks, and buses. We will hear today about the costs and benefits of taking such a step, and the steps that must follow toward sugar or cellulosic ethanol. Ethanol will be just part of a broader energy policy that will reduce our dependence on oil, and will reduce the leverage that the oil producing nations have over our foreign policy and our national security. If it was not clear before, it is now. Domestic energy policy is at the center of our foreign policy.
VINOD KHOSLA
Prepared Statement
VINOD KHOSLA
Partner, Khosla Ventures, Menlo Park, CA
BEFORE THE
U.S. Senate Committee on Foreign Relations
MAY 16, 2006
Good Morning. Chairman Lugar and esteemed members of the committee, I want to start by thanking you for allowing me the opportunity to speak to you today about our unique ability to secure America’s energy independence. Since the President’s State of the Union Address and rising prices at the pumps, there has been a lot of talk about our oil addiction.
I come here to talk not about what must be done but rather how to get it done, simply and pragmatically, in a manner aligned with the major political interests that carry clout in this country. We can not only do the right thing, but also the politically correct thing, if each interest group compromises a little.
If it were not for the rapid growth of our domestic ethanol industry, Americans would see gas prices approaching $4 a gallon with no real alternative or hope in sight. In comparison, the Department of Energy estimates ANWR drilling would save 1 cent per gallon at the pump by 2025. (As quoted in Fortune May 15, 2006) We could be the architect of a global development plan, a Marshall Plan for our times that would support technological advancements and sustainable development of a global alternative to petroleum . . . and best of all it takes very little money to do so. I come to you today with ambitious goals, but goals that are grounded in sound science, technology and business.
I am convinced that we can replace the majority of our petroleum used for cars and light trucks with ethanol within 25 years. This is not an alternative fuel–it can be a mainstream fuel. More importantly, with a few simple policy changes, we can be irreversibly traveling down this path in less than 7 years.
You may ask, “why ethanol”? Ethanol is substantially cheaper to produce today than gasoline before all subsidies and taxes. For example, the cost to produce ethanol in Brazil is less than $0.75 per gallon, while a U.S.-based corn-to-ethanol plant’s production costs are roughly $1.00 per gallon. That equates, even with U.S. costs, to about $1.25 per “gasoline- equivalent” gallon of ethanol. Gasoline, on the other hand, costs $1.60-$2.20 or more per gallon to produce, depending upon the cost of a barrel of oil.
Why shouldn’t ethanol sell for much less than gasoline at the pump? Oil interests distort the price to ensure they don’t lose their lucrative profit opportunity or temporary supply/ demand dynamics. As new technologies ramp up, ethanol can be cheaper than gasoline even if oil drops to $35-$40 per barrel– a level it is not expected to reach, according to the EIA.
In addition to lower cost, E-85 reduces volatile organic compounds by 15 percent, carbon monoxide by 40 percent, NOX by 10 percent and sulfate emissions by 80 percent when compared to gasoline, according to an estimate from one environmental organization.
With ethanol, we get a fuel that is cheaper for consumers and automakers, cleaner and greener, and it takes Middle East terrorism-fueling dollars and moves them to rural America. We capitalize on American technology to create more jobs and cheaper transportation costs for the American public. What is wrong with this picture?
What is the single biggest risk we face from the oil interests distorting the price to ensure they don’t lose their lucrative profit opportunity? If you were making $36 billion of profit per year like Exxon, would you want things to change? Reports of oil company executives lying under oath are reminiscent of the 1985 price manipulation episodes, Enron’s energy price manipulation, and other examples, be they Iran, Russia or Sudan. I personally received a warning from a senior executive of a major oil company that they could drop the price of oil if biofuels started to take off. We cannot let this opportunity slip away again.
My friends from the Mid-West tell me ethanol is the talk of coffee shops there and may be the most important thing to hit rural America in 30 years. It may also be the most important thing for global peace and welfare, the climate crisis, and for consumers. Fortunately, at this time the environmentalists, the automakers the agricultural interests, the security and energy independence proponents, and even the evangelicals are all aligned.
Finally, a cause all interests can rally behind. As Tom Freidman recites a New York Times poll: 89 percent of Americans favor a mandate of more efficient cars; 87 percent say no to a gasoline tax, but that figure drops to 37 percent if the tax is to “reduce our dependence on foreign oil” and to 34 percent if the tax is to “reduce global warming.” The oil interests keep propagating myths like insufficient land, poor energy balance, and high production costs to curb enthusiasm for ethanol. This is reminiscent of the tobacco companies funding studies to prove that smoking does not cause cancer. The NRDC, more concerned about land use than the oil interest, estimate a modest 114m acres of land needs. Argonne National Labs and UC Berkley among many others have discounted the energy balance claims. In my opinion, these are bogus if not ill-intentioned claims and I will address these falsehoods one by one.
Crop Land: Yields of corn are increasing in the United States and Brazil. Brazil has had a 4x increase since 1975 and knowledgeable scientists are forecasting another 4x in the next 10 years.(5) U.S. gallons per acre yields can reach 10x the current levels even without the innovations that are commonplace in Silicon Valley. Based on my forecasts, I can see my way to yields increasing more than 10x to between 3,000 to 5,000 gallons per acre compared to 400 gallons per acre today, demolishing all land use and energy balance arguments. I agree with Rick Tolman, CEO of the National Corn Growers Association, who believes that corn can provide 14-17 billions of gallons of ethanol by 2015 without impacting food supply. Based on my forecasts, including the considerable upside afforded by technology innovations, biomass based ethanol can replace most of our gasoline needs in 20 years, using less than 60m acres of land.
Energy Balance: The only study that claims corn ethanol has an unfavorable energy balance is an outdated study performed by Professor Pimentel. Both USDA & DOE affiliated researchers claim that Pimentel’s 2005 study overstates energy requirements. Professor Kammen at UC Berkley further states that corn ethanol results in a more than 90 percent reduction in petroleum use and a moderate 10-30 percent reduction in greenhouse gases.
s
The NRDC agrees, stating that:
(1) Corn ethanol provides important fossil fuel savings and greenhouse gas reductions;
(2) cellulosic ethanol simply delivers profoundly more renewable energy than corn ethanol; and
(3) very little petroleum is used in the production of ethanol.
From this information, the conclusion is that a shift from gasoline to ethanol will reduce our oil dependence. Though a 25-percent mileage reduction is the reality today, it can be immaterially small over time as engines are optimized for a flex-fuel world. Saab sells a model in Sweden that adjusts itself to take full advantage of E-85’s higher octane– 100 to 105, versus 87 to 93 octane for gasoline. Called the Saab 9-5 BioPower, its turbocharged engine generates 175 horsepower on gasoline and a whopping 215 hp on E-85. (USA Today, 5/4/2006). Even with the additional horsepower, the Saab 9-5 only has an 18-percent lower mileage on ethanol. If the engine was designed to provide the 175 hp on ethanol, we would get an additional substantial step increase in ethanol mileage. This proves that engines can be optimized for ethanol, thus substantially eliminating the mileage penalty which has been a convenient excuse for the oil companies. In the United States in 2000 the ethanol industry sold about 1.6 billion gallons of ethanol at about $1.20 per gallon. By 2005, the industry more than doubled its sales to 4 billion gallons, at a price of about $1.50 per gallon.
In my view plants can meet all their cash flow requirements and pay off construction debt at prices in the $1.30-$1.40 per gallon range, given a cost of production of roughly $1 per gallon without subsidies or tax credits. At today’s prices of over $2.50 per gallon, ethanol producers can pay off their plants in just 11 months rather than the standard 7-year payoff period. It is indisputable that ethanol is not only cheaper to produce than gasoline at about $40/barrel, but also, that the returns can be outstanding. It is disturbing to me to see some factions calling for permanent extensions to the credits, instead of supporting a variable VEETC model, which is genuinely needed to prevent oil price manipulation by interested parties. We have sufficient land and the energy balances and economics are favorable for ethanol as a transportation fuel. All we need to do is kick start the process. Chairman Lugar and members of the committee, the time has come for us to ask ourselves: Do we want to feed our farmers or Middle-East terrorism? Do we want ANWR oil rigs or prairie grass fields? Fossil fuels or green fuels? Should we create farm jobs or Middle-East oil tycoons? Gasoline cars or cars that offer the choice of gasoline or biofuels? Expensive gasoline or cheaper ethanol? This appears to be nothing less than a Darwinian IQ test. Risk capital from investors is the only solution to the oil stranglehold. Three simple things that need a little bit of courage, but not a lot of money are sufficient to get this capital flowing. These three are:
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Mandate that at least 70 percent of the new cars sold in America be FFVs by 2014 with 10 percent annual increases starting with 20 percent by 2009, and that all such cars, old and new, be provided with yellow gas caps, with possible tax incentives of $50 per car.
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Mandate that 10 percent of all gas stations owned or branded by major gas station owners offer at least one ethanol pump. Alternatively, mandating a separate RFS for E-85 and cellulosic ethanol, defined later, would serve a similar purpose. For the first 20,000 stations that convert at least one pump, an incentive can be offered up to $30,000 per station in the first year, $25,000 per station in the second year and $20,000 per year in the third year, the proceeds being appropriated from the Leaking Underground Storage Tank Fund or through a special tax on oil company profits, up to a maximum of $600m over 3 years.
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Make VEETC credit variable with oil price varying from $0.20 at current prices up to $0.80 instead of the current $0.51 credit as oil prices vary from $70 to $30 per gallon. This will insure that OPEC or the National oil companies cannot manipulate prices as easily, hence driving ethanol producers out of business. Such credits should expire once ethanol capacity exceeds 15 billion gallons in this country.
These three policies will assure investors that a permanent market will exist for ethanol and will not be subject to price manipulation by the oil nations. Billions of dollars will flow into the ethanol economy creating a permanent alternative to gasoline, without material government funds. In addition, certain other polices can accelerate the process but are not essential:
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Shift the $0.51 blender’s credit to an “ethanol producers’ credit,” preferably to be used only for plant construction instead of giving it to the oil companies as a “blender’s credit.” This will build permanent U.S. capacity for new ethanol production, independent of whether the ethanol is U.S.-made or imported. In fact, this format will supply all the capital required for plant construction the industry needs to replace all our petroleum and can be structured to be self-effacing when we reach appropriate plant capacity.
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Allow imports of ethanol for consumption above the RFS standard without tariff, subject to switching the VEETC ethanol credit to one directed exclusively toward building plant capacity in the United States. This will create permanent capacity for ethanol production in the United States. It is likely that we will see WTO action challenging the tariff’s legality. A proactive program is more likely to be effective than a reaction in hindsight to WTO action. Early availability of lower priced ethanol in the market will accelerate the switch to E-85 and take ethanol into the domain of a primary replacement for gasoline instead of just being an additive. Concurrent with this provision the ethanol RFS can be extended to 12b gallons by 2015. Based on the national security exemption of the WTO, an incentive or VEETC like credit is probably allowable if it is directed toward building ethanol fuel plant capacity in the United States. An alternative would be to eliminate the tariff only for E-85 ethanol use, accelerating E-85 adoption while keeping the blending market protected against imports. This would allow U.S. farmers to ease the learning curve on ethanol costs. Tariff removal could be coincident with funding of additional E-85 stations.
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Institute a similar limited period credit for cellulosic ethanol or monetize the current “1.5 times” credit for cellulosic ethanol defined in the 2005 energy bill.
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Institute separate RFS standards for E-85 (and possibly cellulosic ethanol) to kick start the E-85 market, which is currently being discouraged by the oil companies.
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Reform and strengthen CAFE, replacing CAFE mileage with CAFE “petroleum mileage” to align and incentivize automakers to promote the use of ethanol and other gasoline alternatives, giving them credit for any technology used to replace petroleum; in addition to increases in mileage standards.
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Provide loan guarantees for the first few cellulosic ethanol plants built with any new technology.
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Institute a cap and trade system for carbon trading. This could effectively reduce the price of ethanol by as much as $0.20-$0.30 per gallon (based on the current trading price of carbon in the European Union) depending upon the ethanol production technology. This would provide incentives to make corn ethanol greener, and less dependent on fossil fuels.
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Switch agricultural subsidies from row crops to energy crops.
As oil prices continue to soar in the United States, I see the following.
First, oil companies use big budget advertising, expensive PR firms and armies of accountants to prove they are not making too much money while making more money than any industry has ever made in the history of the corporate world. It is amazing what money can buy.
Second, oil companies blame everybody but themselves, but more importantly are doing relatively little to invest in alternatives to gasoline, other than token investments and PR campaigns.
Third, they put obstacles in the way of their franchisees who want to offer ethanol instead of offering E-85 themselves. Why don’t we require them to sell ethanol at least 10 percent of their gas stations? We have CAFE standards for automakers, why not E-85 green fuel standards for the oil companies?
Finally, with a fraction of their oil profits invested in new ethanol capacity or ethanol distribution we could be producing tens of billions of gallons of ethanol and solving our addiction to oil. Instead they are sending these profits to the Mideast instead of creating jobs in the USA. Are they entitled to their profits? I believe they are. But that should not prevent us from developing alternatives to their stranglehold on our transportation fuel for the good of society. Here are some examples of why it is clear we need to reign in big oil:
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Gov. Pataki proposed a new bill in New York. The bill would exempt renewable fuels from the provisions of “exclusivity” contracts between fuel providers and retail service stations, which only allow the service stations to sell specific brands of fuel. In most cases, these brands do not include renewable fuels. Since the “exclusivity” contracts prohibit service stations from obtaining renewable fuels like ethanol (E-85) from other sources, these fuels are not available for sale to consumers. The Governor’s proposal would exclude renewable fuels from these contracts if the distributor does not offer these types of fuels.
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A Mobil gas station in St. Louis does not allow the use of credit cards for payment and warns against ethanol. This is typical of how oil companies discourage consumer use with scary notices. An Exxon in Brazil stated that for all flex fuel vehicles every third fill-up should be with gasoline, another falsehood.
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The Foundation for Consumer & Taxpayer Rights released a new study of rising gasoline prices in California that found corporate markups and profiteering are responsible for spring price spikes, not rising crude costs or the national switchover to higher cost ethanol, as the oil industry claims. One can find the study at: http://www.consumerwatchdog.org/ energy/rp/6132.pdf
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The 1985 price manipulation and recoupling of an economy that was decoupling from oil is well known.
Gaining independence from foreign oil would not be unique to the United States. I just recently returned from Brazil, which has declared independence from foreign oil. Let me share some insights with you. I got a very instinctive good feeling about carbon capture. As I looked at sugarcane varieties capable of producing 200 (wet) tons per hectare I could imagine the sound of carbon dioxide getting sucked out of the atmosphere.(5)
My estimates of less than 60 million acres required to fuel most of America’s cars and light trucks by 2030 started to feel conservative as I saw Brazilian entrepreneurs developing technologies to produce over 3,000 gallons per acre.
विश्वास-टिप्पनी
we would therefore need about 5 x $10^{12}$ m2 of land for corn.
This is an area 2,200 km on a side (Figure 14.4)!
The U.S. does not possess this much arable land (estimated at about 30% of this).(5)
Imagine what would happen if we let Silicon Valley entrepreneurs and American scientists and technologists innovate in this area. Some fraction of the land used for export crops could replace much of our gasoline needs.(5) We must signal to our innovators that this is a long-term, large market, as Brazil has done.
As I saw bagasse roll off the conveyor belts into heaps of waste for burning, it struck me that because of the preprocessing already done on this waste material it could produce cellulosic ethanol very soon. Even today’s semideveloped cellulosic ethanol processes could make economic sense without waiting for full development. Orange peels from Florida and wood chips from our Northwestern forests would be next in line.
It became clear that America, Brazil, Australia, India, and Africa could each produce enough ethanol to meet their local gasoline replacement needs and then export enough to serve much of the planet.
विश्वास-टिप्पनी
If we tried to substitute our 18 TW global power demand by burning biological matter,[^12] we would run through all the currently-living mass-land and sea-in a short 15 years!
- Tom Murphy(5)
It was surprising to learn that the average wage at Cosan, the largest Brazilian ethanol producer, was many times the average for similar industries in Brazil. Over a million jobs had been created in the ethanol economy in Brazil. Ethanol produces substantially more jobs per dollar invested than oil does. Almost astounding was the claim by some entrepreneurs that they could see technology driving costs well below 50 cents per gallon.
There is no reason U.S. ethanol production costs won’t come down too. The big manufacturers confirmed their ability to produce ethanol at below 75 cents a gallon today. Why are we paying over $3 a gallon for our gasoline? If ethanol supplies run low Brazilian producers can switch production in hours away from sugar to produce more ethanol. Consumers constantly switch back and forth between ethanol and gasoline based on cost and availability. Wouldn’t it be nice if consumers here had a choice and were not held hostage by oil companies?
It was embarrassing to see Brazilian experts laugh at the myths U.S. energy companies spread, like we cannot use the same storage tanks or tanker trucks or transport ethanol in pipelines. They have been doing this for years with no adverse consequences. Why do we let people interested in slowing down biofuels spread these myths by turning molehills into mountains? Surely, some issues exist but they are easily resolved in the context of a market as large as the transportation fuels market. I was passionate about ethanol before I went. Going there seemed to completely confirm the potential and opened my eyes to all sorts of new possibilities.
Finally, I will leave you with some thoughts on why now is the time to take action. We have a climate crisis, we have an energy crisis, and we have a terrorism crisis and they are all coupled. The price of oil is up, the cost of ethanol production is down and we have a visible climate crisis and an overwhelming terrorism crisis. Economics and the right thing coincide this time around. Consumer pull has been proven in Brazil. Our risks are minimal. According to the firm Expansion Capital Partners, clean, or green, technologies netted less than 1 percent of venture capital funds 6 years ago.
Today, however, the figure has risen to 8 percent, the firm told TechNewsWorld. (http://www.technewsworld.com/story/50076.html) Recent news reports that the U.S. insurance industry has decided to formally study the relationship of global climate change to rising insurance costs and availability concerns. Geopolitics & OPEC politics deserve a special mention. Venezuelan President, Hugo Chavez, is poised to launch a bid to transform the global politics of oil by seeking a deal with consumer countries which would lock in a price of $50 a barrel, according to the Monday April 3, 2006 issue of “The Guardian.” A long-term agreement at that price could allow Venezuela to count its huge deposits of heavy crude as part of its official reserves, which Caracas says would give it more oil than Saudi Arabia. A $50-a-barrel lock-in would open the way for Venezuela, already the world’s fifth-largest oil exporter, to demand a huge increase in its official oil reserves–allowing it to demand a big increase in its production allowance within OPEC. Venezuela holds 90 percent of the world’s extra heavy crude oil–deposits which have to be turned into synthetic light crude before they can be refined and which only become economic to operate with the oil price at about $40 a barrel. Newsnight cites a report from the U.S. Energy Information Administrator Guy Caruso suggesting Venezuela could have more than a trillion barrels of reserves. Saudi Arabia’s Oil Minister scorned the popular notion that America can achieve energy independence as a myth (SF Chronicle, May 3, 2006).
Iran, China, India, Sudan, Nigeria, Venezuela, Argentina, and Bolivia are all responding to the scramble for oil. Rules and principles go by the wayside given the urgency of energy needs for each nation. Asset valuation–increase in Venezuela and Saudi Arabia (each) asset values of over a trillion for every $4 rise in the price of a barrel of oil. According to press reports, for similar reasons, the U.S. oil companies have resisted inventory revaluation methods proposed by FASB.
I came to you today with ambitious goals. I hope that you, too, are convinced that we can replace the majority of our petroleum used for cars and light trucks with ethanol within 25 years. More importantly, with a few simple policy changes, we can be irreversibly traveling down this path in less than 7 years and achieve energy independence, reduce greenhouse gas emissions, and create more jobs for rural Americans. I thank you for your time and attention.
JASON S. GRUMET
Prepared Statement
JASON S. GRUMET
Executive Director, National Commission on Energy Policy, Washington, DC
BEFORE THE
U.S. Senate Committee on Foreign Relations
MAY 16, 2006
INTRODUCTION
Good day, Chairman Lugar and members of the committee. I have the privilege to speak to you today on behalf of the National Commission on Energy Policy (NCEP), a diverse and bipartisan group of energy experts that first came together in 2002 with support from the Hewlett Foundation and several other leading philanthropies. In December 2004, the Commission released a report entitled “Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges.” The first chapter of that report was about oil security because our Commission believed then, and still does, that oil security is one of our nation’s foremost economic, national security and energy challenges. This isn’t news to anyone, of course–least of all this committee. In fact, as national policy obsessions go, America’s oil dependence has been one of our most enduring. For more than 50 years, Congress and multiple administrations of either party have decried our reliance on imported oil and vowed to do something about it. Today, with oil prices topping $70 per barrel and gasoline prices at $3 per gallon, we are again enmeshed in an active debate over energy policy. The lack of real options to address near-term energy prices is a source of great frustration here in Congress and throughout the country. The challenge we face is to move beyond slogans, blame, and false promise of “quick fixes” and seize upon this moment of collective focus to develop long-term policy responses that will meaningfully protect our economy while strengthening our national security. The basic elements of an effective response to our current oil predicament are as easy to summarize as they are difficult to execute. Put simply, the Commission believes we must:
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Expand and diversify supplies,
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Reduce demand, and
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Develop alternatives.
At the outset, I want to stress four themes that I hope will resonate throughout my remarks. First, the elements identified above are complementary components of an effective strategy. If they are not pursued in concert the effort will fail. We must have supply increases and demand reductions. We must pursue greater vehicle fuel economy and aggressive efforts to displace petroleum with biofuels. Simply put, we must move beyond divisive and false choices to develop a comprehensive approach that does not seek to trade one element off against the success of another. Second, until, and unless, private markets reflect the full economic, security, and environmental costs of oil dependence– and until, and unless, consumers possess adequate information to make efficient choices–policies that rely solely on private market decisions will continue to fail. It is therefore incumbent upon government to overcome market barriers and motivate private sector innovation by creating incentives that better reflect the true benefits of greater energy security. Third, improving our energy security is a long-term challenge. If we commit the nation to a fundamental course correction, a secure energy future is within our reach. It will take several years, however, before we begin to reap the benefits of improved policies and technologies. During this time, the problem of high prices and tight supplies will almost certainly get worse as growth in petroleum demand continues to outstrip the rate at which vehicle fuel economy improves and new sources of oil come on line. While biofuels hold great potential, near-term gains will also be incremental when compared against our annual petroleum consumption. If history is a guide, public interest and support for long-term policies will wax and wane as the price of gasoline rises and falls. A real solution therefore will require the kind of commitment, consistency, and courage our nation has mustered in the past when we understood that our future was at risk. Finally, we must better understand and articulate the risks of oil dependence and establish goals that encourage consistent progress and accountability. I believe that our failure over the past 30 years to implement measures commensurate with the risks is in part due to widely held misconceptions about the true nature and scope of the problem and to our inability to establish realistic interim goals and mechanisms to measure our progress in achieving them. Rethinking “Energy Independence” Before delving into solutions, I would like to take on the somewhat heretical task of challenging the aspiration of “energy independence” with its attendant focus on reducing our nation’s use of “foreign oil.” While emotionally compelling, these concepts are vestiges of a world that no longer exists. By failing to recognize the fundamentally global nature of the oil market, and the increasingly global nature of markets for natural gas, the call for energy independence has become an obstacle to effective policy design. There is one world market for oil. It is a fungible global commodity that has a single benchmark price. Wide disparities in the price of gasoline around the world are the product of national subsidies and taxes, but have nothing to do with how much oil different nations import or produce. Our economic vulnerability to oil price shocks is entirely a function of how much oil we use–the continent from which the oil was extracted has no bearing whatsoever on this equation. Moreover, as members of this committee know better than anyone else, some of the most profound consequences of America’s dependence on oil go well beyond the economic. It’s virtually impossible to put a dollar figure on all the costs of that dependence, but there is no question that our thirst for oil constrains our foreign policy, imposes burdens on our military, accounts for approximately for one-third of the U.S. current account deficit which soared to $805 billion in 2005, swells the coffers of undemocratic and even actively hostile governments, and directly or indirectly provides some of the funding for terrorist organizations that mean us harm. These risks and vulnerabilities too, like those we face strictly in terms of our own economic well-being, will surely continue to grow if we don’t take action. Put simply, if current trends don’t change we face a global scramble for energy resources within this century that is sure to be economically and geopolitically damaging to all concerned. Confronted with these realities it is tempting–but wrong– to imagine that if we could only become energy self-sufficient everything would be fine. I can’t underscore this point too strongly: energy “independence” must not be confused with energy “security.” Energy independence is simply unrealistic and has been ever since President Nixon first proposed to enshrine it as a national goal in the 1970s. U.S. oil imports have been rising inexorably ever since. The United States alone currently accounts for fully one-quarter of world oil demand. What may be less well known is that we are also the world’s third largest oil producer at present. But this will not last forever. Our nation holds less than 3 percent of the world’s proved oil reserves. Sixty-one percent of world reserves, by contrast, are located in the Middle East.
World’s Proved Oil Reserve*
Percent of Region World’s Proved Reserves
Middle East…………………………………… 61.7 Europe/Eurasia………………………………… 11.7 Africa……………………………………….. 9.4 South & Central America………………………… 8.5 North America…………………………………. 5.1 Asia Pacific………………………………….. 3.5
- = Only 9% of world reserves are held by countries considered “free” by Freedom House.
Current projections indicate that oil production by the United States and other industrialized countries will decline by 6 percent over the next two decades, even as oil production in the former Soviet Union increases by nearly 50 percent and OPEC output increases 33 percent. This means that U.S. oil imports will continue to grow in the future, as they have for the last several decades, and that we like everyone else will increasingly need to rely on oil supplies that originate in what are now unstable and undemocratic regions of the world. Nor will our dependence on foreign sources of energy be limited to oil: given declining domestic production of natural gas– another fuel that plays an extremely important role in the U.S. economy–it appears inevitable that we will increasingly need to rely on overseas sources for natural gas as well. The key, then, to greater energy security for the United States lies in recognizing–and better managing–our fundamental energy interdependence. Oil Market Fundamentals Nearly all experts agree about the fundamental drivers behind today’s high oil prices and extreme market volatility. For some time now, rising global demand for petroleum–driven not only by growing U.S. demand, but in part by the very rapid modernization of countries like China and India–has been outpacing the discovery and development of new sources of supply. The result is that we now live in a world that requires approximately 85 million barrels of oil daily, but has only very little spare production capacity (as little as 2 percent, according to various estimates) and barely sufficient refining capacity. In this environment even small disruptions along the supply chain can cause serious repercussions. The dynamics are further strained by OPEC’s ability to manipulate production quotas and by the participation of market players that operate on motives outside the bounds of economic efficiency. Unfortunately, this set of conditions seems unlikely to change soon. U.S. and total world demand for oil are expected to increase substantially over the next 20 years. Between 2004 and 2025, U.S. demand is projected to grow 24 percent (from 21 to 26 million barrels per day) and total world demand is expected to increase 34 percent (from 82 to 110 million barrels per day). (In the last year, the U.S. Energy Information Agency has downgraded its 20-year domestic demand projection by 3 million barrels a day based on expectations that high global prices are here to stay.) The world is suffering from what can best be described as a “demand shock” as China, India, and much of the developing world, modernize their economies and dramatically increase their use of motor vehicles. Equally concerning, there is currently very little spare capacity in the global oil market to make up any shortfall in oil supplies that arises as a result of political instability, unforeseen demand growth, acts of terrorism, or weather-related events. In 2005, global spare production capacity totaled approximately 1.5-2.0 million barrels per day; by contrast spare production capacity in 2001 was approximately 7.3 million barrels per day. This means that any event that prevents even a relatively small amount of oil from reaching today’s global markets can have a dramatic impact on prices. In partnership with the organization, Securing America’s Energy Future (SAFE), NCEP has been exploring the potential consequences of today’s tight supply margins by examining the impacts of any number of possible disruptions in global oil supply. With help from industry and military experts, as well as from the Wall Street analysis firm Sanford C. Bernstein and Co. LLC, we concluded that any number of truly unexceptional circumstances could cause global oil prices to literally sky rocket. As part of an oil crisis simulation called Oil ShockWave, we found that a mere 4-percent shortfall in daily world oil supplies could lead to a 177-percent increase in world prices. It wouldn’t take much, in other words, to send oil prices even higher–perhaps significantly higher–than they already are. With the U.S. transportation system over 97 percent reliant upon petroleum, the impacts of such an increase could be devastating. As then Chairman of the Federal Reserve Alan Greenspan observed in 2002, “All economic downturns in the United States since 1973 have been preceded by sharp increases in the price of oil.” A Better Goal for Oil Security If we accept that the key measure of our energy security is not how much oil we import, but how much our economy depends on oil, we can begin to articulate more realistic goals and actually set about achieving them. In fact, the oil intensity of the U.S. economy, as measured by gallons consumed per dollar of GDP generated, was cut in half between 1975 and 2000. There were multiple reasons for this decline and they are worth reviewing as we explore our policy options for the future. First, there were structural shifts in the U.S. economy that led to reduced oil consumption, including a shift to less energy-intensive enterprises generally, together with more efficient oil use in some industries and a shift away from oil to different fuels altogether in other industries, notably in the electric power sector. Second, and very important, were vehicle fuel economy standards introduced in the late 1970s that doubled the average mileage of our passenger car and light-duty fleet. An ambitious goal is to cut the oil intensity of the U.S. economy in half again over 20 years. To achieve this goal would require roughly a 7.25 million barrel per day reduction in oil consumption by 2025. Unfortunately, progress in further reducing the overall oil intensity of the American economy has slowed in recent years, while progress in improving the efficiency of the nation’s vehicle fleet has stalled altogether. But for a modest recent increase in light-truck standards, fuel economy requirements for passenger vehicles have been essentially unchanged since 1980. As a result, average fleet efficiency actually began to decline in recent years as large trucks and SUVs captured ever larger shares of the U.S. auto market. Simply stated, the United States will not have a serious policy to increase oil security until we achieve a significant increase in the fuel economy of our vehicles. A fundamental premise underlying the Commission’s oil security recommendations is the belief that we can neither drill nor conserve our way to energy security. We simply must address both the supply and demand sides of the equation if we are to have any hope of lasting success. As Congress and ordinary Americans search for solutions to the current costs of gasoline, it is painfully clear that there are no good near- term options. We must accept this unfortunate reality and direct our attention to minimizing the harmful effects of the oil shocks that are likely to occur with increasing regularity and severity over the next 20 years. Solutions As noted at the outset, the Commission believes that there are three essential elements to enhanced oil security: Increasing supply, reducing demand, and developing alternatives. The first two of these imperatives can be seen as buying us time to achieve the more fundamental benefits of a diversified portfolio of transportation fuels. We must seek to widen the gap between available supply and demand in the short- to medium-term as a means of calming today’s extremely volatile markets and putting downward pressure on prices, even as we begin developing clean and affordable alternatives for the long-term. The Commission’s specific recommendations for widening the gap on the supply side include:
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Expanding and diversifying conventional supplies of oil, both at home and abroad;
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Expanding the global network of strategic petroleum reserves; and
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Exploring technologies and processes that would allow for the use of unconventional oil resources in a manner that is compatible with climate change and other environmental concerns.
On the demand side, the Commission recommends:
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Significantly strengthening fuel economy standards for new passenger vehicles, while simultaneously reforming the existing CAFE program to reduce compliance costs and provide cost-certainty for manufacturers and consumers;
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Creating incentives to accelerate the market penetration of highly efficient hybrid vehicles while also helping the domestic auto industry retool to meet growing demand for these vehicles; and
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Exploiting opportunities to boost the efficiency of heavy-duty vehicles and to improve the fuel-economy performance of the existing light-duty vehicle fleet.
Finally, to develop long-term alternatives to petroleum, the Commission recommends a sustained and vigorous effort to spur public and private sector investment in the development and early deployment of domestically produced transportation fuels derived from biomass and organic wastes. Of all available alternatives to petroleum fuels, the Commission believes that cellulosic ethanol holds the most potential for displacing a significant fraction of transportation oil demand within the next 20-30 years and should therefore be a focus of near-term RD&D activities. A summary of the potential benefits of supply and demand measures can be found at Appendix A. Oil Supply Measures The Commission believes that opportunities exist to substantially boost global oil production within the next 10 to 20 years. This would help to relieve upward price pressures and reduce the risk of significant supply disruptions over the same timeframe.
Domestic Production: The United States is currently the third largest oil-producing nation after Saudi Arabia and Russia. As such, U.S. production clearly has a significant impact on the stability of the global oil market and efforts to expand production within our own borders must be pursued. Currently, the United States produces about 8.5 million barrels per day of oil (crude and products) and consumes about 21 million barrels per day of finished oil products. Domestic oil production is important to the nation’s economy–it remains an important source of jobs and tax revenues in some regions of the country–and it offers the important advantage of reducing financial transfers to foreign nations. Although domestic production has generally declined over the past decade, it is now projected to increase modestly in the near term (1 million barrels per day in 2016) and to resume a gradual decline thereafter. The United States is thought to have about 25 billion barrels of proved, conventional oil reserves, the great majority in Alaska and off our Pacific Coast with a smaller fraction off the Atlantic Coast and the eastern Gulf of Mexico.
U.S. Proved Conventional Oil Reserves
Crude Oil Conventional Reserves (billions of barrels)
Alaska (ANWR)…………………………………. 10.36 Pacific Offshore………………………………. 10.71 Eastern Gulf of Mexico…………………………. 3.58 Atlantic Offshore……………………………… 2.31
Though technically recoverable, much of this oil is currently off-limits to leasing. If all of it were tapped, it is estimated that U.S. oil output could be increased by about 2 million barrels per day in 2020. Obviously, many issues must be considered in weighing whether it is appropriate to open a particular area to oil drilling and the Commission takes no position on whether the status of specific regions that are currently off-limits should be changed. To provide a sound basis for future decision-making, however, the Commission does believe that an inventory of domestic petroleum reserves should be undertaken as part of a regular, comprehensive assessment of the nation’s known and potential energy resources. Again, however, it cannot be stressed often enough that while U.S. production makes an important contribution to global supplies (and hence is critical to maintaining the near-term stability of global markets), our nation’s economic vulnerability to oil price shocks is largely a function of how much oil we use and not how much we produce.
Global Production: Much more substantial oil reserves exist, of course, in other parts of the world, including– besides the Middle East–parts of the former Soviet Union, Africa, and South and Central America. The Commission therefore recommends that the U.S. Government encourage nations with significant underdeveloped oil reserves to allow foreign investment in their energy sectors to increase global oil production. Kazakhstan, for example, provides an example of the benefits of liberalized investment policies. Having opened its oil resources to significant foreign investment in the mid- 1990s, Kazakhstan’s crude oil production rate more than doubled between 1996 and 2002. Output from this one nation is now expected to reach 2 million barrels per day in the next few years and could peak at as much as 4 million barrels per day further down the road. The Commission also recommends that the U.S. Government consider impacts on world oil markets in cases where unilateral economic sanctions imposed by our nation may be limiting investment in foreign energy markets without necessarily achieving their stated policy objectives.
Unconventional Oil Supplies: Accounting for unconventional oil supplies–such as tar sands in Canada, heavy oil in Venezuela, and oil shale in the United States–would significantly shift the hemispheric balance of world petroleum resources. With today’s high prices, these unconventional resources are already being tapped to a greater extent and by 2015 it is likely that Canada and Venezuela together will produce nearly 3.5 million barrels per day of unconventional crude. At the same time, the Fischer-Tropf process, which has been used for over 50 years to convert coal into a form of clean diesel fuel, could–at prices above $50 per barrel– become a significant source of domestic transportation fuel. Further reliance on unconventional oil resources in the future, however, will require substantial progress toward reducing the substantial energy requirements and negative environmental impacts currently associated with extracting and processing them. Absent efforts to sequester the carbon used in producing unconventional oil, for example, the total greenhouse gas emissions associated with these resources are roughly two and a half times greater than the emissions associated with conventional oil production. While the Commission does not believe that our nation’s oil policy must be viewed as a vehicle for achieving its climate protection objectives, it seems equally clear to us that it would be foolhardy to pursue an oil policy that is at odds with other compelling public policy objectives. Unless and until we learn how to develop these resources without significantly increasing greenhouse gas emissions, the Commission believes that exploiting unconventional oil reserves does not offer a viable long-term pathway toward a more secure energy future. Therefore, the Commission has recommended increased funding to improve the environmental performance of technologies and practices used to produce unconventional oil resources.
Strategic Reserves: Oil stockpiles provide an important insurance policy against the potentially dire consequences of a significant short-term global supply disruption. Combined with private stocks, the U.S. Strategic Petroleum Reserve currently provides us with enough spare capacity to cover the loss of all imports for approximately 150 days, or a partial disruption for much longer. To improve global and domestic oil security, the Commission recommends that the U.S. Government work with other major oil-consuming nations to increase their public reserves and participate in the global network of strategic reserves. In particular, membership in the International Energy Agency (IEA) could provide major emerging oil-consuming nations like China and India with: (1) A greater feeling of ownership on their part in how the “global energy system” is run; (2) improved transparency in energy statistics and policymaking; and (3) an established forum to communicate concerns, success stories, and partnership ideas. IEA membership also brings with it a requirement that nations maintain strategic oil stocks sufficient to supply 90 days of demand and agree to manage them in coordination with IEA member countries (although this requirement is not legally binding). Because the IEA is a cooperative group of the Organization for Economic Cooperation and Development (OECD)–the IEA’s 26 member nations include most OECD countries–a number of issues would have to be addressed with respect to the inclusion of currently non-OECD developing nations. In the past, initiation into the OECD has been a lengthy and sometimes controversial process in which standards of economic development, openness, and human rights are considered. Given the potential benefits noted above, however, possibilities for bringing countries like China or India into the IEA on an expedited or alternative basis– perhaps with special observer or some other unique status– should be explored. Oil Demand Measures While the Commission firmly believes that both supply and demand measures must be pursued as part of an effective strategy to enhance the nation’s energy security, it is important to emphasize that when it comes to protecting the economy from oil price shocks, a barrel produced and a barrel conserved are not the same thing. The benefits of every added barrel of supply–whether produced domestically or abroad– accrue to oil consumers the world over, in the form of a marginal reduction in the market price. By contrast, the benefits that can be achieved through demand-side measures and alternative fuel production–besides being much larger in absolute magnitude–are largely captured by those who implement them. The Commission therefore devoted significant attention to the potential for reducing our nation’s oil demand, particularly in the transportation sector, which–because it accounts for nearly 70 percent of current domestic consumption and is nearly solely dependent on petroleum fuels–is key to oil use in the broader U.S. economy.
Strengthening and Reforming CAFE While Promoting Advanced- Technology Vehicles and Addressing Jobs and Competitiveness Concerns: Improving passenger vehicle fuel economy is by far the most significant and reliable oil demand reduction measure available to U.S. policymakers. As noted previously, CAFE standards played an important role in substantially reducing the oil intensity of the U.S. economy between the late 1970s and early 1990s. However, a longstanding political stalemate has blocked significant progress in fuel economy for over two decades. People often confuse our failure to increase domestic fuel economy with the view that technology options for improving vehicle efficiency have not advanced over the past two decades. Nothing could be farther from the truth. The efficiency of our automobiles increases annually. Estimates of this annual increase vary substantially from a low estimate of roughly 1.5 percent per year to a high estimate of over 5 percent per year. However, absent any requirement to direct these substantial efficiency gains toward achieving the public good of reduced oil dependence, vehicle manufacturers have instead devoted recent technological advancements to simply maintaining fuel economy while dramatically increasing vehicle size and power. While vehicle fuel economy is now no higher than it was in 1981, vehicle weight has increased by 24 percent and horsepower has increased by over 100 percent over this same time period. In fact, most of today’s economy cars outperform the “muscle” cars of the 1970s. If we enhance the rate of efficiency advancement and channel the majority of this improvement into greater fuel economy, we can maintain the amenities of the current vehicle fleet while gradually increasing fuel economy every year. In proposing to significantly strengthen and reform vehicle fuel economy requirements, the Commission sought to address the three issues we believe are most responsible for the last two decades of stagnation in this critical policy area: (1) Uncertainty over the cost of future fuel-saving technology; (2) concern that more stringent standards will compromise vehicle safety; and (3) fears that new standards will put the U.S. auto industry and U.S. auto workers at further competitive risk relative to foreign automakers.
CAFE Reform: Pairing a significant increase in standards with reforms that would make the CAFE program more flexible and reduce the compliance burden for manufacturers would help to address cost concerns. The Commission commends recent efforts by the National Highway Traffic Safety Administration (NHTSA) to introduce program reforms as part of its 2005 rulemaking to update CAFE standards for light trucks. Further reforms that should be considered include allowing manufacturers to trade fuel economy credits with each other and across the light truck and passenger vehicle fleets, as well as “safety valve” mechanisms that would set a defined upper limit on compliance costs in the event that fuel-savings do not mature as expected or prove more expensive than anticipated. The adequacy of NHTSA’s authority to craft effective CAFE standards for passenger cars has recently been called into question. The Commission believes that NHTSA should be granted the requested authority and similarly that Congress should provide NHTSA with clear direction about how to apply it. When NHTSA sets new standards, the Agency seeks to fully offset the costs of new fuel-saving technology with the value of saved gasoline. This approach has obvious merit, but its application depends significantly upon NHTSA’s ability to assess the full societal benefits of avoiding a gallon of gasoline consumption. At present, NHTSA lacks both the tools and authority to adequately factor in many of these broader externalities. This inability results in a systematic undervaluation of the benefits achievable through improved vehicle fuel economy and results in standards that are lower than would be justified by a more comprehensive assessment. It’s not that NHTSA doesn’t work hard to assess these externalities–in its recent light truck rulemaking, the Agency sought to include factors such as reduced vulnerability to oil price shocks, reduced air pollution, and even the value of spending less time at gas stations. However, NHTSA has no ability to quantify the value of reduced future tensions with China over tight oil supplies or the constraints that oil dependence imposes on our foreign policy. After considering the costs of protecting our access to global oil resources, NHTSA, in its recent rulemaking, decided not to include any value in reduced military costs as a result of increased fuel economy. The Regulatory Impacts Assessment reads:
The U.S. military presence in world regions that represent vital sources of oil imports also serves a range of security and foreign policy objectives that is considerably broader than simply protecting oil supplies. As a consequence, no savings in government outlays for maintaining the Strategic Petroleum Reserve or a U.S. military presence are included among the benefits of the light truck CAFE standard adopted for MY 2008-2011.
All told, NHTSA’s recent rulemaking assesses total petroleum market externalities to be slightly less than 6 cents per gallon. When added to projected gasoline costs of $1.60 per gallon over the next decade ($2 pump price minus roughly $.40 in taxes), NHTSA arrives at a total societal value of a gallon of gasoline saved at just under $1.70 gallon. This number clearly helps explain why the increase in truck standards that emerged from the rulemaking process was so modest. When considering the administration’s recent request that Congress grant NHTSA broad authority to reform passenger car standards along the same lines as the recent light-truck rulemaking, Congress must also consider giving the agency specific, updated guidance about the factors to be considered in establishing standards and about how these factors should be weighted and analyzed. Moreover, given the apparent political difficulty of revisiting fuel economy regulations, Congress should also consider establishing–or directing NHTSA to establish–a dynamic fuel economy target that becomes gradually but steadily more aggressive over time, rather than picking a single number. A defined percent-per-year improvement goal, coupled with an effective cost-capping mechanism or well- defined “off-ramps” in the event that later requirements begin to impose unacceptable tradeoffs in terms of cost or other vehicle attributes, may prove more effective over time and more palatable in the short run, than choosing a particular mpg requirement that remains fixed for years or even decades.
Vehicle Safety: Safety concerns have long contributed to the prevailing CAFE stalemate, but there is reason for optimism that the terms of this debate, too, have begun to shift in important ways. First, the rapid emergence of hybrid-electric vehicle technology clearly demonstrates that substantial fuel economy improvements can be achieved while maintaining or even increasing horsepower and without reductions in vehicle weight or size. Second, a more sophisticated approach to the issue of safety–one that accounts for the impact of heavier vehicles on other vehicles in the event of a collision and their effects on overall fleet safety as well as on the safety of their individual occupants–has served to illuminate the fact that while the relationship between vehicle weight and safety is clearly important, it is far from straightforward. Finally, some argue that advances in light but very strong composite materials that allow for significant weight reductions to be achieved in concert with ongoing safety improvements–together with other advances in vehicle design and safety features–will prove fundamentally game-changing, although for now cost issues remain.
Domestic Industry Competitiveness: Given the recent, well- publicized troubles of U.S. automakers, concerns about jobs and competitiveness will continue to figure prominently in any debate over vehicle fuel economy. The Commission worked with the United Auto Workers and experts at the University of Michigan to assess the competitive impacts of a significant increase in fuel-economy requirements on the domestic automobile industry. Our analysis suggests that the domestic automakers currently are at a disadvantage, relative to their foreign competitors, in terms of the expertise and manufacturing capacity needed to design, produce, and incorporate the most advanced hybrid-electric and diesel technologies. Therefore the Commission urges policymakers to consider mechanisms for addressing jobs and competitiveness concerns that would strengthen the domestic industry and better position it to meet future global demand for advanced technology vehicles. Specifically, the Commission recommended in its 2004 report that consumer tax incentives to stimulate consumer demand for highly efficient, advanced-technology vehicles be extended and coupled with business tax incentives aimed at helping parts suppliers and manufacturers with U.S. facilities retool their plants to produce these vehicles. Importantly, the Commission’s analysis showed that such incentives could be designed to ensure that their cost to the U.S. Treasury would be more than covered by the additional tax revenues associated with increased domestic production. In light of the fact that domestic manufacturers are presently losing money and hence not paying much in the way of taxes, additional work is underway to design alternative mechanisms to provide the suggested incentives.
Oil Savings through Increased Fuel Economy: The oil savings achievable through improved new vehicle fuel economy depend, of course, on specific assumptions about how quickly and aggressively new standards would be introduced and on whether other aspects of the current CAFE program are reformed at the same time. Appendix A summarizes the results of a bounding exercise intended to portray the savings that could be achieved if new vehicles technologies were employed to increase fuel economy over the next 20 years. The results are cumulative (that is, each row includes the demand reductions associated with all of the rows above it) and reflect oil savings in 2025 from a baseline business-as-usual demand forecast of 26 million barrels per day. The table suggests that the United States could reduce oil consumption in 2025 by 2.2 million barrels per day by implementing a 40-percent improvement in gasoline vehicle efficiency. If a significant fraction of fuel-efficient hybrid vehicles were added to the mix, the savings would rise to roughly 3.5 million barrels per day. Under the most aggressive scenario considered, U.S. oil consumption could be reduced by nearly 5 million barrels per day if the new-vehicle fleet in 2025 were comprised of a combination of efficient gasoline, gasoline hybrid and plug in hybrid vehicles.
Fuel Economy Improvements in the Heavy-Duty Truck Fleet and Existing Light Vehicle Fleet: Smaller but nonetheless important opportunities exist to reduce U.S. oil consumption by improving the fuel economy of the heavy-duty truck fleet and of the existing light-car fleet. The Department of Energy’s 21st Century Truck Program, for example, is being undertaken with the cooperation of major heavy-truck engine manufactures; it estimates that the fuel economy performance of so-called “Class 8” long-haul trucks, which are the largest fuel consumers of all heavy trucks, could be improved as much as 60 percent. Enhanced diesel technology and improved aerodynamics in the heavy-duty truck fleet could produce oil savings of as much as 1 million barrels per day in 2025. As an initial step, the Commission recommends that EPA be instructed to develop a test procedure to assess heavy-duty vehicle fuel economy so that we have an opportunity to seek reductions from this sector should the will to do so emerge in the future. For the existing light-duty vehicle fleet, simply ensuring that replacement tires have the same low rolling resistance as original- equipment tires can improve vehicle fuel economy by as much as 4.5 percent at very low cost to the vehicle owner. Efficiency improvements are important not only because they produce demand reductions that will allow us to “buy time” to develop new alternatives to oil (a serious effort to diversify our fuel supply will likely take decades), but because they are essential to making many of those alternatives technologically and economically viable on a commercial scale. Biofuels and most other alternative fuels suffer from feedstock constraints, a lower energy density than gasoline, or both. Unless the vehicle fleet becomes more fuel-efficient, efforts to promote a greater reliance on alternative fuels will likely falter due to inadequate supply or inadequate driving range. Conversely, the land requirements for cellulosic ethanol production or the battery requirements for a plug-in hybrid-electric vehicle become much more manageable if the vehicles that employ these fuels or technologies are also highly efficient to begin with. Once one recognizes that the successful development of petroleum alternatives depends on highly efficient vehicle technologies, it becomes apparent that current provisions intended to promote the production of flexible-fueled vehicles by providing credits that weaken overall fleet fuel economy are shortsighted and ultimately counterproductive. Developing Alternatives to Oil The United States burns nearly 140 billion gallons of gasoline each year and relies on petroleum-based fuels to supply nearly all of its transportation energy needs. To meaningfully improve our nation’s energy security, alternative transportation fuels must be capable of being economically and reliably produced on a truly massive scale. The Commission identified four criteria that characterize a promising alternative fuel: (1) It can be produced from ample domestic feedstocks; (2) it has low net, full fuel-cycle carbon emissions; (3) it can work in existing vehicles and with existing infrastructure; and (4) it has the potential to become cost-competitive with petroleum fuels given sufficient time and resources dedicated to technology development. Among the variety of alternative fuel options potentially available for the light-duty vehicle fleet, the Commission believes that ethanol produced from cellulosic biomass (i.e., fibrous or woody plant materials) should be the focus of near-term federal research, development, and commercial deployment efforts. Let me briefly discuss the attributes of traditional corn-based ethanol and then turn to cellulosic ethanol. Corn-based ethanol is far and away our most successful nonpetroleum transportation fuel. The Renewable Fuels Standard adopted in the 2005 Energy Policy Act imposes an annual ethanol sales requirement that grows to 7.5 billion gallons in 2012. Ethanol sales were roughly 4 billion gallons last year. Despite the beneficial sales-volume credits given to producers of cellulosic ethanol, virtually all of this mandate will be met with traditional corn ethanol. A requirement to sell 250 million gallons of cellulosic ethanol takes effect in 2013. To an extent, Congress’s effort to stimulate demand for cellulosic ethanol may be undermined by the unexpected demand for ethanol of any kind. Present expectations are that demand for ethanol will exceed the requirements of the RFS for most if not all of the program. In this context, credits may have little or no value and the 2.5:1 cellulosic credit advantage may provide no meaningful benefit. Congress may want to investigate other policy approaches to achieve the intended aims of these credit provisions. For years, detractors of corn-based ethanol have asserted that the energy content of a gallon of ethanol is matched or even exceeded by the energy required to produce it. The Commission’s analysis disputes this conclusion, finding that corn-based ethanol provides nearly 20 percent more energy than it takes to produce. A more recent study by Argonne National Laboratory finds nearly a 35-percent benefit. Nevertheless, the fundamental liability of corn-based ethanol is that there is simply not enough corn to begin to keep pace with expected growth in transportation energy demand, let alone to reduce current U.S. gasoline consumption in absolute terms. Put simply, it takes roughly 4 percent of our nation’s corn supply to displace 1 percent of our gasoline supply. Even organizations devoted to ethanol advocacy agree that it will be difficult to produce more than 10-12 billion gallons of ethanol a year without imposing unacceptable demands on corn supply and significant upward pressure on livestock feed prices. Cellulosic ethanol is chemically identical to corn-based ethanol and is equally compatible with existing vehicle technology and fueling infrastructure. The added advantages of cellulosic ethanol lie in its significantly lower energy inputs and greenhouse gas emissions, its much larger base of potential feedstocks, and its greater potential to become cost- competitive with gasoline at very large production volumes. For cellulosic ethanol to succeed on a commercial scale, however, important concerns about land requirements must be overcome and production costs must be reduced. The central challenge is producing enough feedstocks without disrupting current production of food and forest products. Some cellulosic ethanol can be produced from currently available waste products such as corn stalks, sugar cane bagasse, and wheat straw. Production volumes on the order of 50 billion gallons per year, however, will require improved high-yield energy crops like switchgrass, the integration of cellulosic ethanol production into existing farming activities, and efficiency improvements in the processes used to convert cellulosic materials into ethanol. A Commission-sponsored analysis of the land required to produce enough cellulosic ethanol to fuel half of the current U.S. passenger vehicle fleet reveals the importance of the advancements noted above. Using status quo assumptions for crop yields, conversion efficiency, and vehicle fuel economy, Oak Ridge National Laboratory has estimated that it would take 180 million acres or roughly 40 percent of the land already in cultivation in the United States to fuel half the current vehicle fleet with cellulosic ethanol. Estimated land requirements can be reduced dramatically–to approximately 30 million acres–if one assumes steady but unremarkable progress over the next two to three decades to (1) double per-acre yields of switchgrass, (2) increase the conversion efficiency of ethanol production by one-third, and (3) double the fuel economy of our vehicle fleet. As a point of reference, there are roughly 30 million acres in the Conservation Reserve Program (CRP). Another central challenge is reducing production costs for cellulosic ethanol. Because energy crops like switchgrass can be grown with minimal inputs of energy, fertilizer, and pesticides, the use of such feedstocks offers obvious economic benefits, as does producing ethanol from materials that would otherwise be treated as waste. The National Renewable Energy Laboratory and a separate analysis sponsored by the Commission both suggest that mature cellulosic ethanol production could compete economically with gasoline. However, these studies are projections. At this time, no full-scale production of cellulosic ethanol exists anywhere in the world. Until cellulosic ethanol is produced in a variety of commercial facilities, it will not be possible to prove or disprove current cost estimates. These are serious challenges, but they are achievable if we dedicate ourselves to a serious, coordinated, and sustained research, development, and commercialization effort. As a critical first step in this direction, the Energy Policy Act of 2005 contains at least 10 major programs to promote ethanol derived from cellulosic feedstocks. These programs include explicit authorizations for more than $4.2 billion over the next decade to support critical R&D as well as “first-mover” commercial facilities through a combination of grants, loan guarantees, and production incentives. While these programs demonstrate Congress’s clear intention to promote biofuels, continued vigilance will be required to ensure that this vision is achieved. Historically, efforts to promote biofuels have been undermined by a lack of appropriations, inconsistent funding year to year, and an unusual degree of congressional earmarks. These factors, if continued, will make it difficult to achieve the critical objective of diversifying our nation’s fuel supply. The 2005 Energy Policy Act also took steps to ensure that increased use of ethanol will not undermine air quality and public health standards. Eliminating the opportunity for ethanol-blended gasoline to meet less protective evaporative emission standards remains necessary to ensure that our efforts to increase energy security do not undermine our clean air goals. Finally, carmakers will need to take some steps to better accommodate ethanol-blended gasoline. The Coordinated Research Council, which is supported by the automotive and petroleum industries and the State of California, has been conducting research to examine the extent to which automobile evaporative emissions increase in cars using ethanol-blended fuels. The research appears to indicate that when a small quantity of ethanol is blended into gasoline, the resulting mixture escapes more readily through the hoses and seals in the vehicle’s fuel system leading to more smog-forming emissions. The problem appears less prevalent in newer vehicles but demonstrates the type of challenges that will arise as we begin to transition toward a more diverse suite of transportation fuels. One of the many reasons for interest in promoting flexible-fueled vehicles capable of running on up to 85 percent ethanol blends is that when ethanol is the dominant constituent, the overall volatility of the fuel is reduced and evaporative problems go away. Efforts by Chairman Lugar, Senator Obama, and others to increase the number of flexible- fueled vehicles sold over the next decade and significantly increase ethanol refueling infrastructure deserve serious consideration. In sum, the Commission urges Congress to make every effort to fund the research and demonstration projects authorized in the Energy Policy Act of 2005. While it is clear that all discretionary programs must come under continual budget scrutiny, inconsistent funding from year to year can be devastating to long-term research efforts by making it impossible to hire and train experts, build infrastructure, and amass knowledge based on iterative experimentation. The Commission recognizes that Congress alone is responsible for appropriations, but can’t help but note that the high level of noncompetitive earmarks is undermining the strategic goals of our nation’s bioenergy programs. For example, in 2004, of the $94 million in appropriations for DOE’s bioenergy programs, nearly $41 million was directed to earmarked projects. In 2005, earmarks accounted for nearly 50 percent of the program’s budget. Paradoxically, this high level of earmarks reflects the enthusiasm of many Members of Congress for promoting domestic alternatives to petroleum. However, an effective national effort that coordinates the efforts of Federal, State, and private institutions cannot be mounted under these circumstances. Conclusion Sadly, there are no good options for delivering immediate relief from high prices at the gas pump. And while it’s understandable at times like this that people want to focus on price gouging, windfall-profits, or restrictive environmental laws–as if our plight was somehow the result of a few greedy people or poorly written statutes–we must direct the vast majority of our attention to confronting the fundamental roots of our oil security predicament. To make real progress, we must substitute thoughtful analysis for rhetoric and rise above the temptation to take political advantage of the current crisis by crafting a truly bipartisan response. Prices may, of course, fall again in the months ahead. But there is almost no scenario in which the underlying causes of the current crisis simply resolve themselves without a concerted effort by the United States and other major oil- consuming nations to change course. The real tragedy would be if this “moment” simply passes as others have with no real progress toward a lasting solution. In short, there is no question that we will someday use less oil than we do now. The question is rather whether we arrive at that point on our own terms or on someone else’s. The Commission believes that the sacrifices we choose are infinitely preferable to those imposed on us by forces we cannot control. The National Commission on Energy Policy looks forward to working with this committee in its ongoing effort to chart a more secure energy future for our nation.
Appendix
Summary of Measures for Improving U.S. Oil Supply
Appendix A
Summary of Measures for Improving U.S. Oil Supply
Projected Impact/Projected Oil Measure Savings
Increasing Supply Exploit all domestic conventional Increase U.S. output by 2.0 MBD reserves Exploit global reserves Increase global supply by 4.0+ ofunconventional oil MBD
Reducing Demand Heavy Duty Trucks Enhanced Diesel Technology and 1.0 MBD Aerodynamics Reduce Average Highway Speed by 0.3 MBD 10 mph
Passenger Vehicles and Delivery Trucks Advanced Gasoline Engine 2.2 MBD Technology (32 mpg)
Advance Gasoline Engine 3.5 MBD Technology + 50% Advanced Hybrid/ Diesel Sales (40 mpg)
Advanced Gasoline Engine 4.6 MBD Technology + Advanced Hybrid/ Diesel + 25% Plug-in Hybrids (50 mpg)
DevelopingAlternative Fuels Quadruple ethanol production post- 2.0 MBD (30 billion gallons) 2012
Dramatically increase biodiesel 0.5 to 1.0 MBD (7.5 to 15 billion production gallons) Create Domestic Fischer-Tropsch 0.5 to 3.0+ MBD (7.5 to 45+ Industry (Coal to Diesel) billion gallons)
“THE HIDDEN COST OF OIL”
Thursday, March 30, 2006
Opening Statement
HON. RICHARD G. LUGAR
U.S. Senator From Indiana,
Chairman, Senate Committee on Foreign Relations
The Foreign Relations Committee meets today to consider the externality costs of U.S. dependence on fossil fuels. The gasoline price spikes following the Katrina and Rita hurricanes underscored for Americans the tenuousness of short-term energy supplies. Since these events, there is a broader understanding that gasoline and home heating prices are volatile and can rapidly spike to economically damaging levels due to natural disasters, terrorist attacks, or other world events. But, as yet, there is not a full appreciation of the hidden costs of oil dependence to our economy, our national security, our environment, and our broader international goals. Today, with the help of experts who have thought a great deal about these issues, we will attempt to more clearly define some of these costs. We are cognizant that this is a difficult and imprecise exercise. We are also aware that most, if not all, energy alternatives have some externality costs. But we are starting from the presumption that if we blithely ignore our dependence on foreign oil, we are inviting an economic and national security disaster. With less than 5 percent of the world’s population, the United States consumes 25 percent of its oil. If oil prices remain around $60 a barrel through 2006, we will spend approximately $320 billion on oil imports this year. Most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism. More than three-quarters of the world’s oil reserves are controlled by national oil companies. And within 25 years, the world will need 50 percent more energy than it does now. These basic facts demand a major reorientation in U.S. policy aimed at reducing U.S. dependence on fossil fuels. Our goals must be to mitigate the short-term costs of our dependence on oil, while pursuing energy alternatives that would reduce the international leverage of petro-superpowers, improve environmental quality, cushion potential oil price shocks, stimulate new high-tech energy industries, and ground the American economy on energy sources that will neither run out nor be cut off by a foreign supplier. There are at least six basic threats associated with our dependence on fossil fuels. First, oil supplies are vulnerable to natural disasters, wars, and terrorist attacks that can produce price shocks and threats to national economies. This threat results in price instability and forces us to spend billions of dollars defending critical fossil fuel infrastructure and choke points. Second, over time, finite fossil fuel reserves will be stressed by the rising demand caused by explosive economic growth in China, India, and many other nations. This is creating unprecedented competition for oil and natural gas supplies that drives up prices and widens our trade deficit. Maintaining fossil fuel supplies will require trillions in new investment–much of it in unpredictable countries that are not governed by democracy and market forces. Third, energy rich nations are using oil and natural gas supplies as a weapon against energy poor nations. This threatens the international economy and increases the risk of regional instability and military conflict. Fourth, even when energy is not used overtly as a weapon, energy imbalances are allowing oil-rich regimes to avoid democratic reforms and insulate themselves from international pressure and the aspirations of their own people. In many oil rich nations, oil wealth has done little for the people, while ensuring less reform, less democracy, fewer free market activities, and more enrichment of elites. It also means that the United States and other nations are transferring billions of dollars each year to some of the least accountable regimes in the world. Some of these governments are using this money to invest abroad in terrorism, instability, or demagogic appeals to anti-Western populism. Fifth, reliance on fossil fuels contributes to environmental problems, including climate change. In the long run, this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability. Sixth, our efforts to facilitate international development are often undercut by the high costs of energy. Developing countries are more dependent on imported oil, their industries are more energy intensive, and they use energy less efficiently. Without a diversification of energy supplies that emphasizes environmentally friendly options that are abundant in most developing countries, the national incomes of energy poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism. Each of these threats comes with short- and long-term costs. As a result, the price of oil dependence for the United States is far greater than the price consumers pay at the pump. Some costs, particularly those affecting the environment and public health, are attributable to oil no matter its source. Others, such as the costs of military resources dedicated to preserving oil supplies, stem from our dependence on oil imports. But each dollar we spend on securing oil fields, borrowing money to pay for oil imports, or cleaning up an oil spill is an opportunity missed to invest in a sustainable energy future. Certain types of costs are extremely difficult to quantify. We understand that many national security risks are heightened by our oil dependence. But how, for example, would we assign a dollar figure to Iran’s use of its energy exports to weaken international resolve to stop its nuclear weapons program? Yet we should do our best to quantify the externality costs of oil, so we have a clearer sense of the economic and foreign policy tradeoffs that our oil dependence imposes on us. As the U.S. Government and American businesses consider investments in energy alternatives, we must be able to compare the costs of these investments with the entire cost of oil. Public acknowledgement of the billions of dollars we spend to support what the President has called our “oil addiction,” would shed new light on investment choices related to cellulosic ethanol, hybrid cars, alternative diesel, and other forms of energy. As we address these questions today, we will have the benefit of a distinguished panel of experts. Dr. Hillard Huntington is executive director of the Energy Modeling Forum at Stanford University. He is a senior fellow and past president of the United States Association for Energy Economics. He recently coordinated two studies funded by the Department of Energy that evaluated the economic risks of oil price shocks. Mr. Milton Copulos is President of the National Defense Council Foundation. He has advised Secretaries of Defense, Energy, and Interior and was a member of the National Petroleum Council. He is widely published on military affairs and has devoted much study to the military expenditures associated with ensuring the flow of oil. Dr. Gary Yohe is the John E. Andrus Professor of Economics at Wesleyan University. Professor Yohe is widely published on the adaptation and mitigation of climate change. He recently edited Avoiding Dangerous Climate Change, the collection of papers on the subject that were prepared for last year’s G-8 Summit. We welcome our three witnesses and look forward to their insights.
Opening Statement
HON. JOSEPH R. BIDEN, Jr.
U.S. Senator From Delaware,
Ranking Member, Senate Committee on Foreign Relations
Mr. Chairman, thank you for holding this hearing on the “Hidden Costs of Oil.” For most of us, the costs of oil seem far from hidden. They are right up there on the signs at our gas stations, they are there in black and white on our heating bills. But as our witnesses will show us today, the price at the pump, the price on our heating bills, as bad as they may be, are only part of the story. Those prices conceal the hidden tax we pay to OPEC countries who use their pricing power to charge us more than they could get in an open international market for oil. In addition, those prices conceal the costs of the security commitments we face to protect the supply of oil from OPEC and other foreign sources. And they conceal the costs to our foreign policy, which has been handcuffed for over half a century by our dependence on oil from parts of the world with very different interests from our own. At the same time, the rising price of oil has created a cushion that props up despotic regimes and finances their militaries or allows other countries to put off hard decisions about democratic and economic reform. Finally, the price at the pump hides the long-term environmental damage–as well as the economic and social disruptions–that will come with global warming. The economic, social, political, and environmental costs we face today–and the costs of dealing with their repercussions in the future–will not stay hidden. There is no free lunch, as economists never tire of telling us. Somebody eventually has to pick up the tab. When we pay too much for oil–because OPEC can use its market power–we have less money for other priorities. That artificial inflation affects both domestic and imported oil, since there is essentially just one world market for oil. In turn, we pay too much for transportation, and power. We pay too much for the plastics and other products derived from oil. That is a dead-weight loss for the entire economy. Every watt of electricity from our power plants, every minute we run a refrigerator or air conditioner, every trip to the store, everything shipped by truck or rail–all those parts of our everyday lives costs more than they should. That leaves us with less to spend on other priorities. It make us poorer–as individuals, as families, as a nation. Mr. Chairman, we often speak about the costs of our foreign policy–usually we are speaking metaphorically. We may talk about trading values or prestige in one area to secure influence or leverage in another.But there are real costs to our policies, too, of course. As hard as they may be to calculate, we must try to measure the economic costs of our reliance on oil, especially on imported oil, on oil from countries that are themselves unstable or that promote instability. That will be important testimony for the record of this committee, Mr. Chairman. Throwing our net a little wider, Mr. Chairman, from the quantifiable costs of oil to our economy, and the costs of our foreign entanglements to secure that oil, we come to the costs we will incur to cope with the climate change that will result from our use of oil and other fossil fuels. You and I share a concern about all of the foreign policy implications of climate change, Mr. Chairman. Climate change will alter growing seasons, redistribute natural resources, lift sea levels, and shift other fundamental building blocks of economic, social, and political arrangements around the world. It could spark massive human migrations and new wars over resources. We will pay a price for those, too. No other issue carries such a threat to our way of life. Putting a dollar value on that threat can show us what we are risking if we don’t act now to slow global warming. In every one of the areas we will look at today, the near- term prospects are grim. The rise of the massive economies of China and India will continue to put pressure on supply, will demand tens of billions in investments, will further complicate global oil and energy politics, and will accelerate the accumulation of carbon dioxide and other greenhouse gases. Half the world’s population–3 billion people–live on $2 a day. Just to provide them with a little electricity to replace wood and kerosene for cooking, to pump water, to light a schoolhouse–will require more than our current energy system can provide. To meet the inevitable challenges built into our current fossil fuel economy, we must first start with the facts. Today we will learn the many ways the true costs of oil are hidden from us. To make clear choices, we need to have the right information. Hidden costs lead consumers to make the wrong choices. They distort investment decisions–we invest too much in systems that will make our problems worse, and we invest too little in solutions. This hearing will give us some of the facts we need to start making the right choices. Thank you, Mr. Chairman.
MILTON R. COPULOS
Prepared Statement
MILTON R. COPULOS
President, National Defense Council Foundation, Alexandria, VA
BEFORE THE
U.S. Senate Committee on Foreign Relations
MARCH 30, 2006
My name is Milton R. Copulos, and I am president of the National Defense Council Foundation. I would like to thank Chairman Lugar for giving me the opportunity to speak with the committee today and I would also like to commend him for his leadership addressing our nation’s perilous energy dependence.
A HEADLONG RUSH INTO DISASTER
America is rushing headlong into disaster. What is worse, however, is that it is a disaster of our own design. More than three decades have passed since the 1973 Arab Oil Embargo first alerted the nation to its growing oil import vulnerability. Yet, despite this warning, we are now importing more than twice as much oil in absolute terms than we did in 1973, and the proportion of our oil supplies accounted for by imports is nearly double what is was then. What makes this dependence even more dangerous than it was three decades ago is the fact that the global market has become a far more competitive place with the emerging economies of China, India, and Eastern Europe creating burgeoning demand for increasingly scarce resources. Indeed, over the past decade the Chinese economy has grown at a frenetic pace, officially estimated at 9.2 percent in 2005. India’s growth rate for that year was 7.1 percent. In Eastern Europe, Belarus grew at 7.8 percent, the Czech Republic at 4.6 percent, and the Ukraine at 4.4 percent. This compares with 3.5 percent for the United States, 2.1 percent for Japan, and 1.7 percent for the European Union. As a result of this explosive growth, oil consumption in the developing countries is expected to increase at a rate of 3 percent annually over the next two decades. But even this figure may severely understate the problem. Indeed, China alone has accounted for 40 percent of the total increase in world oil consumption over the past several years. Moreover China plans to add 120 million vehicles to its automobile fleet over the next decade, ultimately requiring 11.7 million barrels per day of new crude oil supplies. India, too, is expected to continue to require increasingly large amounts of oil with a projected increase of 28 percent over just the next 5 years. Even conservative estimates suggest that nearly 30 million barrels per day of new oil supplies will be required by the year 2025 just to service the developing world’s requirements. When Europe and the Americas are included the requirement is closer to 40 million barrels per day. It is doubtful that new supplies sufficient to meet this skyrocketing demand will be found from conventional sources.
UNCERTAIN SUPPLIERS
Nor is it just the potential physical shortfall of resources that is a source of concern. An even greater concern lies in the instability of U.S. sources of oil imports. The top six sources of U.S. oil imports, Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, and Iraq account for 65.1 percent of all foreign crude reaching our shores and 38.9 percent of total domestic consumption. Of these, four, Saudi Arabia, Venezuela, Nigeria, and Iraq provide 38.2 percent of oil imports and 22.6 percent of total consumption. For a variety of reasons, none of the four I just mentioned can be considered a reliable source of supply.Venezuela’s President Hugo Chavez is a vocal opponent of the United States who has twice threatened to cut off oil shipments to the United States. Nigeria’s production has been repeatedly disrupted by civil unrest, and some 135,000 barrels of oil per day are lost to theft. Last month, a terrorist attack on the massive Saudi oil processing facility at Abqaiq was barely thwarted, but not before two of the terrorist’s explosive-laden cars were detonated. Moreover, this was not the only instance of an attempt to disrupt the flow of Saudi oil. In the summer of 2002, Saudi Interior Ministry forces blocked an al-Qaeda plot to attack and cripple the loading dock at Ras Tanura which handles 10 percent of the world’s oil supplies. Attacks on oil facilities in Iraq are a frequent occurrence. Nor are the attacks on U.S. oil supplies a coincidence. In December of 2004, al-Qaeda issued a fatwa that said in part:
We call on the mujahideen in the Arabian Peninsula to unify their ranks and target the oil supplies that do not serve the Islamic nation but the enemies of this nation.
The fatwa went onto declare:
Be active and prevent them from getting hold of our oil and concentrate on it particularly in Iraq and the Gulf.
Clearly, given the instability that characterizes four of our top six sources of oil, the question is not whether we will experience a supply disruption, but rather when. The disruption could occur as a consequence of a terrorist act, or could result from a politically motivated embargo. In the end, it doesn’t really matter why a disruption occurs, because the consequences would be identical, and severe.
THE CONSEQUENCES OF DISRUPTION
The supply disruptions of the 1970s cost the U.S. economy between $2.3 trillion and $2.5 trillion. Today, such an event could carry a price tag as high as $8 trillion–a figure equal to 62.5 percent of our annual GDP or nearly $27,000 for every man, woman, and child living in America. But there is more cause for concern over such an event than just the economic toll. A supply disruption of significant magnitude, such as would occur should Saudi supplies be interdicted, would also dramatically undermine the nation’s ability to defend itself. Oil has long been a vital military commodity, but today has taken on even more critical importance. Several examples illustrate this point:
A contemporary U.S. Army Heavy Division uses more than twice as much oil on a daily basis as an entire World War II field army.
The roughly 582,000 troops dispatched to the Persian Gulf used more than twice as much oil on a daily basis as the entire 2-million man Allied Expeditionary Force that liberated Europe in World War II.
In Operation Iraqi Freedom, the oil requirement for our Armed Forces was 20 percent higher than in the first gulf war, Operation Desert Storm, and now amount to one barrel of refined petroleum products per day for each deployed service member.
Moreover, the military’s oil requirements will be even higher in the future. Therefore, a shortage of global oil supplies not only holds the potential to devastate our economy, but could hamstring our armed forces as well.
THE HIDDEN COST OF IMPORTED OIL
While it is broadly acknowledged that our undue dependence on imported oil would pose a threat to the nation’s economic and military security in the event of a supply disruption, less well understood is the enormous economic toll that dependence takes on a daily basis. The principal reason why we are not fully aware of the true economic cost of our import dependence is that it largely takes the form of what economists call “externalities,” that is, costs or benefits caused by production or consumption of a specific item, but not reflected in its pricing. It is important to understand that even though external costs or benefits may not be reflected in the price of an item, they nonetheless are real. In October 2003, my organization, The National Defense Council Foundation, issued “America’s Achilles Heel: The Hidden Costs of Imported Oil,” a comprehensive analysis of the external costs of imported oil. The study entailed the review of literally hundreds of thousands of pages of documents, including the entire order of battle of America’s Armed Forces and more than a year of effort. Its conclusions into divided the externalities into three basic categories: Direct and Indirect economic costs, Oil Supply Disruption Impacts, and Military Expenditures. Taken together, these costs totaled $304.9 billion annually, the equivalent of adding $3.68 to the price of a gallon of gasoline imported from the Persian Gulf. As high as these costs were, however, they were based on a crude oil refiner acquisition cost of $26.92. Today, crude oil prices are hovering around $60 per barrel and could easily increase significantly. Indeed, whereas in 2003 we spent around $99 billion to purchase foreign crude oil and refined petroleum products, in 2005 we spent more than $251 billion, and this year we will spend at least $320 billion. But skyrocketing crude oil prices were not the only factor affecting oil-related externalities. Defense expenditures also changed. In 2003, our Armed Forces allocated $49.1 billion annually to maintaining the capability to assure the flow of oil from the Persian Gulf. I should note that expenditures for this purpose are not new. Indeed, last year marked the 60th anniversary of the historic meeting between Saudi monarch King Abdul Aziz and U.S. President Franklin Roosevelt where he first committed our nation to assuring the flow of Persian Gulf oil–a promise that has been reaffirmed by every succeeding President, without regard to party. In 1983 the implicit promise to protect Persian Gulf oil supplies became an explicit element of U.S. military doctrine with the creation of the United States Central Command, CENTCOM. CENTCOM’s official history makes this clear stating in part:
Today’s command evolved as a practical solution to the problem of projecting U.S. military power to the gulf region from halfway around the world.
I am stressing the longstanding nature of our commitment to the gulf to underscore the fact that our estimates of military expenditures there are not intended as a criticism. Quite the opposite, in fact. Without oil our economy could not function, and therefore protecting our sources of oil is a legitimate defense mission, and the current military operation in Iraq is part of that mission. To date, supplemental appropriations for the Iraq War come to more than $251 billion, or an average of $83.7 billion per year. As a result, when other costs are included, the total military expenditures related to oil now total $132.7 billion annually. So, where does that leave us? In 2003, as noted, we estimated that the “hidden cost” of imported oil totaled $304.9 billion. When we revisited the external costs, taking into account the higher prices for crude oil and increased defense expenditures we found that the “hidden cost” had skyrocketed to $779.5 billion in 2005. That would be equivalent to adding $4.10 to the price of a gallon of gasoline if amortized over the total volume of imports. For Persian Gulf imports, because of the enormous military costs associated with the region, the “hidden cost” was equal to adding $7.41 cents to the price of a gallon of gasoline. When the nominal cost is combined with this figure it yields a “true” cost of $9.53 per gallon, but that is just the start. Because the price of crude oil is expected to remain the $60 range this year, expenditures for imports are expected to be at least $320 billion this year. That amounts to an increase of $70 billion in spending for foreign oil in just one year. That increase would raise the total import premium or “hidden cost” to $825.1 billion, or almost twice the President’s $419.3 billion defense budget request for fiscal year 2006. If all costs are amortized over the total volume of imports, that would be equivalent to adding $5.04 to the price of a gallon of gasoline. For Persian Gulf imports, the premium would be $8.35. This would bring the “real” price of a gallon of gasoline refined from Persian Gulf oil to $10.86. At these prices the “real” cost of filling up a family sedan is $217.20, and filling up a large SUV $325.80. But, can anything be done about this enormous drain on our economy? The answer to that question is, “yes.”
SOLVING THE PROBLEM
The simple truth is that we do not suffer from a lack of energy resources. Rather, what we suffer from is a lack of the political will and public consensus to use them. As Pogo said, “We have met the enemy and they is us.” What then can we do? The first step is to recognize that we face a two-fold problem. The first part entails assuring adequate fuel supplies for the 220 million privately owned vehicles on the road today. These vehicles have an average lifespan of 16.8 years and the average age of our vehicle fleet is 8.5 years. Therefore, we will require conventional fuels or their analogs for at least a decade, even if every new vehicle produced from this day forth runs on some alternative. The second part of the problem is how to affect a transition to alternatives to conventional petroleum. This transition will take much longer than a decade–perhaps a generation or more–but the longer we delay beginning to make the change, the longer it will take to accomplish. In the near term, say the next 5 to 10 years, we essentially have two options. First, to make the greatest possible use of our readily accessible conventional domestic resources, particularly the oil and natural gas that lay off our shores. We should also consider using some of our 1,430 trillion cubic feet of domestic gas reserves as a feedstock for motor fuels produced through the Fischer-Tropsch process. Indeed, we currently have 104 trillion cubic feet of so-called “stranded” natural gas in Alaska and a pipeline with some 1.1 million barrels per day of excess capacity. Stranded gas could be converted into clean burning motor fuel and transported in the existing pipeline to the lower 48 states. We can also expand our use of renewable fuels such as alcohol and biodiesel. A concerted program to make full use of them could significantly add to our motor fuel stocks within the stated time frame. We should also encourage the acquisition of advanced vehicle technologies such as flex-fuel vehicles, hybrids and plug-in hybrids and vehicles that use propane or natural gas. At the same time, we should encourage the installation of biodiesel and E-85 pumps in our nation’s filling stations so that the infrastructure for alternative fuels can keep pace with the growth of the alternative fuel vehicle fleet. Another point is to make sure that we do not forget to address nontransportation petroleum consumption. The fact that two-thirds of our petroleum is consumed in the transportation sector means that one-third is not. The opportunities to reduce oil consumption from nontransportation are greater than you might expect. Take residential energy use for example. Roughly 12 percent of distillate use goes to home heating, most of it imported from the Middle East. Yet, there are alternatives readily available that could totally eliminate this use, and at the same time save consumers money. For instance, a developer in Moline, IL, is currently building homes that are between 85 percent and 90 percent energy efficient, and meet their heating and cooling requirements with geothermal energy. More important, these homes are being sold for 20 percent less than conventional housing sold in the same area. So consumers are not only saving energy, they are saving enormous amounts of money. There is another commercial process that converts waste wood into a zero-sulfur industrial boiler fuel. Our Clean Forests program that removes dead wood and debris from national forests to prevent fires is generating an enormous amount of such waste wood, and that is just the tip of the iceberg. Oak Ridge National Laboratory estimates that a total of 1.366 billion tons of biomass is available for energy production each year. Utilizing this process, it could be turned into 5.6 million barrels of oil per day, or close to 27 percent of our total domestic requirements. These, of course, are just two examples. Many more exist. The important consideration is that we have a wealth of options that could help in the near to intermediate term if we would only make use of them. To do this, however, we must have leadership. In this regard, I should note that Chairman Lugar and his colleagues, Senators Chaffee, Coleman, Nelson, and Obama, deserve particular praise for their sponsorship of S. 2025, the Vehicle and Fuel Choices for American Security Act, which is based on the Energy Security Blueprint of the Set America Free Coalition, of which I was a founding member. It is focused on reducing our dependence on foreign oil, not by compromising the American way of life, but by encouraging fuel choice, utilization of the vast array of America’s domestic energy resources and accelerated deployment of advanced vehicle technologies. It is clear that this sort of bipartisan effort is exactly the kind of action that is required if we are to make any progress on this critical issue. In the longer term, there are other domestic energy resources that can be brought into play. We have between 500 billion and 1.1 trillion barrels of oil contained in our huge oil shale resources. We have 496.1 billion tons of demonstrated coal reserves–27 percent of the world total. We also have 320,222 trillion cubic feet of natural gas in the form of methane hydrates. This is equivalent to 51.1 trillion barrels of oil. Indeed one on-shore deposit in Alaska alone contains 519 trillion cubic feet of natural gas. That is equal to 82.9 billion barrels of oil. We also have 4.85 billion pounds of uranium reserves. Harnessing this vital resource to provide electricity for our cities, towns, and farms is only common sense. Moreover, it could serve to reduce the need to use natural gas for electricity generation, preserving it for higher uses. There is one final point I want to make sure is not forgotten. Some portion of every dollar we spend on imported oil finds its way into the hands of individuals who wish to do us harm. The simple truth is that international terrorism stands on two financial pillars: Oil and the drug trade. To the extent that we reduce the revenues generated by either of these activities, we hinder the ability of terrorists to operate. To conclude, while we our nation is in dire peril due to its excessive dependence on imported oil, the situation is far from hopeless. We have the resources necessary to provide our nation’s energy needs if we can only find the political will to do so.
HILLARD HUNTINGTON
Prepared Statement
DR. HILLARD HUNTINGTON
Executive Director, Energy Modeling Forum, Stanford University, Stanford, CA
BEFORE THE
U.S. Senate Committee on Foreign Relations
MARCH 30, 2006
Thank you, Chairman Lugar, Ranking Member Biden, and distinguished members of the committee, for the opportunity to discuss with you today the hidden cost of oil. Tight oil markets with minimal surplus capacity have made world oil prices particularly jumpy over recent months. In the last 6 months, a series of political and natural events have cascaded around the globe and left their impact on increasingly nervous oil-consuming nations. These developments have been extremely varied and include the following:
A thwarted suicide attack in February at the Abqaiq oil processing facility in eastern Saudi Arabia;
A string of turmoil in the Niger Delta highlighted by a recent speedboat attack in January by gunmen on the riverside offices of Italian oil company Agip;
Antigovernment attempts to disrupt congressional elections in Venezuela culminating in an explosion at an oil pipeline connected to that country’s largest oil refinery; and
Devastating hurricanes Katrina and Rita in the United States in August and September.
Their sporadic nature conveys an element of unpredictability and surprise. I have recently coordinated several studies for the Energy Modeling Forum at Stanford University that relate directly to this issue. I would like to share a few observations that I think summarize the perspectives of many (but certainly not all) participants who were involved in the studies. Our forum frequently brings together the leading experts and advisors from government, business, and university and other research organizations to discuss how we can improve analysis of key energy problems that keep policymakers awake at night. In this particular case, the work was done primarily for the U.S. Department of Energy, but we were asked to invite individuals we thought were the leading people on this issue. Our two studies focused on the risks of another major oil disruption and the economic consequences of oil price shocks. I am also submitting both reports that expand considerably over my brief remarks here today. I will also briefly discuss a third issue: Our dependence on the oil-producing cartel. Although these episodes have made oil-importing countries nervous and have imposed some very high costs on people and infrastructure, they have yet to duplicate the types of oil shocks that were experienced during the 1970s and early 1990s. As a result, their economic impacts have been more tolerable than in the past. Despite recent oil price volatility, for example, real GDP in the United States has grown strongly, by 3.5 percent annually since the end of 2001. A number of knowledgeable experts, however, are concerned about the very real possibility of much more damaging shocks in the future. A group assembled by Stanford’s EMF thought that the odds of, at least, one very damaging shock over the next 10 years were higher than those of an oil market with some volatility but without such a shock. Although another major oil disruption is not a certainty, its likelihood is significantly high enough to be worrisome. Your odds of drawing a club, diamond, or heart from a shuffled deck of playing cards are three out of four. In the EMF study, the participants found that the odds of a foreign oil disruption happening over the next 10 years are slightly higher at 80 percent. Disruption events included surprise geopolitical, military, or terrorist turmoil that would remove at least 2 million barrels per day–an amount representing about 2.1 percent of expected global oil production. Foreign disruptions of this magnitude would have more serious effects on oil prices and the economy than we have seen with the Katrina and Rita hurricanes. Oil prices, however, would rise more and for longer than a few months or a heating season. In the study, experts estimated the amount of oil lost to the market as the number of barrels removed by the initial disruption, minus any offsets from the use of excess capacity from undisrupted regions. The experts were asked to exclude any releases from the U.S. strategic petroleum reserve, as these actions require separate decisions from the government during an emergency. The approach identified four major supply regions where disruptions are most likely. These regions account for approximately similar shares of total world oil production. Collectively, they account for about 60 percent of total world oil production. The study lumped Algeria, Angola, Libya, Mexico, Nigeria, and Venezuela as the first region, called “West of Suez.” Saudi Arabia was the second region, and other Persian Gulf states–Iran, Iraq, Kuwait, Qatar, UAE, and Oman– were the third. Russia and the Caspian states comprised the fourth region. The riskiest areas were the Persian Gulf countries outside of Saudi Arabia and several countries along the Atlantic Basin, such as Nigeria and Venezuela. The least risky area was Russia and the Caspian states. Although the participants found the possibility of disruptions was lower in Saudi Arabia than in several other vulnerable regions, disruptions there would tend to have larger effects. In the second study on the economic consequences of a major disruption, we sought to understand how easily the economy could absorb such a shock. Figure 1 shows that oil price shocks preceded 9 of the last 10 recessions in the United States. The solid line indicates the path of inflation-adjusted crude oil prices since 1950. The gray bars denote periods when the U.S. economy was experiencing recessions as defined by the National Bureau of Economic Research (NBER). This finding was first advanced by Professor James Hamilton at University of California at San Diego and has been confirmed by numerous other researchers. If a large disruption does occur, we can expect very serious economic consequences. Large disruptions, especially if they move inflation-adjusted oil prices higher than experienced recently, will cause unemployment and excess capacity to grow in certain key sectors. Many large-scale models of the U.S. economy estimate that the level of real GDP could decline by 2 percent for a doubling of oil prices. Since the economy is growing more rapidly than 2 percent per year, that impact would not mean a recession. Other researchers, however, think that these estimates underestimate the impacts, because they do not focus explicitly on sudden and scary oil price shocks. These other researchers think that our historical experience suggests that the level of real GNP would decline by more, at 5 percent for a doubling of the oil price. My personal view is that the higher estimate may be closer to what would actually happen if we had a major disruption. That would mean a recession. Some people think that oil shocks may not be a problem because the Federal Reserve Board could intervene and lessen the impact. I have a great deal of faith in the Federal Reserve Board. They have done a marvelous job in controlling inflation, which places the U.S. economy in a better position for offsetting oil disruptions than in previous decades. I am not yet convinced that they can compensate the economy for a large devastating disruption. They would have to make some important decisions very quickly at a time when fears were running rampant. They may also find it difficult to stimulate the economy because nominal interest rates are already very low, not only here but also abroad. For this reason, I think that the United States should seriously consider other types of insurance policies that would allow the Federal Reserve Board more leeway and flexibility in controlling our inflation rates. As a general rule, strategies that reduce our dependence on oil consumption are more effective than policies that reduce our imports. One should view the world oil market as one giant pool rather than as a series of disconnected puddles. When events happen anywhere in the market, they will raise prices not only there but also everywhere that connect to that large pool. Since reducing our imports with our own production does not sever our link to that giant pool, disruptions will cause prices to rise for all production, including that originating in the United States. More domestic supplies do not protect us from these price shocks. Unfortunately, insurance policies are never free. It will cost us something to implement a strategy that reduces our risk to another major oil disruption. But it will also cost us a lot of money and jobs if we do not adopt an insurance policy and the nation faces another major disruption. As a result of the 1970 oil price shocks, we shifted away from oil in many sectors in the early 1980s, but that trend has slowed considerably since then. Moreover, transportation remains strongly tied to oil use. The dependence on oil in transportation not only affects households directly through higher gasoline costs but it also raises the costs of transporting goods around the country. Our most recent studies did not address a third issue that could influence the costs of using oil. It is sometimes argued that the United States could adopt policies that would try to minimize or break the oil-producing cartel’s control over the market. Our forum addressed this issue many years ago. Although the range of views was wide, our working group conservatively estimated that the hidden cost of oil from this source might be $5 per barrel, or 12 cents per gallon. Several years ago, the National Research Council used a very similar estimate in their review of the corporate average fuel economy standards for automobiles. That estimate is not trivial, but it is considerably smaller than various estimates for gasoline’s hidden costs due to pollution, congestion and automobile accidents. In summary, the nation is vulnerable to another major disruption not because the economy imports oil but primarily because it uses a lot of oil, primarily for gasoline and jet fuel. Even if domestic production could replace all oil imports, which I am not advocating, the economy would remain vulnerable to the types of disruptions discussed here. However, it is very appropriate that this committee focus its energy on this issue. Oil-importing governments have committed significant political and military resources to the Middle East over a number of decades in order to provide regional stability that is critical to world oil supplies. Excessive exposure to oil vulnerability risks in this country increases these costs or reduces the capacity to pursue foreign policy objectives that are critical for mitigating nuclear proliferation, terrorism, and other risks that reduce global security. I cannot provide you with an estimate for this political cost of using oil, but it is extremely important.
GARY W. YOHE
Prepared Statement
DR. GARY W. YOHE
John E. Andrus Professor of Economics, Wesleyan University, Middletown, CT
BEFORE THE
U.S. Senate Committee on Foreign Relations
MARCH 30, 2006
Mr. Chairman, Senator Biden, and members of the Committee on Foreign Relations, thank you for your invitation to present testimony in on “The Hidden (Climate Change) Costs of Oil”. It is indeed an honor to be here, today. The task that I accepted when I agreed to testify involves providing some insight into the economic cost of carbon emissions so that you can “back out the share of oil to get the right order of magnitude.” I am afraid, however, that this deceptively complicated question has the same answer as nearly every other question in economics: “It depends.” My testimony will therefore be directed at providing insight into the underlying factors upon which these costs depend. I will, however, also offer some thoughts about what the underlying uncertainty means for climate policy and the hidden cost of oil. I will begin with a brief review of the range of more than 100 published estimates of what is termed the “social cost of carbon”; this is the calculation by which we can attribute a share of cost to oil based on its carbon content (per unit energy). I will highlight why the range of these estimates is so large. I will suggest which of the factors that make the range so large can be influenced by political decisionmakers, but I will also focus attention on scientific factors that are beyond their control. Thinking about how we should cope with these scientific factors will lead me to identify two fundamental sources of hidden cost that may not be immediately obvious. I will, in particular, suggest an alternative way to calculate the hidden climate costs of oil based explicitly on hedging against the potentially severe economic costs of abrupt changes in policy. These policy adjustments may be required over the near to moderate term as we come to know more about the impacts and/or likelihoods of climate change (particularly abrupt climate change). It is important to recognize that many of these impacts have not yet been included in the direct calculation of social cost. Adopting a risk-management (hedging) approach to minimize the cost of future policy adjustments is therefore an appropriate, economically rational way to think about the social cost of carbon. Moreover, it makes uncertainty a reason to act immediately rather than a reason to procrastinate. I will, as well, argue that ignoring social costs calculated by either a tradition direct method or one derived from a risk-management approach systematically undervalues projects and programs that would reduce our consumption of petroleum (like investment in ethanol as an alternative source of energy) while it produces an symmetric overvaluation of projects and programs that would do just the opposite (like drilling in the Arctic National Wildlife Refuge). To begin, I recall “burning ember” diagram from the Third Assessment Report (the TAR) of the Intergovernmental Panel on Climate Change (2001) in Figure 1. It duplicates Figure TS-12 from the Technical Summary of the Third Assessment Report where five Lines of Evidence” were identified. These are the five sources of concern, or indicators of vulnerability, that have captured our attention. Two are essentially economic indicators of aggregate impacts at the global and regional levels. They are dominated by estimates of the costs of the climate impacts in market-based sectors like real estate (in response to rising seas), agricultural, energy, and the like. As such, they do include evaluations of how various nations and even communities within nations might adapt to climate-related stress. It is important to recognize, of course, that these impacts are felt unevenly across the globe. Panel A of Figure 2 offers a representative portrait of a possible geographic distribution of vulnerability to climate impacts in 2050 calibrated in terms of aggregate impacts. Developing countries show up as most vulnerable, but developed countries are surely not immune to climate risk even when their superior capacities to adapt are recognized. A third row in Figure 1 focuses attention squarely on ecosystems, although the IPCC did not provide the detailed assessment of ecosystem services that was so thoroughly documented in the recently completed Millennium Ecosystem Assessment. The last two rows reflect vulnerability to two potentially more significant areas concern: “Risks from Future Large-Scale Discontinuities” and “Risks from Extreme Weather Events”. Figure 2 illustrates the uneven impact point by displaying a plausible global distribution of vulnerability in 2050 calibrated to the risks of extreme weather events. Developing countries are still most vulnerable, but developed countries also face significant vulnerabilities from a more urgent “source of concern.” Economists have been trying for some time to assign currency values to the impacts of climate change identified in Figure 1 by tracking their potential trajectories along long- term scenarios of how the future might unfold. Not surprisingly, economists do not agree on what that future might hold. They do, however, agree on what measure to use: “The social cost of carbon.” What is that? It is the damage caused over time by releasing an addition unit of ton of carbon in the atmosphere discounted back to the year of its emission. That is to say, the social cost of carbon represents the “marginal cost” of emissions; alternatively, it represents the “marginal benefit” of unit of carbon emissions reduction. Most importantly for present purposes, the social cost of carbon, when modified by the carbon content of petroleum, is the hidden (climate change) cost of oil. Figure 3 displays the range of more than 100 estimates currently available in the published literature; it is derived from Tol (2005). Panel A of Figure 3 displays the social cost in dollars per metric ton of carbon; Panel B tracks the estimate to the hidden cost of oil by expressing social cost in dollars per barrel of oil. How should the data portrayed in Figure 3 be read? Percentile values are recorded up the vertical axis for cost estimates ordered from lowest to highest. So, for example, point A indicates that 12 percent of the published estimates were below $0. Point B highlights the median estimate, suggesting that 50 percent of the estimates were below $13 per ton of carbon ($2 per barrel of oil), and 50 percent of the estimate were above this benchmark. Point C shows that 20 percent of the estimates were above $73 per ton of carbon ($9 per barrel of oil). Finally, the average across all of the published estimates is $85 per ton ($11 per barrel of oil). How should the content of Figure 3 be read, given all of the disagreement that it reveals? Richard Tol, an economist from Germany, read the data to mean that $45 per ton should be interpreted as the upper bound for a reasonable “best” estimate of the social cost of carbon; this is $6 per barrel of oil. Thomas Downing (2005), a geographer from the Stockholm Environment Institute office in the United Kingdom looked at the same distribution through the lens of enormous experience in developing countries where changes in climate produce enormous displacement effects that cannot be quantified in terms of currencies. He read the data to mean that $45 per ton or $6 per barrel of oil should be interpreted as a lower bound to the true social cost of carbon. I have been told that presenting such a figure in a political environment would allow people who do not think that climate is a problem to focus on the lower part of range and people who think that climate is a large problem to focus on the upper part of the range. Productive conversations between the two sides, I have also been told, would seldom be a product of such readings. For this, and a few other reasons, I now preach caution to all. To appropriately read Figure 3, we must work to understand what is going on behind the scenes. Why is the range so large? Which of the “Lines of Evidence” do the estimates include, and which do they miss? What combinations of underlying factors produce low or even negative estimates of social cost, and what other combinations support estimates on the high end of the scale? Answers to these questions can be enormously revealing. The choice of discount rate and the incorporation of equity weights are extremely important, and both lie within the purview of decisionmakers. High discount rates sustain low estimates because future damages become insignificant. Conversely, low discount rates produce high estimates because future damages are important. Meanwhile, strong equity weighting across the globe support high estimates because poor developing countries are most vulnerable. Conversely, weak or no equity weighting can produce low estimates because poor developing countries do not factor heavily in the overall calculation. It turns out, however, that several scientific parameters that decisionmakers cannot choose are even more important in explaining the variability depicted in Figure 3. Indeed, climate sensitivity (i.e., the increase in global mean temperature that would result from a doubling of greenhouse gas concentrations from preindustrial levels) is the largest source of variation. It is possible to derive high estimates for the social cost of carbon even if you assume low discount rates and almost no equity weighting. All that is required is the assumption that the climate sensitivity lies at the high range of the latest range of estimates. Andronova and Schlesinger (2001), for example, find that the historical record could easily be explained with climate sensitivities as high as 8 or 9 degrees Centigrade (even though the TAR reported an upper bound of 5.5 degrees). Moreover, none of the estimates from which Figure 3 was drawn include the economic costs of “Risks from Extreme Climate Events” or “Risks from Future Large-Scale Discontinuities.” To offer one glimpse at the role that these sources of concern might play, I can report the results of some more recent work that focuses on what we know about when the Atlantic thermohaline circulation (the Gulf Stream when it flows close to the United States) might weaken or suddenly collapse. Schlesinger, et al. (2006) put the chance of collapse at 50 percent if the global mean temperature were to climb by another 2 degrees Centigrade. Put another way, Yohe, et al. (2006) show more than a 40 percent chance of collapse by 2105 along a “middle of the road” emissions scenario. Imposing a global policy targeted at a $100 per ton social cost of carbon ($12 per barrel of oil) would reduce that likelihood to 25 percent if it were initiated immediately; but only to 35 percent if it were delayed by 30 years. At this point, it is essential to re-emphasize the point that none of these critical scientific factors can be decided by committee deliberation and popular elections. Their values are up to nature to decide, and we simply do not know what she has in the cards for us. The bottom-line is that the planet faces significant risks whose economic impacts have not yet been quantified. We have some idea of their likelihood, though, and so it is impossible to claim with certainty that they will not materialize as the future unfolds. What should we do? We should recognize that the climate policy will be adjusted over time as we learn more, especially if all (or even one) of the really bad news scenarios begin to materialize. We should also recognize that these adjustments could significantly and immediately change the economic environment in which we will be living. Moreover, we should recognize that these adjustments might be required sooner rather than later. All of this risk in the policy realm suggests an alternative method for estimating the social cost of carbon. Yohe, et al. (2004) conducted a simple “act-then-learn” experiment which showed that the expected discounted cost of global policy adjustment in 2035 could be minimized if a modest hedging policy were begun now. Their work suggests a risk-based social cost of carbon in 2005 equal to about $10 per ton ($1.50 per barrel of oil). And their approach makes uncertainty is the reason to act in the near term rather than a reason to delay. To be clear, tacking on $1.50 to the price of a barrel of oil will not do the trick. This risk based social cost would increase over time at the rate of interest. So it would be $3 per barrel in 2020 and $5 per barrel just after 2030. The critical component of the policy, and this estimate of social cost, is not the starting point. Consistent with the observation by Watkiss, et al. (2005) that the traditionally computed social cost of carbon increases over time, it is the persistent and predictable ratcheting-up of the effective price of carbon that would give the hedging strategy any traction at all. This observation brings me to my last point–identifying a second potentially expensive consequence of ignoring the hidden climate cost of oil. Failing to include estimates of the social cost of the carbon content of oil simply makes projects that use more oil or provide more oil more likely to go forward. Why? Because the calculations upon which the investment decisions would be made would inappropriately underestimate true costs. They would, in other words, show exaggerated benefit-cost ratios because the denominators would be too low. Conversely, failing to include the social cost of the carbon content of oil makes projects that conserve oil or provide alternative sources of energy less likely to go forward. They would simply show deflated benefit-cost ratios because the numerators would be too low. So, what if I had to pick a number? What would I say if asked to estimate place the hidden social cost of oil in perspective? I think that my $1.50 per barrel risk-based estimate is too low, since our analysis assumed immediate global participation in any policy response 2005 and it captured only a very limited set of possible sources of uncertainty. Given all of the impacts that are not yet part of the more traditional approaches, though, I do not think that the $6 per barrel estimate that separated Tol from Downing is too high. If pressed, I would probably say $5 per barrel for 2006, but I could be just as comfortable with $10. Indeed, I would insist only that the social cost attributed to oil for its climate impacts increase over time at the real rate of interest. Again, thank you for the opportunity to be here today, and thank you for your attention. “HIGH COST OF CRUDE:
THE NEW CURRENCY OF FOREIGN POLICY”
Wednesday, November 16, 2006
Opening Statement
HON. RICHARD G. LUGAR
U.S. Senator From Indiana,
Chairman, Senate Committee on Foreign Relations
The committee meets today to examine the effects of U.S. oil consumption on American foreign policy and on our wider economic and security interests. High oil prices have hurt American consumers at the gas pump, and record revenues flowing into oil producing nations are changing the world’s geopolitical landscape. Increasingly, oil is the currency through which countries leverage their interests against oil dependent nations such as ours. Oil is not just another commodity. It occupies a position of singular importance in the American economy and way of life. In 2003, each American consumed about 25 barrels of oil. That is more than double the per capita consumption in the United Kingdom, Germany, and France and more than 15 times that of China. With less than 5 percent of the world’s population, the United States consumes 25 percent of its oil. Higher oil prices have helped drive the consumer price index up 4.7 percent during the past year. Motorists felt this pinch at the pump long before the destruction of Hurricanes Katrina and Rita. This year, the United States has spent about $19 billion per month on oil imports. The cost of imported oil now accounts for approximately one-third of our trade deficit. In the short run, our dependence on oil has created a drag on economic performance at home and troubling national security burdens overseas. In the long run, this dependence is pushing the United States toward an economic disaster that could mean diminished living standards, increased risks of war, and accelerated environmental degradation. Up to this point, the main issues surrounding oil have been how much we have to pay for it and whether we will experience supply disruptions. But in decades to come, the issue may be whether the world’s supply of oil is abundant and accessible enough to support continued economic growth, both in the industrialized West and in large rapidly growing economies like China and India. When we reach the point where the world’s oil- hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict than it already is. Since 1991, we have fought two major wars in the oil-rich Middle East, and oil infrastructure and shipping lanes are targets for terrorism. In addition to the enormous dollar cost we pay for the military strength to maintain our access to foreign oil, our petroleum dependence exacts a high price in terms of foreign policy and international security. Massive infusions of oil revenue distort regional politics and can embolden leaders hostile to U.S. interests. Iran, where oil income has soared 30 percent this year, threatened last month to use oil as a weapon to protect its nuclear ambitions. At a time when the international community is attempting to persuade Iran to live up to its nonproliferation obligations, our economic leverage on Iran has declined due to its burgeoning oil revenues. Similarly, the Chavez government in Venezuela resists hemispheric calls for moderation, in part because it has been emboldened by growing oil revenues. Russia uses its gushing oil and natural gas income and reserves as leverage over new democracies in East Europe. Globally, critical international security goals, including countering nuclear weapons proliferation, supporting new democracies, and promoting sustainable development are at risk because of dependence on oil. Diversification of our supplies of conventional and nonconventional oil, such as Canada’s tar sands, is necessary and under way. Yet because the oil market is globally integrated, the impact of this diversification is limited. Our current rate of oil consumption, coupled with rapidly increasing oil demand in China, India, and elsewhere, will leave us vulnerable to events in the tumultuous Middle East and to unreliable suppliers such as Venezuela. Any solution will require much more than a diversification and expansion of our oil supply. Despite the widening discussion of our energy vulnerability, the U.S. political system has been capable of only tentative remedial steps that have not disturbed the prevailing oil culture. The economic sacrifices imposed on Americans recently by rising oil prices have expanded our nation’s concern about oil dependence. But in the past, as oil price shocks have receded, motivations for action have also waned. Currently, policies for mediating the negative effects of oil dependence continue to be hamstrung in debate between supply-side approaches and those preferring to decrease demand. We must consider whether the political will now exists to commit to a comprehensive strategy. Our weak response to our own energy vulnerability is all the more frustrating given that alternatives to oil do exist. Oil’s importance is the result of industrial and consumption choices of the past. We now must choose a different path. Without eliminating oil imports or abandoning our cars, we can offset a significant portion of demand for oil by giving American consumers a real choice of automotive fuel. We must end oil’s near monopoly on the transportation sector, which accounts for 60 percent of American oil consumption. I believe that biofuels, combined with hybrid and other technologies, can move us away from our extreme dependence on oil. Corn-based ethanol is already providing many Midwesterners with a lower cost fuel option. Cellulosic ethanol, which is made of more abundant and less expensive biomass, is poised for a commercial takeoff. We made progress in the 2005 energy bill, which includes incentives to produce 7.5 billion gallons of renewable biofuel annually. I introduced legislation last week that would require manufacturers to install flexible-fuel technology in all new cars. This is an easy and cheap modification, which allows vehicles to run on a mixture of 85 percent ethanol and 15 percent gasoline. We will get even greater payoffs for our investment in oil alternatives if American technological advances can be marketed to the rest of the world. Nations containing about 85 percent of the world’s population depend on oil imports. These nations could reap many of the same security and economic benefits by breaking their oil import chains. Developing countries could improve their balance of payments and promote rural development by growing profitable biomass, while offering new markets for fuel technologies. We need to think creatively about cooperating with other countries to address today’s global energy challenges. For example, earlier this month I introduced S. 1950, “The United States-India Energy Security Cooperation Act of 2005.” This bill would promote greater cooperation with India on clean coal technology, ethanol, and other energy sources. I am particularly pleased to welcome two old friends, today, who will assist us in our inquiry today. Dr. James Schlesinger, former Secretary of Defense, Secretary of Energy, and Director of Central Intelligence, has seen America through oil shocks and has remained committed to improving America’s energy situation. He is a keen analyst of the geopolitical consequences of oil dependence, as well as an authority on America’s energy future. Also joining us is Mr. James Woolsey, former Director of Central Intelligence. In 1999, Jim and I–and I would stress my dependance on his tutelage in this–coauthored “The New Petroleum,” an article in Foreign Affairs that laid out the case for a greater role for cellulosic ethanol. He has continued to serve as a leading advocate for forward-looking reforms of our energy policy. We thank our distinguished witnesses for coming and look forward to their insights.
JAMES SCHLESINGER
Prepared Statement
HON. JAMES SCHLESINGER
Senior Advisor, Lehman Brothers, Washington, DC
BEFORE THE
U.S. Senate Committee on Foreign Relations
NOVEMBER 16, 2005
विस्तारः (द्रष्टुं नोद्यम्)
James R. Schlesinger made a statement before the United States Senate in November of 2005. You may recall that Schlesinger was Secretary of Defense during the Nixon and Ford Administrations. The similarity between Schlesinger’s statement and planetforlife is a coincidence. The single graphic is very similar because it obviously came from the same source.
Here is an excerpt from Schlesinger’s biography.[1]
“To replace Richardson, President Nixon chose James R. Schlesinger, who was born on 15 February 1929 in New York City and educated at Harvard University, where he earned a B.A. (1950), M.A. (1952), and Ph.D. (1956) in economics. Between 1955 and 1963 he taught economics at the University of Virginia and in 1960 published The Political Economy of National Security. In 1963 he moved to the Rand Corporation, where he worked until 1969, in the later years as director of strategic studies.”
Mr. Chairman, members of the committee, I thank the committee for this opportunity to discuss the quest for energy security, the implications of our heavy dependence on imported oil, the rise in oil prices, and their manifold political and economic repercussions for our nation. In so many ways, the use of oil as our primary energy source turns out to be a two-edged sword. Given that dependence, the ramifications are too numerous to discuss in detail. Given the necessary limitations on time, I must be selective. Therefore, I shall touch only upon several salient points.
- Mr. Chairman, the problem of energy security is of relatively recent origin. When mankind depended upon windmills, oxen, horses, etc., energy security was not a strategic problem. Instead, as a strategic problem it is a development of modem times–and reflects most crucially the turn to fossil fuels as increasingly the source of energy. The Industrial Revolution in the 19th century, strongly reinforced by the rapid growth of oil-dependent transportation in the 20th, unavoidably posed the question of security of supply. Imperial Germany took over Lorraine with its coal fields after the Franco-Prussian War–to insure its energy security. When Britain, pushed by Churchill, converted its Navy to oil early in the 20th century, it sought a secure supply of oil under its own control in the Persian Gulf–which incidentally increased its concern for the security of the Suez Canal. For the United States, where the production of oil had started and for long was primarily located, the question of security of supply did not arise until the 1960s and 1970s. Since then, we have regularly talked about–and sought by various measures–to achieve greater energy security. Such measures, limited as they were, have generally proved unsatisfactory. The nation’s dependence on imported hydrocarbons has continued to surge. Mr. Chairman, until such time as new technologies, barely on the horizon, can wean us from our dependence on oil and gas, we shall continue to be plagued by energy insecurity. We shall not end dependence on imported oil nor, what is the hope of some, end dependence on the volatile Middle East–with all the political and economic consequences that flow from that reality. That is not to say that various measures and inventions will not, from time to time, shave our growing dependence, but we will not end it. Instead of energy security, we shall have to acknowledge and to live with various degrees of insecurity. To be sure, we have certain short-term problems to which I shall presently turn.
More importantly, we face a fundamental, longer term problem.
In the decades ahead, we do not know precisely when,
we shall reach a point, a plateau or peak,
beyond which we shall be unable further to increase production of conventional oil worldwide.
We need to understand that problem now and to begin to prepare for that transition.
The underlying problem is that
for more than three decades,
our production has outrun new discoveries.
Most of our giant fields were found 40 years ago and more.
Even today, the bulk of our production comes from these old—and aging—giant fields.
More recent discoveries tend to be small with high decline rates—and are soon exhausted.
Since the issue is crucial—and is not widely understood—I have prepared a chart which lays bare the problem.
Mr. Chairman, the upshot is, quite simply, that,
as the years roll by, the entire world will face a prospectively growing problem of energy supply.
Moreover, we shall inevitably see a growing dependency on the volatile Middle East.
We shall have to learn to live with degrees of insecurity–rather than the elusive security we have long sought. To be sure, some insecurity will be mitigated by the Strategic Petroleum Reserve, and other emergency measures. That will provide some protection against (short-term) supply disruptions, but it will not provide protection against the fundamental long-term problem.
- In addition to the long-term problem of the prospective limit on conventional oil production, we have a number of short-term or cyclical problems that have contributed to the current stringency and current high prices. Spare production capacity has essentially disappeared. This reflects the volatility of oil prices, which has led to a low rate of investment in new capacity, as well as an unexpected surge of demand, particularly from China and the United States. For many years, we have had excess capacity in refining. That, too, has largely disappeared, and we lack capacity to refine the heavy, sour crudes that remain available. Here in the United States, the problem has been amplified by the battering of gulf infrastructure by Hurricanes Katrina and Rita. We also have an added, self-inflicted problem of some 17 boutique blends of gasoline, mandated by state authorities. The insurgency in Iraq has prevented the increase in production, even to the prewar level, that many expected. Long- term sanctions against Iraq, Iran, and Libya, both United States and international, have reduced their contribution to world supply. This has taken place against inelastic domestic production of natural gas. There are, in addition, problems of electric power generation and transmission. The point about all of these is these are not inherent problems. In principal, they would all yield to additional investment. Yet, we must bear in mind that investment activity depends upon price signals, and that there is a long period of gestation before additional investment activity brings supply to market. Some of these problems may, however, be ameliorated by changes in law or in regulation.
By about 2010, we should see a significant increase in oil production
as a result of investment activity now under way.
There is a danger that any easing of the price of crude oil will, once again,
dispel the recognition that there is a finite limit to conventional oil.
In no way do the prospective investment decisions solve the long-term, fundamental problem of oil supply.
-
Let me turn now to the political and economic ramifications. Again, let me underscore that energy actions tend to be a two-edged sword. To some extent, the recent higher prices for oil reflect some of our own prior policies and actions. For example, the sanctions imposed upon various rogue nations, by reducing world supply, have resulted in higher prices. Operation Iraqi Freedom, followed by the insurgency, has caused unrest in the Middle East. The consequence has been somewhat lower production and a significant risk premium that, again, has raised the price of oil. The effect of higher oil prices has been significantly higher incomes for producers. A much higher level of income has meant that a range of nations, including Russia, Iran, Venezuela, as well as gulf Arab nations have had their economic problems substantially eased. As a result, they have become less amenable to American policy initiatives. Perhaps more importantly, the flow of funds into the Middle East inevitably has added to the moneys that can be transferred to terrorists. As long as the motivation is there and controls remain inadequate, that means that the terrorists will continue to be adequately or amply funded. To the extent that we begin to run into supply limitations and to the extent that we all grow more dependent on the Middle East, this problem of spillover funding benefits for terrorists is not going to go away.
-
There are, of course, additional problems of an economic nature. We all understand that higher oil prices can depress spending on other goods and services–and thereby cause slower growth rates and possibly a worldwide recession. The reverse side of rising receipts for producers is, of course, rising out-payments by consumer nations. This can readily augment structural imbalances. This year, the American balance-of- payments deficit looks to be almost three-quarters of a trillion dollars. That is not small change. Of the well over $700 billion of that deficit, some $300 billion comes from oil and gas. It is recognized that the U.S. balance-of-payments deficit represents the locomotive that drives much of the world’s economies. In performing this service–for which we get little thanks–the United States is steadily adding to its financial obligations to others. How long this process can continue is uncertain, but high oil prices add to the dilemma.
Finally, Mr. Chairman, I must point to another problem. The United States is today the preponderant military power in the world.
Still, our military establishment is heavily dependent upon oil.
At a minimum, the rising oil price poses a budgetary problem for the Department of Defense
at a time that our national budget is increasingly strained.
Moreover, in the longer run, as we face the prospect of a plateau in which we are no longer able, worldwide,
to increase the production of oil against presumably still-rising demand,
the question is whether the Department of Defense will still be able to obtain the supply of oil products
necessary for maintaining our military preponderance.
In that prospective world,
the Department of Defense will face all sorts of pressures at home and abroad
to curtail its use of petroleum products,
thereby endangering its overall military effectiveness.
In closing, Mr. Chairman, I trust that I have fulfilled the request in your letter of invitation to analyze “the complexity of U.S. reliance on imported energy sources, particularly oil, and the difficulties the United States faces in mediating detrimental effects of this dependency.” Even in the short run, actions that we take may substantially increase the resources and reduce the economic and political pressures on states that are hostile to us.
In the longer run, unless we take serious steps to prepare for the day
that we can no longer increase production of conventional oil,
we are faced with the possibility of a major economic shock—and the political unrest that would ensue.
The United States has just over four percent of the world’s population
and uses roughly twenty-five percent of the world’s oil production.
In a sense, this statistic in itself is misleading,
because the United States produces roughly twenty to twenty-five percent of the gross world product.
Nonetheless, that statistic does underscore our potential vulnerability
in an era that we may no longer be able to produce additional conventional crude oil worldwide.
Thank you very much, Mr. Chairman. I shall be happy to answer any questions that you or the Members of the Committee may have.
JAMES WOOLSEY
Prepared Statement
HON. R. JAMES WOOLSEY
Vice President, Booz Allen Hamilton, McClean, VA
BEFORE THE
U.S. Senate Committee on Foreign Relations
NOVEMBER 16, 2005
Mr. Chairman and members of the committee, it’s a real pleasure to appear before this committee today on this issue. I am appearing solely on my own behalf and represent no organization. By way of identification I served as Director of Central Intelligence, 1993-95, one of the four Presidential appointments I have held in two Republican and two Democratic administrations; these have been interspersed in a career that has been generally in the private practice of law and now in consulting. The substantial majority of the points I will make today are drawn from an August 2005 paper by former Secretary of State, George P. Shultz, and myself, although I have updated some points due to more recent work; the two of us are cochairmen of the Committee on the Present Danger and the full paper may be found at the committee’s Web site (www.fightingterror.org). Just over 4 years ago, on the eve of 9/11, the need to reduce radically our reliance on oil was not clear to many and in any case the path of doing so seemed a long and difficult one. Today both assumptions are being undermined by the risks of the post-9/11 world, by oil prices, and by technological progress in fuel efficiency and alternative fuels. There are at least seven major reasons why dependence on petroleum and its products for the lion’s share of the world’s transportation fuel creates special dangers in our time. These dangers are all driven by rigidities and potential vulnerabilities that have become serious problems because of the geopolitical realities of the early 21st century. Those who reason about these issues solely on the basis of abstract economic models that are designed to ignore such geopolitical realities will find much to disagree with in what follows. Although such models have utility in assessing the importance of more or less purely economic factors in the long run, as Lord Keynes famously remarked: “In the long run, we are all dead.” These dangers in turn give rise to two proposed directions for government policy in order to reduce our vulnerability rapidly. In both cases it is important that existing technology should be used, i.e., technology that is already in the market or can be so in the very near future and that is compatible with the existing transportation infrastructure. To this end government policies in the United States and other oil- importing countries should: (1) Encourage a shift to substantially more fuel-efficient vehicles within the existing transportation infrastructure, including promoting both battery development and a market for existing battery types for plug-in hybrid vehicles; and (2) encourage biofuels and other alternative and renewable fuels that can be produced from inexpensive and widely available feedstocks–wherever possible from waste products.
PETROLEUM DEPENDENCE: THE DANGERS
- The current transportation infrastructure is committed to oil and oil-compatible products This fact substantially increases the difficulty of responding to oil price increases or disruptions in supply by substituting other fuels. There is a range of fuels that can be used to produce electricity and heat and that can be used for other industrial uses, but petroleum and its products dominate the fuel market for vehicular transportation. With the important exception, described below, of a plug-in version of the hybrid gasoline/ electric vehicle, which will allow recharging hybrids from the electricity grid, substituting other fuels for petroleum in the vehicle fleet as a whole has generally required major, time- consuming, and expensive infrastructure changes. One exception has been some use of liquid natural gas (LNG) and other fuels for fleets of buses or delivery vehicles, although not substantially for privately owned ones, and the use of corn- derived ethanol mixed with gasoline in proportions up to 10 percent ethanol (“gasohol”) in some States. Neither has appreciably affected petroleum’s dominance of the transportation fuel market. Moreover, in the 1970s about 20 percent of our electricity was made from oil–so shifting electricity generation toward, say, renewables or nuclear power could save oil. But since today only about 3 percent of our electricity is oil-generated, a shift in the way we produce electricity would have almost no effect on the transportation or oil market. This could change over the long run, however, with the advent of plug-in hybrid vehicles, discussed below. There are imaginative proposals for transitioning to other fuels for transportation, such as hydrogen to power automotive fuel cells, but this would require major infrastructure investment and restructuring. If privately owned fuel cell vehicles were to be capable of being readily refueled, this would require reformers (equipment capable of reforming, say, natural gas into hydrogen) to be located at filling stations, and would also require natural gas to be available there as a hydrogen feed-stock. So not only would fuel cell development and technology for storing hydrogen on vehicles need to be further developed, but the automobile industry’s development and production of fuel cells also would need to be coordinated with the energy industry’s deployment of reformers and the fuel for them. Moving toward automotive fuel cells thus requires us to face a huge question of pace and coordination of large-scale changes by both the automotive and energy industries. This poses a sort of industrial Alphonse and Gaston dilemma: Who goes through the door first? (If, instead, it were decided that existing fuels such as gasoline were to be reformed into hydrogen on board vehicles instead of at filling stations, this would require onboard reformers to be developed and added to the fuel cell vehicles themselves–a very substantial undertaking.) It is because of such complications that the National Commission on Energy Policy concluded in its December 2004, report “Ending The Energy Stalemate” that “hydrogen offers little to no potential to improve oil security and reduce climate change risks in the next 20 years.” To have an impact on our vulnerabilities within the next decade or two, any competitor of oil-derived fuels will need to be compatible with the existing energy infrastructure and require only modest additions or amendments to it. 2. The Greater Middle East will continue to be the low-cost and dominant petroleum producer for the foreseeable future Home of around two-thirds of the world’s proven reserves of conventional oil–45 percent of it in just Saudi Arabia, Iraq, and Iran–the Greater Middle East will inevitably have to meet a growing percentage of world oil demand. This demand is expected to increase by more than 50 percent in the next two decades, from 78 million barrels per day (bbl/d) in 2002 to 118 bbl/d in 2025, according to the Federal Energy Information Administration. Much of this will come from expected demand growth in China and India. One need not argue that world oil production has peaked to see that this puts substantial strain on the global oil system. It will mean higher prices and potential supply disruptions and will put considerable leverage in the hands of governments in the Greater Middle East as well as in those of other oil-exporting states which have not been marked recently by stability and certainty: Russia, Venezuela, and Nigeria, for example. Deep-water drilling and other opportunities for increases in supply of conventional oil may provide important increases in supply but are unlikely to change this basic picture. Even if other production comes on line, e.g., from unconventional sources such as tar sands in Alberta or shale in the American West, their relatively high cost of production could permit low-cost producers, particularly Saudi Arabia, to increase production, drop prices for a time, and undermine the economic viability of the higher cost competitors, as occurred in the mid-1980s. For the foreseeable future, as long as vehicular transportation is dominated by oil as it is today, the Greater Middle East, and especially Saudi Arabia, will remain in the driver’s seat. 3. The petroleum infrastructure is highly vulnerable to terrorist and other attacks The radical Islamist movement, including but not exclusively al-Qaeda, has on a number of occasions explicitly called for worldwide attacks on the petroleum infrastructure and has carried some out in the Greater Middle East. A more well-planned attack than what has occurred to date–such as that set out in the opening pages of Robert Baer’s recent book, “Sleeping With the Devil” (terrorists flying an aircraft into the unique sulfur-cleaning towers in northeastern Saudi Arabia), could take some 6 million barrels per day off the market for a year or more, sending petroleum prices sharply upward to well over $100/barrel and severely damaging much of the world’s economy. Domestic infrastructure in the West is not immune from such disruption. U.S. refineries, for example, are concentrated in a few places, principally the gulf coast. The recent accident in the Texas City refinery–producing multiple fatalities–points out potential infrastructure vulnerabilities, as of course does this fall’s hurricane damage in the gulf. The Trans-Alaska Pipeline has been subject to several amateurish attacks that have taken it briefly out of commission; a seriously planned attack on it could be far more devastating. In view of these overall infrastructure vulnerabilities policy should not focus exclusively on petroleum imports, although such infrastructure vulnerabilities are likely to be the most severe in the Greater Middle East. It is there that terrorists have the easiest access, and the largest proportion of proven oil reserves and low-cost production are also located there. Nor is anything particularly useful accomplished by changing trade patterns. To a first approximation there is one worldwide oil market and it is not generally useful for the United States, for example, to import less from the Greater Middle East and for others then to import more from there. In effect, all of us oil-importing countries are in this together. 4. The possibility exists, particularly under regimes that could come to power in the Greater Middle East, of embargoes or other disruptions of supply It is often said that whoever governs the oil-rich nations of the Greater Middle East will need to sell their oil. This is not true, however, if the rulers choose to try to live, for most purposes, in the seventh century. Bin Laden has advocated, for example, major reductions in oil production and oil prices of $200/barrel or more. In 1979 there was a serious attempted coup in Saudi Arabia. Much of what the outside world saw was the seizure by Islamist fanatics of the Great Mosque in Mecca, but the effort was more widespread. Even if one is optimistic that democracy and the rule of law will spread in the Greater Middle East and that this will lead after a time to more peaceful and stable societies there, it is undeniable that there is substantial risk that for some time the region will be characterized by chaotic change and unpredictable governmental behavior. Reform, particularly if it is hesitant, has in a number of cases been trumped by radical takeovers (Jacobins, Bolsheviks). There is no reason to believe that the Greater Middle East is immune from these sorts of historic risks. 5. Wealth transfers from oil have been used, and continue to be used, to fund terrorism and its ideological support Estimates of the amount spent by the Saudis in the last 30 years spreading Wahhabi beliefs throughout the world vary from $70 billion to $100 billion. Furthermore, some oil-rich families of the Greater Middle East fund terrorist groups directly. The spread of Wahhabi doctrine–fanatically hostile to Shiite and Suffi Muslims, Jews, Christians, women, modernity, and much else–plays a major role with respect to Islamist terrorist groups: A role similar to that played by angry German nationalism with respect to Nazism in the decades after World War I. Not all angry German nationalists became Nazis and not all those schooled in Wahhabi beliefs become terrorists, but in each case the broader doctrine of hatred has provided the soil in which the particular totalitarian movement has grown. Whether in lectures in the madrassas of Pakistan, in textbooks printed by Wahhabis for Indonesian schoolchildren, or on bookshelves of mosques in the United States, the hatred spread by Wahhabis and funded by oil is evident and influential. On all points except allegiance to the Saudi State, Wahhabi and al-Qaeda beliefs are essentially the same. In this there is another rough parallel to the 1930s–between Wahhabis’ attitudes toward al-Qaeda and like-minded Salafist jihadi groups today and Stalinists’ attitude toward Trotskyites some 60 years ago. The only difference between Stalinists and Trotskyites was on the question whether allegiance to a single state was required or whether free-lance killing of enemies was permitted. But Stalinist hatred of Trotskyites and their free- lancing didn’t signify disagreement about underlying objectives, only tactics, and Wahhabi/Saudi cooperation with us in the fight against al-Qaeda doesn’t indicate fundamental disagreement between Wahhabis and al-Qaeda on, e.g., their common genocidal fanaticism about Shi’a, Jews, and homosexuals. So Wahhabi teaching basically supports al-Qaeda ideology. It is sometimes contended that we should not seek substitutes for oil because disruption of the flow of funds to the Greater Middle East could further radicalize the population of some states there. The solution, however, surely lies in helping these states diversify their economies over time, not in perpetually acquiescing to the economic rent they collect from oil exports and to the uses to which these revenues are put. 6. The current account deficits for a number of countries create risks ranging from major world economic disruption to deepening poverty, and could be substantial reduced by reducing oil imports The United States in essence borrows about $2 billion a day, every day, principally now from major Asian states, to finance its consumption. The single largest category of imports is the approximately $1 billion per working day borrowed to import oil. The accumulating debt increases the risk of a flight from the dollar or major increases in interest rates. Any such development could have major negative economic consequences for both the United States and its trading partners. For developing nations, the service of debt is a major factor in their continued poverty. For many, debt is heavily driven by the need to import oil that at today’s oil prices cannot be paid for by sales of agricultural products, textiles, and other typical developing nation exports. If such deficits are to be reduced, however, say by domestic production of substitutes for petroleum, this should be based on recognition of real economic value such as waste cleanup, soil replenishment, or other tangible benefits. 7. Global-warming gas emissions from man-made sources create at least the risk of climate change Although the point is not universally accepted, the weight of scientific opinion suggests that global warming gases produced by human activity form one important component of potential climate change. Oil products used in transportation provide a major share of U.S. man-made global warming gas emissions.
THREE PROPOSED DIRECTIONS FOR POLICY
The above considerations suggest that government policies with respect to the vehicular transportation market should point in the following directions: 1. Encourage improved vehicle mileage, using technology now in production Three currently available technologies stand out to improve vehicle mileage. Diesels First, modern diesel vehicles are coming to be capable of meeting rigorous emission standards (such as Tier 2 standards, being introduced into the United States, 2004-08). In this context it is possible without compromising environmental standards to take advantage of diesels’ substantial mileage advantage over gasoline-fueled internal combustion engines. Substantial penetration of diesels into the private vehicle market in Europe is one major reason why the average fleet mileage of such new vehicles is 42 miles per gallon in Europe and only 24 mpg in the United States. Although the United States has, since 1981, increased vehicle weight by 24 percent and horsepower by 93 percent, it has actually somewhat lost ground with respect to mileage over that near-quarter century, In the 12 years from 1975 to 1987, however, the United States improved the mileage of new vehicles from 15 to 26 mpg. Hybrid gasoline-electric Second, hybrid gasoline-electric vehicles now on the market show substantial fuel savings over their conventional counterparts. The National Commission on Energy Policy found that for the four hybrids on the market in December 2004 that had exact counterpart models with conventional gasoline engines, not only were mileage advantages quite significant (10-15 mpg) for the hybrids, but in each case the horsepower of the hybrid was higher than the horsepower of the conventional vehicle. Light-weight carbon composite construction Third, constructing vehicles with inexpensive versions of the carbon fiber composites that have been used for years for aircraft construction can substantially reduce vehicle weight and increase fuel efficiency while at the same time making the vehicle considerably safer than with current construction materials. This is set forth thoroughly in the 2004 report of the Rocky Mountain Institute’s “Winning the Oil Endgame.” Aerodynamic design can have major importance as well. This breaks the traditional tie between size and safety. Much lighter vehicles, large or small, can be substantially more fuel-efficient and also safer. Such composite use has already been used for automotive construction in Formula 1 race cars and is now being adopted by BMW and other automobile companies. The goal is mass-produced vehicles with 80 percent of the performance of hand-layup aerospace composites at 20 percent of the cost. Such construction is expected to approximately double the efficiency of a normal hybrid vehicle without increasing manufacturing cost. 2. Encourage the commercialization of alternative transportation fuels that can be available soon, are compatible with existing infrastructure, and can be derived from waste or otherwise produced cheaply Biomass (cellulosic) ethanol The use of ethanol produced from corn in the United States and sugar cane in Brazil has given birth to the commercialization of an alternative fuel that is coming to show substantial promise, particularly as new feedstocks are developed. Some 6 million vehicles in the United States, and all new vehicles in Brazil other than those that use solely ethanol, are capable of using ethanol in mixtures of up to 85 percent ethanol and 15 percent gasoline (E-85). These are called Flexible Fuel Vehicles (FFV) and require, compared to conventional vehicles, only a somewhat different kind of material for the fuel line and a differently programmed computer chip. The cost of incorporating this feature in new vehicles is trivial. Also, there are no large-scale changes in infrastructure required for ethanol use. It may be shipped in tank cars (and, in Brazil, in pipelines), and mixing it with gasoline is a simple matter. Although human beings have been producing ethanol, grain alcohol, from sugar and starch for millennia, it is only in recent years that the genetic engineering of biocatalysts has made possible such production from the hemicellulose and cellulose that constitute the substantial majority of the material in most plants. The genetically engineered material is in the biocatalyst only; there is no need for genetically modified plants. These developments may be compared in importance to the invention of thermal and catalytic cracking of petroleum in the first decades of the 20th century–processes which made it possible to use a very large share of petroleum to make gasoline rather than the tiny share that was available at the beginning of the century. For example, with such genetically engineered biocatalysts it is not only grains of corn but corn cobs and most of the rest of the corn plant that may be used to make ethanol. Such biomass, or cellulosic, ethanol is now likely to see commercial production begin first in a facility of the Canadian company, Iogen, with backing from Shell Oil, at a cost of around $1.30/gallon. The National Renewable Energy Laboratory estimates costs will drop to around $1.07/gallon over the next 5 years, and the Energy Commission estimates a drop in costs to 67-77 cents/gallon when the process is fully mature. The most common feedstocks will likely be agricultural wastes, such as rice straw, or natural grasses such as switchgrass, a variety of prairie grass that is often planted on soil bank land to replenish the soil’s fertility. There will be decided financial advantages in using as feedstocks any wastes which carry a tipping fee (a negative cost) to finance disposal–e.g., waste paper, or rice straw, which cannot be left in the fields after harvest because of its silicon content. Old or misstated data are sometimes cited for the proposition that huge amounts of land would have to be introduced into cultivation or taken away from food production in order to have such biomass available for cellulosic ethanol production. This is incorrect. The National Commission on Energy Policy reported in December that, if fleet mileage in the United States rises to 40 mpg–somewhat below the current European Union fleet average for new vehicles of 42 mpg and well below the current Japanese average of 47 mpg–then as switchgrass yields improve modestly to around 10 tons/acre it would take only 30 million acres of land to produce sufficient cellulosic ethanol to fuel half the U.S. passenger fleet. By way of calibration, this would essentially eliminate the need for oil imports for passenger vehicle fuel and would require only the amount of land now in the soil bank (the Conservation Reserve Program (CRP) on which such soil-restoring crops as switchgrass are already being grown. Practically speaking, one would probably use for ethanol production only a little over half of the soil bank lands and add to this some portion of the plants now grown as animal feed crops (for example, on the 70 million acres that now grow soybeans for animal feed). In short, the United States and many other countries should easily find sufficient land available for enough energy crop cultivation to make a substantial dent in oil use. There is also a common and erroneous impression that ethanol generally requires as much energy to produce as one obtains from using it and that its use does not substantially reduce global warming gas emissions. The production and use of ethanol merely recycles in a different way the CO2 that has been fixed by plants in the photosynthesis process. It does not release carbon that would otherwise stay stored underground, as occurs with fossil fuel use, but when starch, such as corn, is used for ethanol production much energy, including fossil-fuel energy, is consumed in the process of fertilizing, plowing, and harvesting. Even starch-based ethanol, however, does reduce greenhouse gas emissions by around 30 percent. Because so little energy is required to cultivate crops such as switchgrass for cellulosic ethanol production, and because electricity can be coproduced using the residues of such cellulosic fuel production, reductions in greenhouse gas emissions for celluslosic ethanol when compared to gasoline are greater than 100 percent. The production and use of cellulosic ethanol is, in other words, a carbon sink. Biodiesel and renewable diesel The National Commission on Energy Policy pointed out some of the problems with most current biodiesel “produced from rapeseed, soybean, and other vegetable oils–as well as . . . used cooking oils.” It said that these are “unlikely to become economic on a large scale” and that they could “cause problems when used in blends higher than 20 percent in older diesel engines.” It added that “waste oil is likely to contain impurities that give rise of undesirable emissions.” The Commission notes, however, that biodiesel is generally “compatible with existing distribution infrastructure” and outlines the potential of a newer process (“thermal depolymerization”) that produces renewable diesel without the above disadvantages, from “animal offal, agricultural residues, municipal solid waste, sewage, and old tires.” (This has recently been designated “Renewable Diesel” in the Energy Act of this past summer.) The Commission points to the current use of this process at a Conagra turkey processing facility in Carthage, Missouri, where a “20 million commercial-scale facility” is beginning to convert turkey offal into “a variety of useful products, from fertilizer to low-sulfur diesel fuel” at a potential average cost of “about 72 cents per gallon.” Other Alternative Fuels Progress has been made in recent years on utilizing not only coal but slag from strip mines, via gasification, for conversion into diesel fuel using a modern version of the gasified-coal-to-diesel process used in Germany during World War II. Qatar has begun a large-scale process of converting natural gas to diesel fuel. Outside the realm of conventional oil, the tar sands of Alberta and the oil shale of the Western United States exist in huge deposits, the exploitation of which is currently costly and accompanied by major environmental difficulties, but both definitely hold promise for a substantial increase in oil supply. 3. Plug-in hybrids and battery improvements A modification to hybrids could permit them to become “plug-in-hybrids,” drawing power from the electricity grid at night and using all electricity for short trips before they move to operating in their gasoline-electric mode as hybrids. With a plug-in hybrid vehicle one has the advantage of an electric car, but not the disadvantage. Electric cars cannot be recharged if their batteries run down at some spot away from electric power. But since all hybrids have tanks containing liquid fuel plug-in hybrids have no such disadvantage. The “vast majority of the most fuel-hungry trips are under 6 miles” and “well within the range” of current (nickel- metal hydride) batteries’ capacity, according to Huber and Mills (“The Bottomless Well,” 2005). Current Toyota Priuses sold in Japan and Europe have a button, that Toyota has removed for some reason on American vehicles, that permits all-electric driving for up to a kilometer; all that is really needed is to equip hybrids with adequate batteries so that this capability can be extended. Over half of all U.S. vehicles are driven less than 30 miles/day, so a plug-in hybrid that can obtain that range might go for many weeks without visiting the gasoline station. Other experts, however, emphasize that whether with existing nickel-metal-hydride battery types or with the more capable lithium-ion batteries now commercially available for computer and other applications, it is important that any battery used in a plug-in hybrid be capable of taking daily charging without being damaged and be capable of powering the vehicle at an adequate speed and argue that battery development will be necessary in order for this to be the case. But the California experience with electric vehicles (EVs) in the 1990s suggests otherwise. It demonstrated that batteries used in those vehicles, particularly the nickel-metal-hydride ones that were used in later EV models (some of which are still on the road), have easily shown the capability for being charged daily for a number of years. And at U. Cal. (Davis) Professor Andy Frank has been designing and operating plug-in hybrids for years that now, with commercially available batteries, operate all electrically for 60 miles at up to 60 mph before the hybrid gasoline-electric feature needs to be used. Whether development is needed for some improvements to lithium-ion batteries or only financial incentives for mass production of them or the more mature nickel-metal-hydride batteries, such efforts should have the highest priority because plug-in hybrids promise to revolutionize transportation economics and to have a dramatic effect on the problems caused by oil dependence. Moreover the attractiveness to the consumer of being able to use electricity from overnight charging for a substantial share of the day’s driving is stunning. The average residential price of electricity in the United States is about 8.5 cents/ kwh, and many utilities sell off-peak power for 2-4 cents/kwh. When one takes into consideration the different efficiencies of liquid-fueled and electric propulsion, then where the rubber meets the road the cost of powering a plug-in hybrid with average-cost residential electricity would be about 40 percent of the cost of powering the same vehicle with today’s approximately $2.50/gallon gasoline, or, said another way, for the consumer to be able to buy fuel in the form of electricity at the equivalent of $1/gallon gasoline. Using off-peak power would then equate to being able to buy 25-to-50 cent/gallon gasoline. Given the burdensome cost imposed by current fuel prices on commuters and others who need to drive substantial distances, the possibility of powering one’s family vehicle with fuel that can cost as little as one-tenth of today’s gasoline (in the U.S. market) should solve rapidly the question whether there would be public interest in and acceptability of plug-in hybrids. Although the use of off-peak power for plug-in hybrids should not require substantial new investments in electricity generation for some time (until millions of plug-ins are on the road), greater reliance on electricity for transportation should lead us to look particularly to the security of the electricity grid as well as the fuel we use to generate electricity. In the United States the 2002 report of the National Academies of Science, Engineering, and Medicine (“Making the Nation Safer”) emphasized particularly the need to improve the security of transformers and of the Supervisory Control and Data Acquisition (SCADA) systems in the face of terrorist threats. The National Commission on Energy Policy has seconded those concerns. With or without the advent of plug-in hybrids, these electricity grid vulnerabilities require urgent attention.
CONCLUSION
The dangers from oil dependence in today’s world require us both to look to ways to reduce demand for oil and to increase supply of transportation fuel by methods beyond the increase of oil production. The realistic opportunities for reducing demand soon suggest that government policies should encourage hybrid gasoline-electric vehicles, particularly the battery work needed to bring plug-in versions thereof to the market, and modern diesel technology. The realistic opportunities for increasing supply of transportation fuel soon suggest that government policies should encourage the commercialization of alternative fuels that can be used in the existing infrastructure: Cellulosic ethanol and biodiesel/renewable diesel. Both of these fuels could be introduced more quickly and efficiently if they achieve cost advantages from the utilization of waste products as feedstocks. The effects of these policies are multiplicative. All should be pursued since it is impossible to predict which will be fully successful or at what pace, even though all are today either beginning commercial production or are nearly to that point. The battery development for plug-in hybrids is of substantial importance and should for the time being replace the current r&d emphasis on automotive hydrogen fuel cells. If even one of these technologies is moved promptly into the market, the reduction in oil dependence could be substantial. If several begin to be successfully introduced into large-scale use, the reduction could be stunning. For example, a 50-mpg hybrid gasoline/electric vehicle, on the road today, if constructed from carbon composites would achieve around 100 mpg. If it were to operate on 85 percent cellulosic ethanol or a similar proportion of biodiesel or renewable diesel fuel, it would be achieving hundreds of miles per gallon of petroleum-derived fuel. If it were a plug-in version operating on either upgraded nickel-metal-hydride or newer lithium-ion batteries so that 30-mile trips or more could be undertaken on its overnight charge before it began utilizing liquid fuel at all, it could be obtaining in the range of 1,000 mpg (of petroleum). A range of important objectives–economic, geopolitical, environmental–would be served by our embarking on such a path. Of greatest importance, we would be substantially more secure.