Witness Panel 1

• Mr. Amory Lovins

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  Witness Panel 1

  Mr. Amory Lovins

  How innovative technologies, business strategies, and policies
  can dramatically enhance energy security and prosperity

  Invited Testimony to United States Senate Committee on Energy and Natural Resources
  Hearing on Energy Independence, SD-366, 0930–1130 Tuesday 7 March 2006

  AMORY B. LOVINS , CHIEF EXECUTIVE OFFICER
  ROCKY MOUNTAIN INSTITUTE
  ________________________________________________________________________

  Both energy independence and its purpose, energy security, rest on three pillars:

  1. 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.

  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  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.  DOE policy that didn’t undercut DoD’s mission would:
  • shift from brittle energy architecture that makes major failure inevitable to more efficient, resilient, diverse, dispersed systems that make it impossible; 
  • avoid electricity investments that are meant to prevent blackouts but instead make them bigger and more frequent;
  • stop creating attractive nuisances for terrorists, from vulnerable LNG and nuclear facilities to overcentralized U.S. and Iraqi electric infrastructure; 
  • acknowledge that 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’s 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: 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 —making LNG needless and uncompetitive.

  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.  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.

  Our study shows how the U.S. can redouble the efficiency of using oil at an average cost  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.

  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.  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. 

  Oil elimination’s compelling business logic would drive its eventual adoption. But sup¬¬portive 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 superefficient cars far more effectively than gasoline taxes or efficiency standards, and would make money for both consumers and automakers.  Novel policies could also support automotive retooling and re¬train¬ing, superefficient 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 led Wal-Mart to launch a plan to double its heavy truck fleet’s 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 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. 

  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.
  
  

• Ms. Susan Cischke

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  Witness Panel 1

  Ms. Susan Cischke

  EMBARGOED UNTIL DELIVERED
  STATEMENT OF:
  Susan M. Cischke
  Vice President of Environmental and Safety Engineering
  Ford Motor Company
  Senate Energy and Natural Resources Committee
  "The Goal of U.S. Energy Independence"
  Tuesday, March 7, 2006
  Page 2 of 6
  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
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  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.
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  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
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  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
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  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 Honorable R. James Woolsey

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  Witness Panel 1

  The Honorable R. James Woolsey

  U.S. Senate Committee on Energy

  March 7, 2006

  Energy Independence

  Testimony of

  R. James Woolsey

   
   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 US 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 US, 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:

  1.  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 US, 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 US, 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 US 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 US 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 US.  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 US 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, 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 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 depolymerization”) 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 US 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 US 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.     
  

• Mr. Frank Verrastro

  Director and Senior Fellow, Energy and National Security Program

  Center for Strategic and International Studies

  Read statement

  Witness Panel 1

  Mr. Frank Verrastro

  Testimony before the
  Committee on Energy and Natural Resources
  United States Senate
  “Comments and Observations on the Topic
  of U.S. Energy Independence”
  March 7, 2006
  A Statement by
  FRANK VERRASTRO
  Director and Senior Fellow, Energy Program
  CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES, 1800 K STREET, NW,WASHINGTON, DC 20006
  TELEPHONE: (202) 887-0200; FACSIMILE: (202) 775-3199 WWW.CSIS.ORG
  
  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 EnergyWorld
  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.
  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 CAFÉ 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 CAFÉ 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 longlived
  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 CAFÉ (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.