[Senate Hearing 109-860]
[From the U.S. Government Publishing Office]
S. Hrg. 109-860
ENERGY SECURITY AND OIL DEPENDENCE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 16, 2006
__________
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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
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Page
Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening
statement...................................................... 34
Prepared statement........................................... 35
Coleman, Hon. Norm, U.S. Senator from Minnesota.................. 3
Grumet, Jason S., Executive Director, National Commission on
Energy Policy, Washington, DC.................................. 12
Prepared statement........................................... 21
Khosla, Vinod, partner, Khosla Ventures, Menlo Park, Ca.......... 3
Prepared statement........................................... 8
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Additional Prepared Statement Submitted for the Record
Feingold, Hon. Russell D., U.S. Senator from Wisconsin........... 57
(iii)
ENERGY SECURITY AND OIL DEPENDENCE
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TUESDAY, MAY 16, 2006
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met at 9:34 a.m., in room SD-419, Dirksen
Senate Office Building, Hon. Richard G. Lugar (chairman of the
committee) presiding.
Present: Senators Lugar, Chafee, Coleman, Martinez, and
Biden.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order.
The 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 costs to
the United States 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
underinvestment 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 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 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 Senate bill 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 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 the 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. We look forward to your insights.
Your full statements will be made a part of the record, but we
will ask you to proceed as comprehensively as you wish. The
purpose of the hearing is to hear you and then for members to
question you and for you to enhance our experience with these
issues and, hopefully, with the public that is viewing this
hearing.
I mention in advance, so that this will not be
disconcerting to you as witnesses or to those participating in
the hearing, that we are scheduled to have a rollcall vote on
the Senate floor at approximately 10 minutes after 10. These
things have a way sometimes of being extended onward, but at
some point I will call a recess of the committee so that all of
us will be present to hear what you are saying. You will have a
full audience of Senators in that case, and then after a short
recess to have votes cast by Senators who are here, we will be
back into action again.
We thank you for coming. I note the presence of my
colleague, Senator Coleman. Senator, do you have an opening
comment or thought this morning before our witnesses begin
their testimony?
STATEMENT OF HON. NORM COLEMAN, U.S. SENATOR FROM MINNESOTA
Senator Coleman. I am looking forward to hearing the
testimony, Mr. Chairman, and I want to thank you for having
this hearing. I think this is one of the most important issues
facing this country today. There's no question about it. It is
a national security issue. It is an economic security issue. It
is about our present. It is about our future. So I am glad that
we are thinking outside the barrel, and I think this is an
opportunity. I am just thrilled to be here. So with that, I
want to hear from the witnesses.
The Chairman. Thank you very much, Senator.
We will proceed with you, Mr. Khosla, if you would give
your testimony.
STATEMENT OF VINOD KHOSLA, PARTNER, KHOSLA VENTURES, MENLO
PARK, CA
Mr. Khosla. Thank you, Mr. Chairman, for this opportunity
to speak to you and the rest of the committee and other guests
about this important issue of America's energy independence.
Since the President's State of the Union and rising prices
at the pumps, there has been a lot of talk about oil addiction.
But I come here not so much to talk about what must be done
because there has been a lot of talk about that, but rather,
how to get it done simply and without a lot of ruffled
feathers, aligned with the major political interests, and in a
fashion that is not only politically correct, but also the
correct thing to do. For once, those things coincide.
If it was not for rapid growth of our domestic ethanol
industry, Americans would be seeing prices approaching $4 a
gallon or more. For comparison, the Department of Energy has
estimated that ANWR drilling would save 1 cent per gallon at
the pump by 2025, according to a quote in the most recent
Fortune magazine. Because of this unusual opportunity, we have
the ability to be the architects of a new global development
plan, not just an American plan, a sort of a Marshall Plan for
our times that could support technological advancements and
sustainable development of a global alternative to petroleum.
And what is most attractive to me is it takes almost no money
to do it.
I come here with very ambitious goals, but goals that are
grounded in science, technology, and a practical knowledge of
business. Having gone through similar industry transitions in
computing, in the Internet, and in telecommunications, I can
tell you that ethanol and biofuels, in general, do not have to
be an alternative fuel. In fact, they can be our mainstream
fuel. More importantly, with a few policy changes, we can
achieve this transition not by 2040 or 2050, but be
irreversibly down a new path of energy independence in less
than 7 years, in my view.
But before I go there, let me talk about some assertions
that, at first, seem implausible. I do not believe we need any
oil for cars and light trucks, and we definitely do not need to
wait for hydrogen. We do not need new cars, new engine designs,
or new distribution systems, and this rapid changeover within 7
years that I talked about, in fact, is economically feasible,
possible, and relatively little cost. All this at little cost
to consumers, the Government, and automakers.
That might seem implausible, but I hope I can convince you
that it is at least plausible. Brazil went from 4 percent of
their new cars sold being flex fuel cars to 80 percent in less
than 3 years, all driven by consumer demand. They reduced
petroleum usage by 40 percent. All the scenarios I have seen in
this country talk about doing that in 30, 50 years, or longer.
It happened because ethanol costs 75 cents a gallon to produce
in Brazil versus petroleum production costs that are between
$1.60 a gallon to $2.20. In fact, in the 10th-largest car
market in the world, which is Brazil, rumor has it that VW is
planning on phasing out all gasoline-only cars. When a major
automaker starts to not make gasoline cars in a major market,
we should be paying attention. All this has come with a 60- to
80-percent reduction in greenhouse gas emissions and $50
billion in import savings for a small economy like Brazil.
Hopefully, that convinces us that it is at least plausible.
So the next question I ask is how we go from the plausible
to the possible. Many of us have heard that there are between 5
million to 6 million cars capable of ethanol, FFVs, and a 4-
billion-gallon-a-year supply of ethanol in this country
already. But to make it more visceral, I submit that at least
in the State of California, there are almost as many flex fuel
cars on the roads as diesel vehicles. That should prove to us
that this is, in fact, possible. U.S. production costs for corn
ethanol are about $1 a gallon, far below the cost of petroleum.
And a rapid increase in capacity, 20 percent or more per year,
is already in process.
So I then ask if, in fact, it is possible, what makes it
probable. There are a few issues that come to mind, but I want
to give you a sense of what I hear about this new revolution
that has quietly been taking place for many, many years in
rural America. My friends from the Midwest tell me that ethanol
is the talk of every coffee shop in the Midwest. It is the most
important topic in rural America in decades. But it also may be
the most important thing for global peace and welfare, for the
climate crisis, and for consumers.
Fortunately, this time around, 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.
Consumer polls support the same idea. Tom Friedman,
reciting a New York Times poll, suggested that 89 percent of
U.S. adults favor a mandate for more efficient cars. When asked
if they want higher taxes on gasoline, 87 percent say no, but
when asked if they favor gasoline taxes to reduce our
dependence on foreign oil, that 87 percent drops to 37 percent.
When asked if they favor gasoline taxes to reduce global
warming, that 87 percent drops to 34 percent. The American
people want that.
The oil interests and the American Petroleum Institute keep
propagating myths like insufficient land, poor energy balance,
and high production costs to curb enthusiasm for ethanol. This
to me is reminiscent of the tobacco companies funding studies
to prove that smoking does not cause cancer. The NRDC, somebody
I trust a lot more than the American Petroleum Institute, has
estimated that it takes only 114 million acres of land to
replace our gasoline. Argonne National Labs, a U.S. Government
lab, and UC Berkeley, among others, have discounted the energy
balance studies. In my opinion, these are either bogus or ill-
informed claims, and I hope we can address these falsehoods one
by one.
First, on crop lands. Brazil has had a 4X increase since
1975 in the yield of ethanol per acre. Knowledgeable scientists
there see a path to another 4X. In the United States, I believe
gallons per acre can be extended by about 8-10 times what they
are today, about 400 to 500 gallons per acre, even without the
innovations that are commonplace in Silicon Valley. Based on my
personal forecasts, I can see yields increasing all the way to
3,000 gallons per acre, conservatively, and 5,000 gallons per
acre, optimistically, in the next 25 years, compared to about
400 gallons per acre today. This could demolish all energy and
land use arguments. Based on my forecasts, including the
considerable upside afforded by technology innovations,
biomass-based ethanol can replace almost all of our gasoline
needs in 25 years, using less than 60 million acres of land.
In the United States, the ethanol industry sold about 1.6
gallons of ethanol at $1.20 a gallon in 2000. In 2005, at $1.50
a gallon, they sold 4 billion gallons. My personal estimates
say that at prices for ethanol between $1.35-$1.40 a gallon,
approximately, you can build plants and pay off all cash flow
and debt requirements. Those numbers are far below the numbers
we are seeing today in the marketplace. Today, with prices
where they are, one can pay off a new plant in less than a
year, far less than the 7 years that could be standard for
investors.
While it is disturbing to me to see some factions calling
for permanent extensions of the credits, instead of supporting
variable credits or other structures that would provide them
insurance if oil prices were ever manipulated that I believe is
possible, I do think, in general, this is a very viable
industry with or without supports. We have sufficient land and
energy balance and economics are favorable for ethanol as a
transportation fuel. Consumers will demand it once it is
available at the prices it can be made available as a
commodity. All we need to do is kick-start this process.
The time has come for us to ask ourselves the following
questions. Do we want to feed our farmers or Mideast
terrorists? Do we want ANWR oil rigs or prairie grasses? Do we
want fossil fuels or green fuels? Create farm jobs or Mideast
tycoons? Gasoline cars or cars that offer consumers the choice
of gasoline or biofuels? Expensive gasoline or cheaper fuels?
This appears to me to be nothing less than a simple Darwinian
IQ test for us.
Most importantly, I believe this does not take any capital
from Government. Risk capital for investors is probably the
only solution to the oil stranglehold we are in. Three simple
things that need to change. So let me talk about what these
three things are.
If our goal is to convince investors to pour in billions of
dollars, we need to assure them both a large market and a
stable market exist.
First, I suggest we mandate that at least 70 percent of all
new cars sold in America be flex fuel cars by 2014, 10 percent
annual increases starting with 20 percent by 2009. We are
already approaching that 2009 number. All such cars, new and
old, be provided with a yellow gas cap. I might add that flex
fuel cars are 100 times more effective at saving petroleum than
hybrids per consumer dollar spent in purchasing the car. I am
happy to answer questions on that claim later. Of course, flex
fuel hybrids are the best combination of all. So I suggest that
this mandate makes gasoline savings very cost effective.
My second recommendation would be that we mandate that 10
percent of all gas stations owned or branded by the major gas
station owners offer at least one ethanol pump. Sweden, by the
way, has mandated 50 percent of its pumps by 2009 to offer E85.
Alternatively, mandating a separate RFS for E85 and cellulosic
ethanol would serve a similar purpose. I suggest that for the
first 20,000 stations that convert at least one pump, we offer
an incentive of $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, a slight modification to current law that offers
$30,000, up to 30 percent. I suggest that the proceeds be
appropriated from the leaking underground storage tank fund,
the LUST fund, that already has over $2 billion. The maximum
cost to this program would be no more than $600 million,
probably a lot less.
The last and most important recommendation is based on the
following somewhat appalling story. In January, I gave a brief
talk on this at Davos. A senior executive from a major oil
company walked up to me and said, you know, we can drop the
price of gasoline to drive the ethanol producers out of
business. It galled me that he had the courage to come up to me
and say that.
So I suggest that we take the VEETC credit and make it a
variable credit. I have already stated that the level of the
credit, 51 cents per gallon, is not required for cash flow for
ethanol plants today. It was required when ethanol was selling
for $1.20 a gallon. I would recommend that we make it a
variable credit that changes from 20 cents a gallon to 80 cents
a gallon based on the price of petroleum as it varies from $70
a barrel to $30 a barrel. This will ensure that OPEC or the
national oil companies cannot manipulate prices as easily,
hence driving ethanol producers out of business. I do believe
such credits should expire once ethanol capacity exceeds 15
billion gallons in this country because I do not believe they
will be needed.
These three policies will ensure investors a permanent
market for the ethanol and will cause billions of dollars to
flow in.
In addition, certain other policies can accelerate the
process, even though I consider them what I call page 2
recommendations and not essential. I do believe if we do make
the VEETC credit variable, down to 20 cents, it would benefit
the American farmer and the ethanol producer if we shift the
credit to an ethanol producers credit instead of making it a
blenders credit. Today it is estimated they get about 25 cents,
the oil companies collecting the rest of the benefit.
One variant of that would be to make the credit applicable
only to building new plant capacity in America. That has
multiple benefits. It will increase plant capacity, increase
supply, and drive down prices for consumers for biofuels.
Second, I would suggest that we allow imports of ethanol
without tariff but only for consumption above the RFS standard.
We have an RFS standard that corn ethanol can meet. I even
suggest we extend the standard up toward 15 billion gallons by
2015. But if we allow imports above that without tariff, we
will make it more attractive for consumers to buy E85 and we
will accelerate the adoption of the E85 economy, which I
believe will enhance the value proposition for all ethanol
producers, including today's corn ethanol producers, in the
United States through this mechanism.
If, in fact, we do build the VEETC credit only for plant
construction in the United States, any credits that go to
Brazilian producers who import ethanol into the United States
will only be for additional plant construction in the United
States, enhancing our energy security and probably relatively
safe under the WTO action because of the provisions for
exceptions for national security under WTO.
I suggest we institute a cellulosic ethanol credit, similar
to the VEETC credit. In fact, the last energy bill contained a
1.5X credit. I suggest we monetize that.
I suggest a separate RFS standard for E85, as I have
already said.
I would recommend we reform and strengthen CAFE partially
by making it a CAFE petroleum mileage standard with automakers
incented to provide both increased fuel economy through
technologies like hybrids and improved use of biofuels, the
renewable fuels. Today they have almost no incentive to
encourage the use of biofuels.
I would suggest we provide loan guarantees for the first
few cellulosic ethanol plants with every new technology, but
only for the first few plants of each technology.
It is not well known that if we institute a system for
carbon trading, it should drop the effective price of a gallon
of ethanol by between 20 to 30 cents a gallon depending upon
what technology is used to produce the ethanol.
Finally, I suggest we switch agricultural subsidies to
energy crops, a much safer place to do it, and frankly, a place
with much more social good.
My dream with these recommendations is that Wal-Mart offers
E85 at $1.99 a gallon at every store in America. They offer an
all-American product, a much greener product, at a price that
every consumer will want and will increase the demand for flex
fuel cars.
Let me stop there, Mr. Chairman, and offer to answer any
questions.
[The prepared statement of Mr. Khosla follows:]
Prepared Statement of Vinod Khosla, Partner, Khosla Ventures, Menlo
Park, CA
Good morning. Chairman Lugar, 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 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,
while asking each interest group to compromise 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.
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 it sell for much less than gasoline at the pump,
except for the oil interests distorting 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, E85
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 Mideast 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?
The single biggest risk we face is the oil interests distorting the
price to ensure they don't loose 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 it 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 to change our
dependence on oil slip away again.
My friends from the Midwest tell me ethanol is the talk of coffee
shops and maybe the most important thing in 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, this time around
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 favor a mandate
of more efficient cars; 87 percent say no to a gasoline tax but that
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. U.S.
gallons per acre yields can reach 10X the current levels even without
the innovations that are common place 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 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- and DOE-affiliated researchers claim that
Pimentel's 2005 study overstates energy requirements. Professor Kammen
at UC Berkley further states that corn ethanol results in more than a
90-percent reduction in petroleum use and a moderate 10-30-percent
reduction in greenhouse gases. The NRDC agrees, stating that (1) corn
ethanol is providing 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 . . . a shift from gasoline to
ethanol will reduce our oil dependence. Remember tobacco claiming and
funding studies, forever, to prove that smoking does not cause cancer?
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 E85'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
E85. (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 Mideast
terrorism? Do we want ANWR oil rigs or prairie grass fields. Fossil
fuels or green fuels? Create farm jobs or Mideast tycoons? Gasoline
cars or cars that offer the choice of 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,
not a lot of money are sufficient to get this capital flowing.
These three are:
(a) Mandate 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 all such cars, old and new, be provided with a yellow gas
cap, with possible tax incentives of $50 per car.
(b) 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 E85 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.
(c) 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 policies can accelerate the process but
are not essential:
(1) 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 ``blenders 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.
(2) 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. Besides early
availability of lower priced ethanol in the market will accelerate the
switch to E85 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 allowed if it is directed toward building
ethanol fuel plant-capacity in the United States. An alternative would
be to eliminate the tariff only for E85 ethanol use, accelerating E85
adoption while keeping the blending market protected against imports
allowing U.S. farmers to get down the learning curve on ethanol costs.
Tariff removal could be coincident with funding of additional E85
stations.
(3) 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.
(4) Institute separate RFS standards for E85 (and possibly
cellulosic ethanol) to kick-start the E85 market which is currently
being discouraged by the oil companies.
(5) 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.
(6) Provide loan guarantees for the first few cellulosic ethanol
plants built with any new technology.
(7) 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.
(8) Switch agricultural subsidies from row crops to energy crops.
In the United States as oil prices continue to soar I see the
following:
1. 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. Amazing what money can buy.
2. They blame everybody but themselves, but more importantly, are
doing relatively little to invest in alternatives to gasoline, other
than token investments and PR campaigns.
3.They put obstacles in the way of their franchisees who want to
offer ethanol instead of offering E85 themselves. Why don't we require
them to sell ethanol at, at least, 10 percent of their gas stations? We
have CAFE standards for automakers, why not E85 green fuel standards
for the oil companies?
4. 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 rein in big oil:
1. Governor 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 (E85) 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.
2. Mobil gas station in St. Louis does not allow use of credit
cards for payment and warns against ethanol, is typical of how oil
companies discourage consumer use with scary notices. An Exxon in
Brazil stated that every third fill-up should be with gasoline for all
flex fuel vehicles, another falsehood.
3. The Foundation for Consumer and 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.
4. 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:
1. I got a very visceral feel for 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.
2. 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. 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. We must signal to our
innovators that this is a long-term, large market, as Brazil has done.
3. 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.
4. It became clear that America, Brazil, Australia, India, Africa
could each produce enough ethanol to meet their local gasoline
replacement needs and then export enough to serve much of the planet.
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.
6. 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.
Run, don't walk, seems so compelling suddenly. 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?
7. 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 not be hostage to oil companies?
8. It was embarrassing to see Brazilian experts laugh at the myths
U.S. energy companies spread like we cannot use the same storage tanks,
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? Some issues surely exist but they are easily
resolved in the context of a market as large as the transportation
fuels market.
9. 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.
1. We have a climate crisis, we have an energy crisis, we have a
terrorism crisis, and they are all coupled.
2. 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.
3. Economics and the right thing coincide this time around.
Consumer pull has been proven in Brazil. Our risks are minimal.
4. According to the firm Expansion Capital Partners, clean, or
green, technologies netted less than 1 percent of venture capital funds
as of 6 years ago. Today, however, the figure has risen to 8 percent,
the firm told TechNewsWorld (http://www.technewsworld.com/story/
50076.html).
5. 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.
6. Geopolitics and 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 hugh 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, 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.
The Chairman. Well, thank you very much for that very
thoughtful and provocative testimony. I am certain our Senators
will have questions of you, but we will hear first from Mr.
Grumet. We will be provoked again and stimulated, as the case
may be, and then proceed with our questions. I am delighted to
have you, and we will ask you to proceed.
STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, NATIONAL
COMMISSION ON ENERGY POLICY, WASHINGTON, DC
Mr. Grumet. Thank you very much, Chairman Lugar. I
appreciate very much the opportunity to be here today. I thank
Senators Chafee, Coleman, and Martinez for joining. I welcome
you to interrupt me whenever you actually need to do the
people's business and cast a vote.
The Chairman. Thank you.
Mr. Grumet. It is a privilege to be here today on behalf of
the National Commission on Energy Policy. It is a privilege to
share a table with Mr. Khosla, whose optimism about cellulosic
ethanol, buoyed by his willingness to put his own resources
behind that optimism, I find one of the more constructive and
compelling things that I have heard in the last several months,
and it very much reinforces, I think, the Commission's view
that cellulosic ethanol is one of a series of important
solutions.
Mr. Chairman, as you noted, our Commission was brought here
to try to see if we could bring somewhat of a more constructive
center in what has been a very polarized energy policy debate
on a lot of topics. We were able to put together a consensus
report in December 2004, and we are very happy that many of
those recommendations were engaged with and some actually even
adopted in the Energy Policy Act.
But we are mindful that many were not, and we have decided
to stay together and really try to address what we see as the
three structural challenges to our energy system, those being
the need to begin a long-term effort to address the risks of
climate change, the need to figure out a way that we can start
to build and site the 21st century energy infrastructure that
we are going to need to support our economy, our security, and
our environmental needs, and then, of course, the need to
address oil security, which we placed as the first chapter in
our report because we believed then, as we do now, that it
represents some of the foremost challenges to our foreign
policy, our national security, and our economic vitality.
Mr. Chairman, I agree with almost everything you said in
your opening statement. I am just going to take about four
times as long to now repeat it back to you and hopefully add a
few additional details.
At $70 a barrel, we get asked--I am popular at cocktail
parties for the first time in my life--what can we do to bring
down the price of gasoline. And over the next 15 minutes, I
commit to offer you not one good suggestion, Mr. Chairman, to
bring down the cost of gasoline in the next 6 or 12 months, and
that is because a defining aspect of this problem is that there
are no good opportunities to meaningfully reduce the cost of
gasoline.
What is unfortunate is that much of our debate,
understandably, focuses on that need for a quick fix, and what
I would hope to suggest to you today is that we have an
opportunity and this committee, I think, could lead that
opportunity to, in a bipartisan way, seize this moment so that
in the next 5, 10, and 20 years we will have a new future for
this country that is far more secure.
I would suggest to you that the components of that future
are as easy to describe as they are difficult to implement. We
simply must increase and diversify our sources of petroleum in
the near term. We must aggressively pursue greater efficiency,
primarily through increased fuel economy, and we must seek to
significantly diversify petroleum through alternative fuels.
What I would like to do, Mr. Chairman, with the bulk of my
remarks today is to talk about what I think those big
opportunities are. The back of my now slightly damp testimony
is an Appendix A, what I like to call measures that matter.
These are those things that could really take something on the
order of, at least, a million barrels of oil a day off of
domestic demand or add that to global production. Just as
context, we presently use about 21 million barrels a day of
petroleum. That is projected to grow to 26 million or 27
million; the global market, 85 million, growing to 110 million.
So you really need to think about these in the scale of a
million barrels a day if you think you are really going to
start to nibble at the problem.
But before I do that, I want to--I guess at the risk of
being branded somewhat a heretic--directly challenge what have
been the dual aspirations for our energy policy over the last
30 years, those being, I think, the mythologies of energy
independence and foreign oil. This is not simply an academic
exercise because it is my sense that our failure over the last
30 years to make real progress toward these goals is twofold.
One, I think they are unrealistic goals and actually probably
undesirable if we retain them. But as importantly, I do not
think they lay out a measurable or productive metric that
allows us to be held accountable to the kind of long-term
progress that is required.
The litany of problems that you laid out, Mr. Chairman, are
deeply compelling. It leads one to emotionally desire to
basically take our marbles and go home, get away from these
guys. The problem is we have 3 percent of the world's marbles
and we use 25 percent of annual oil production. So the notion
that we can somehow isolate ourselves from this global dynamic
is a vestige of a past that really does not exist. We now live
in a global reality, global markets and clearly a geologically
global reality. And I can tell you more times than I would like
that I have had really passionate discussions with people about
energy independence which then end with someone suggesting we
have got to make sure we site those LNG facilities because my
chemical industry is really getting kicked in the teeth. I
think that just further demonstrates that our energy markets,
be they oil, natural gas, or others, are global markets. And if
we can recognize and better manage our energy interdependence,
I think we will be in a much stronger position to deal with
this problem meaningfully.
Let me say another word or two about foreign oil because
that, of course, is the mantra. Right? Let us get off foreign
oil. When it comes to economics, what people are paying at the
pump, what our economy feels each and every year, oil is oil.
There is one fundamental benchmark price for oil. The big
variety in oil prices at the pump are purely a function of
taxes and subsidies. The cost of a barrel of crude oil in
Norway, which is an exporting nation, is the same as it is in
Japan, which is an importing nation. The extent to which our
economy is vulnerable to oil price shocks is solely a function
of how much oil we use, the ratio of imports to exports, the
continent from which that oil was originally brought to the
surface has no bearing on that, Mr. Chairman. So it is my
suggestion that if we can accept that our economic security is
really more a function of how much oil our economy depends upon
and not the province of that oil, we can then begin to
articulate a set of solutions that really can start to have a
real impact.
Between 1975 and 2000, oil intensity per GDP--that is, the
amount of oil we use to produce $1 of domestic product--was cut
in half. What that did was make our economy twice as resilient
to the kinds of oil price shocks that we have experienced
recently, and many would argue that the fact that we have been
able to increase and continue economic growth in the last
several years in the face of high prices is, in many regards,
due to that enhanced resiliency.
An ambitious goal, Mr. Chairman, would be to try to do that
again. Between now and 2025, if we could reduce 7.25 million
barrels a day of oil, we would again have halved the dependence
of our economy on oil.
Now, before starting to review the measures that I think
could get us there, I want to just note three themes that I
think will hopefully resonate through the balance of my
remarks.
The first is that the components of this solution are
complementary. We have to move beyond the divisive debate about
whether it is supply or demand, whether we need alternatives or
efficiency, because unless we put all of these pieces together,
we will simply fail. While I think the future that Vinod lays
out is the place we need to go--this is a future toward
alternatives--if we do not buy time by better managing our
global oil assets and by dramatically increasing efficiency, I
fear we will suffer as a nation immeasurable pain on the road
to that future.
Second, Mr. Chairman, I believe the solutions are going to
require activist government. Until and unless we internalize
the true costs of oil dependence, foreign policy costs,
environmental costs, economic shock costs, military costs, into
the private marketplace, private decisions will inherently fail
to provide efficient outcomes. So that is why I think
Government is going to have an ongoing obligation to confront
market barriers and to place standards in place such that those
costs ultimately get borne by the private market decision.
My final reflection is that this is, of course, a long-term
challenge. There is incredible negative momentum in the system.
No matter how ambitious we are today, no matter what policies
we put into place this year, this problem will continue to get
worse for a time before it gets better, as the ongoing demand
for greater energy use outstrips our meager efficiency and
relatively flat-line ability to produce more oil domestically.
Finally, Mr. Chairman, if history is a guide, public
support will wax and wane as the price of gasoline goes up and
down. The solution, therefore, requires a kind of commitment
and consistency that this country really only is able to muster
when we truly understand that our future is at risk, and I
think this committee's ability to frame this challenge and its
true force is going to be a critical component.
So, Mr. Chairman, if I can turn from the lofty to the
specific and now start to talk a little bit about specific
measures, I want to start on the question of oil supply.
We are the third-largest oil producer in the world here in
the United States, something that most people, I think, don't
appreciate. We produce about 9 million barrels a day, roughly.
We import about 12 million barrels a day. However, we have a
very mature oil market. We have punched a lot of holes in these
continental 48 States, and despite significant investment
increases in the last decade, our production has stayed flat
and has even begun to decline a little bit.
Now, there is a tremendous focus on reserves that are off-
limits and a view that that is really an obstacle to our own
energy security. I will tell you that there are very
significant oil reserves in this country that are presently
off-limits to drilling. Between the Pacific Coast, Alaska, gulf
coast, we have about 25 billion barrels of proven reserves.
Now, there are very serious choices, and the Commission did not
make specific recommendations about how to balance those
competing interests.
I will note that if we drilled everywhere, Santa Monica,
coast of Connecticut, ANWR, coast of Rhode Island, coast of
Florida--sorry, Mr. Coleman, I can't bring you into that
discussion--estimates are that we could raise domestic
production by about 2 million barrels a day over the next 20
years. Now, that is a lot of oil, but one must recognize that
when thinking about the benefits of production measures, you
have to think about those benefits on the basis of the global
market because all the benefits of production are shared with
all around the world who use that oil. So if we were to produce
another 2 million barrels a day in the United States, it would
have a salutary effect of about a 2-percent increase on the
global oil market, certainly not insignificant. But I think
thinking about that against the 20 or so million barrels a day
we use here in the United States would be misleading.
So to turn to global production, two-thirds of the world's
oil is found in Saudi Arabia, Iran, and Iraq. The good news is
that of late, the efforts in the former Soviet Union have been
basically offsetting the demand growth in China. There has been
an eery parallelism between their ability to increase
production while China's demand has skyrocketed. So continuing
effort to try to open investment in these countries to
diversify global production is of critical importance.
We have had real success there. When Kazakhstan opened its
borders to foreign investment between 1996 and 2002, they fully
doubled their oil production.
One of the challenges I think we face, Mr. Chairman, which
you mentioned, is that an increasing fraction of the global oil
market is now being tied up by statist enterprises. So thinking
about how we, in our foreign policy, are able to ensure that
the competitive marketplace, American technology and investment
has access to that global reserve is very important.
I want to turn now to unconventional oil. These are the tar
sands in Canada, the heavy oil in Venezuela, as well as the
opportunity to take our incredibly abundant coal supplies and
transform them into liquids like alternative diesel fuels. This
is an incredible resource when one thinks about its magnitude.
If, in fact, we were to include those heavy oils and
unconventional oils in our global picture, it would
dramatically shift the hemispheric balance such that the North
American Hemisphere would move from 13 percent of global
reserves up to 36 percent of the global reserves. If we brought
in coal to liquid technologies, that would further increase the
hydrocarbon potential of the people who we know and like.
The problem is not enough resource constraint. The problem
is not enough atmosphere. At present, developing oil out of
unconventional reserves or out of coal basically has about a 3-
time impact on the greenhouse gas emissions of those fuels. If
you were to sequester each and every molecule that was used in
the production, you could basically hold it even. And I think
that is an incredibly important and realistic aspiration
because it is our view at the Commission that one need not
solve our climate change problems through our oil security
measures. But I think we feel equally strongly that we cannot
fundamentally undermine an alternative and equally compelling
national challenge by trying to solve our oil security problem.
So, I guess I would suggest to you that it is incredibly
important that if we seek to rely upon these unconventional
resources, we begin a fundamentally very different series of
investments to try to make sure we can understand how to
develop those resources in ways that are compatible with our
other challenges. Otherwise, I do not think that they will, in
fact, become part of the long-term equation.
Now, let me move on to efficiency, but just say one word
about strengthening strategic reserves. As I think all are
aware, we have a significant strategic petroleum reserve here
in the United States, as do the other countries in the OECD who
are members of the International Energy Agency. These reserves
provide a very significant insurance policy and a real
significant, I think, psychological deterrent against those who
would like to manipulate the oil market.
China and India and the developing countries in which much
of the recent growth is occurring, are not members, do not
participate in this global strategic reserve. I think this
committee has begun this discussion and has taken up the
serious question of what we can do to encourage all countries
who play a significant role in putting strain on the system to
pay into the security policy. There are a lot of rules to
become a member of the OECD, a lot of things that deal with
human rights and economic transparency and a lot of, I think,
obstacles that will keep China out of the strategic reserve for
some period of time unless we find a way to be creative, give
them some kind of special observer status and welcome them in
more quickly. But I think that is a critical component of the
long term.
I will now try to efficiently move into the discussion of
efficiency measures, Mr. Chairman. I think that these measures
deserve focus because not only do they have the largest impact
potentially in purely absolute terms, but as I mentioned
earlier, every barrel of oil we save or displace, the benefits
of those accrue entirely to the United States. So if we can
reduce our demand from 25 million to 24 million barrels, that 1
million barrels is a 4-percent benefit to our country, whereas
a 1-million-barrel production is about a 1-percent benefit to
global security.
Far and away, significantly strengthening and reforming
CAFE is the single most important thing we can do in the near
term to increase our energy security. There are a plethora of
proposals around Congress right now about how to become energy
secure. I would say to you, flatly, that unless those proposals
contain a serious obligation to increase fuel economy, I do not
believe they provide a serious option for a solution.
Mr. Chairman, fuel economy in this country has been
stagnant for over 20 years and many confuse that with the
notion that we are not making technological progress, and
nothing could be further from the truth. Each and every year
for the last 20 years, energy efficiency of our engines have
become much, much more efficient, by 2-3 percent a year.
However, absent any obligation to take those technological
gains and put them toward the public good of reducing our oil
dependence, companies have done the understandable thing. We
have made our cars bigger, heavier, and faster. A car today, on
average, is about 25 percent heavier than it was 20 years ago
and gets fully 100 percent more power. The economy cars of
today outperform the muscle cars of the 1970s. So one of the
key conclusions of our Commission was that looking at this
incredible opportunity coming forward by hybrids and advanced
diesels, that Government must act to both accelerate those
programs and to direct the efficiency toward the public good of
lowering our oil dependence.
I want to talk for a couple moments about the challenges
with CAFE that primarily revolve around safety and job
concerns, and I will just skim these complicated topics. But
for a long time, there has been an assertion that to increase
fuel economy, we have to make cars smaller. That is simply not
the case. We do not need to make cars smaller. We may need to
stop making them bigger every year. We may need to stop making
them more and more powerful every year, but if we just held the
line on our rather delightful automobile fleet and started to
direct the future efficiency gains toward making those cars go
farther on a mile of gasoline, we would be on the way to a more
efficient future.
Now, the safety issue is far more complex. There are
opportunities with new materials. There are opportunities to
make cars safer. The problem we have is when Hummers eat Minis.
It is the disparity of weight on the highways more than
anything else that creates the safety issues we are concerned
about. So there are ways to reform CAFE which I think can help
in that regard.
On the issue of jobs, there is a depressing reality that
our domestic industry is less capable of competing to create
the advanced cars of the future. We have worked with the UAW
and experts at the University of Michigan and others to try to
assess the validity of these concerns and believe that they are
real. One of the recommendations we proposed, which has been
batted about by many, is the idea to provide significant tax
incentives for the retooling of domestic facilities and
domestic parts suppliers, not unlike what Vinod was suggesting
about the tax incentives for domestic production of ethanol. We
believe that those would not only be GATT-legal, but they would
allow us to both provide the cars people want while keeping the
American auto base strong.
We were caught a little short when I think a representative
from Ford mentioned that they do not pay a lot of taxes these
days, and so offering them tax incentives was maybe not the
most efficient mechanism of giving them the relief that they
desired. Senator Obama, who could not join us today, offered a
new alliterative mechanism with the health care of hybrids, the
idea that we address the catastrophic health care costs of some
of the auto industry in exchange for a commitment to building
hybrids. While I think we have work to do on finding the
perfect mechanism, the tough love metaphor, I think, is going
to be a component of the solution. We have to challenge the
domestic industry and recognize at the same time that they do
not have a level playing field with their foreign competitors
and will have to address that.
Finally, on CAFE, there has been a lot of discussion about
reforming CAFE as of late. The Commission strongly believes
that pairing a significant increase with significant reform is
the right thing to do. We commend NHTSA for their restructuring
of the recent light duty truck rule. We are a little bit less
sanguine that they have significantly strengthened that rule.
They have changed the model so that it is a much more effective
tool. They just have not taken that tool out for a drive. And
the key reason is that the way NHTSA tries to set CAFE is quite
reasonable. They try to determine what is the value of a gallon
of gasoline saved, social total value, and set the new CAFE
standards such that the costs of new technology are offset by
the fuel savings.
In this last rulemaking, NHTSA determined that the total
social value of a gallon of gasoline saved over the next decade
was $1.70. They used the EIA projections, which they are
obligated to do, which says real cost of gasoline will be about
$1.60 and we are going to add 40 cents of taxes. So it is $1.60
of real value. And then they looked at all of the different
externalities they could think about, and they came up with 6
cents. It is not because they are not good people who try hard.
They simply do not have the authority or the tools to think
about the issues that, I think, this committee cares about.
They looked at dozens of different things. They looked at air
pollution costs. They looked at protecting the economy from
price shocks. They even placed a value on saving consumers time
by not having to go to gasoline stations.
Unfortunately, when they grappled with the question of
military costs, they concluded that they could not ascribe any
quantifiable costs that our country pays to have our military
provide access to oil. So they factored that in as zero. They
could not even begin to contemplate the issues, Mr. Chairman,
that you addressed at the beginning: The likelihood of
increased tensions with China, the extent to which our foreign
policy prerogatives are inhibited. These are concerns that this
committee, I think, understands well and that only this
Congress has the ability to, in fact, instruct NHTSA as to how
to engage.
So, I believe, the President's request for greater
authority is intelligent and should be supported. I think
Congress should also try to provide some direction as to how
the executive branch use that authority not only by suggesting
that they incorporate the annual increases in efficiency and
direct them toward improvements, but help NHTSA think about how
to grapple with the very real costs of oil dependence that this
committee is keenly aware of.
I want to end, Mr. Chairman, by a few words on alternatives
and will not begin to add to what, I think, Mr. Khosla has done
a very fine job of. Simply to note that as long as our
transportation system is 97 percent dependent upon petroleum,
we will not be in control of our own destiny. Very much like
Mr. Khosla, the Commission concluded that cellulosic ethanol is
the most promising opportunity to displace a significant amount
of petroleum, and there are four reasons. And we applied these
tests to a number of different options, but there is an ample
domestic feedstock, it has low net greenhouse gas--inching
benefits. It can largely rely on existing infrastructure, and
it has the potential to be cost competitive over time with
gasoline. Those are kind of the four horsemen of a real fuel.
Let me just note that I very much agree that infrastructure
in the near term is the challenge. I support the suggestion
that we really focus, as you have with Senator Obama and
others, on bringing forth that infrastructure. I note that once
we get above 10 or 15 billion gallons of corn-based ethanol, we
start running out of corn flakes. So I think corn is the
pathway to our biofuture. It is the pathway to our
infrastructure but, like Mr. Khosla, believe that it is
cellulosic ethanol that has the real long-term potential.
And then, finally, a note on land. We very much agree that
land is not ultimately a challenge for a big cellulosic
industry. We concluded that you could displace half of the
gasoline in this country with about 30 million acres of land. I
will note that we presume significant increases, as Mr. Khosla
does, in the yield per acre of energy crops, real but not
remarkable increases in the conversion efficiency of that
product to fuel, and a doubling of fuel economy. If you do not
do those three things, you are looking at 180 million acres,
which would be entirely unacceptable. These are incredibly
realistic opportunities, but they all have to be pursued.
Having begun with the heretical challenge of energy
independence, I think I want to end with something equally
provocative, thinking about authorization, appropriations, and
noncompetitive earmarks.
EPAct did a fine job. There are 10 programs in the Energy
Policy Act which are directed toward providing incentives for
the first mover of ethanol facilities that we all want about $4
billion of authorizations. I think we all know that in this
fiscal climate, the challenge of providing appropriations for
that is a real one, and the Commission urges this Congress to
do whatever it can.
I will also note that in 2005 fully half of the DOE
research budget for cellulosic ethanol was directed to
noncompetitive earmarks. The irony here, Mr. Chairman, is I
think this clearly reflects the keen interest that Congress has
in this program. I will simply note that unless we try to
channel that interest, we will literally love this program to
death as we continue to pull it apart in ways that frustrate
long-term research progress.
So, truly, now in conclusion as promised, I am here to
offer no near term solutions, whatsoever. I think there is an
understandable frustration about that, which leads us to want
to talk about windfall profits and price gouging and restricted
environmental laws as if a few bad people or poorly crafted
statutes were somehow responsible for the misery that people
are feeling. I guess I would suggest to you that we need to
look beyond those quick fixes and that if, in fact, we come
together and agree that there is an opportunity in a bipartisan
way to focus on increasing traditional oil supply, on
significantly enhancing the efficiency of our fleet, and on
simultaneously moving toward the vision that we share about a
biofuels future, we can then put ourselves in a position where
we will be in charge of our own destiny. It is clear to me that
we will use less oil in this country in the future. I think the
question is whether we do that on our terms or whether it is
done to us on terms that will fundamentally be unacceptable to
our health and happiness.
Thank you for the opportunity to be here today.
[The prepared statement of Mr. Grumet follows:]
Prepared Statement of Jason S. Grumet, Executive Director, National
Commission on Energy Policy, Washington, DC
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:
1. Expand and diversify supplies;
2. Reduce demand; and
3. 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, 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.
------------------------------------------------------------------------
Percent of
Region world's proved
reserves
------------------------------------------------------------------------
Middle East........................................... 61.7
Europe/Eurasia........................................ 11.7
Africa................................................ 9.4
South and 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. (See Fig.1) 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
skyrocket. 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. (See Fig. 2) 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:
1. Expanding and diversifying conventional supplies of oil,
both at home and abroad;
2. Expanding the global network of strategic petroleum
reserves; and
3. 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:
1. 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;
2. 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
3. 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.
------------------------------------------------------------------------
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 decisionmaking, 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. (See Fig. 3) 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. (See Fig. 4) 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. (See Fig. 5) 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. autoworkers 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 trade-offs 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, sugarcane 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 A
SUMMARY OF MEASURES FOR IMPROVING U.S. OIL SUPPLY
------------------------------------------------------------------------
INCREASING SUPPLY
-------------------------------------------------------------------------
Measure Projected impact
------------------------------------------------------------------------
Exploit all domestic conventional reserves Increase U.S. output by 2.0
MBD.
Exploit global reserves of unconventional Increase global supply by
oil. 4.0+ MBD.
------------------------------------------------------------------------
------------------------------------------------------------------------
REDUCING DEMAND
-------------------------------------------------------------------------
Measure Projected oil savings
------------------------------------------------------------------------
Heavy Duty Trucks:
Enhanced diesel technology and 1.0 MBD.
aerodynamics.
Reduce average highway speed by 10 mph 0.3 MBD.
Passenger Vehicles and Delivery Trucks:
Advanced gasoline engine technology 2.2 MBD.
(32 mpg).
Advanced gasoline engine technology + 3.5 MBD.
50% advanced hybrid/diesel sales (40
mpg).
Advanced gasoline engine technology + 4.6 MBD.
advanced hybrid/diesel + 25% plug-in
hybrids (50 mpg).
------------------------------------------------------------------------
------------------------------------------------------------------------
DEVELOPING ALTERNATIVE FUELS
-------------------------------------------------------------------------
Measure Projected oil savings
------------------------------------------------------------------------
Quadruple ethanol production post-2012.... 2.0 MBD (30 billion
gallons).
Dramatically increase biodiesel production 0.5-1.0 MBD (7.5-15 billion
gallons).
Create Domestic Fischer-Tropsch Industry 0.5-3.0+ MBD (7.5-45+
(Coal to Diesel). billion gallons).
------------------------------------------------------------------------
The Chairman. Well, thank you very much, Mr. Grumet. We
really appreciate the extraordinary testimony of both of our
witnesses.
I want to recognize now the distinguished ranking member of
our committee, Senator Biden, for his opening statement or
comments.
OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR
FROM DELAWARE
Senator Biden. Mr. Chairman, I would ask unanimous consent
that my opening statement be placed in the record.
The Chairman. It will be placed in the record in full.
Senator Biden. By way of brief explanation, I had 170
Delawareans that I had agreed to meet with prior to this
hearing being set.
But I just want to reference your leadership again here.
There is not a single more significant thing we could be doing
than what we are doing right now.
My dear old mother has an expression. Out of everything
bad, something good will come if you look hard enough for it. I
think this has presented us with an overwhelming opportunity,
if we seize it, to be able to regain control of our national
security and our destiny here. It would not have happened had
we not reached this crisis state and the cost of oil
skyrocketing. I hope we do not shrink from this as we did 25
years ago.
So I want to thank you, Mr. Chairman. I will read the
witnesses' statements with great interest. I thank you again
for your leadership in this area.
[The prepared statement of Senator Biden follows:]
Prepared Statement of Hon. Joseph R. Biden, Jr., U.S. Senator From
Delaware
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.
The Chairman. Well, thank you very much, Senator Biden.
Let me just indicate, as the witnesses have, that in this
area there has been strong bipartisan cooperation on this
committee and with members of other committees, for that
matter. But almost all of the significant legislation has
bipartisan cosponsorship and many cosponsors, 24, 25, maybe
upward, which is important because sometimes it is difficult
for the Congress to move, even for this body to move. But I
think there is an impelling need that you have illustrated.
Now, at this point, at the risk of losing the entirety of
the committee, the vote has commenced, and as I indicated, we
will have a recess, we will vote, and hopefully then we will
have time to ask our questions without interruption. But I
wanted both of you to give your testimony and for all of us to
get set and then we will come back and commence our
questioning.
For the moment, the committee is recessed for the vote.
[Recess.]
The Chairman. The committee is called to order again.
We will have a 10-minute round of questioning by members of
the committee, and I will commence with my questions.
Mr. Khosla, you mentioned some intriguing possibilities
with regard to the acreage issue. As you pointed out, sometimes
critics of alternative plans point out that we are limited in
this country by the number of acres we could devote. Usually
the argument is made, first of all, with regard to corn
ethanol, but then as you observe, maybe more generally with
regard to switchgrass or biofuels materials that might come in
the cellulosic ethanol in addition.
In the figures that you gave--and sort of retrace this for
us, if you will--you talked about 400 to 500 gallons of ethanol
per acre coming from, as I understand, current practices. Is
that in the corn field or the cellulosic field? What are the
400 or 500 gallons at this point?
Mr. Khosla. Sir, roughly 140-some bushels per acre times
2.7 or 2.8 gallons of ethanol per bushel would result in about
400 gallons per acre, roughly.
The Chairman. So that is the corn yield, the 140 bushels.
Mr. Khosla. Yes.
The Chairman. Now, how do we get from there to some
multiple? And, ultimately, in the years beyond, you were even
talking about 3,000 to 5,000, which is quite a jump.
Mr. Khosla. I expect that we can get to yields of corn,
according to the National Corn Growers Association, approaching
2,000 bushels per acre.
The Chairman. 2,000 bushels per acre.
Mr. Khosla. By 2015. And we might improve some yields. But
corn is fundamentally limited.
Sir, my presentation has a slide on the various
technologies, but I believe cellulosic technologies have the
most impact when it comes to achieving yields of 3,000 gallons
per acre.
[Editor's note.--The slides and graphs contained in
``Biofuels: Think Outside the Barrel'' and shown by Mr. Khosla
during his presentation at this hearing, were not reproducible
but will be maintained in the permanent record of the
committee.]
The Chairman. Now, let me just run back through this
because 2,000 bushels per acre in a timeframe of 2015----
Mr. Khosla. I'm sorry; 200 bushels per acre.
The Chairman. OK; 200. I have sort of a parochial view as a
corn farmer.
Mr. Khosla. I apologize.
The Chairman. For a moment, I was beginning to do the math
here and thinking I really have something going out there at
the farm. [Laughter.]
However, 200. And that seems within the ballpark of what I
understand. From my father's experience on the same farm, 60
years ago, we were getting 40 or 50 and we are now getting 140
or 150 in our generation. There really has not been a great
deal of impetus to improve the yield of corn.
As one of you pointed out just obliquely, you suggested
that if we have another agriculture program, the subsidies or
whatever payments that are made to farmers ought to come this
time for energy. That will be a big sell, putting on capital
over in the Agriculture Committee, because I would just have to
advise you we have had a hearing, and a very good one, on
sugar, recently, and on one other southern crop that is heavily
subsidized, currently, with all sorts of intricate payment
systems.
Now, into the hearing on sugar--and this is why this is on
my mind--Saxby Chambliss, our chairman, had to go off to
another meeting and left me in charge of the hearing, which is
a dangerous situation because we engaged the sugar people, the
users, the growers, the whole lot in a very good conversation.
Their future lies in producing ethanol from sugar, not really
from doubling the price to American consumers and trying to
extract their due. And that will be a tough sell but not
impossible. I notice papers throughout sugar land, whether it
was the sugar beet people up north or the ones down south,
picked this up in the same spirit in which you are talking
about it this morning. Not only Brazilian sugar might be
available, but, in fact, American sugar, which is in abundance
and which now keeps out other people and ruins our CAFTA
agreement with Central America and CARVAS with South America,
and creates all sorts of diplomatic problems.
But, nevertheless, as you point out, even if we get to 200
bushels to the acre times 2.7, that gets you to 540 or so,
which is not 3,000. So when you get to the 3,000 mark, there
has got to be something else, and this is more in the
cellulosic variety, I gather.
Mr. Khosla. Yes, sir. If you might refer to the
presentation that you have, slide 58 speaks to the yield for
various technologies.
The Chairman. All right.
Mr. Khosla. A basic assumption I make is we can now get
about 6 tons per acre of biomass yields. The best plant
biologists in the country I have talked to completely support
the notion that in 25 years, that yield can go up to 27.5 tons
per acre. If we can do 27.5 tons per acre and 118 gallons per
ton of biomass, then the numbers are what we get in this chart
on page 58, roughly about 3,000 gallons per acre.
The Chairman. Yes, and that chart is very instrumental in
our understanding and as a part of your presentation.
I want to just develop the point from the standpoint that
this often is a criticism of all we are talking about today.
The skeptics would say, after all, there is not enough land
left in America to do all these sorts of things. At best, this
is still a niche idea in which you do a little bit of it, get
maybe, single digits or 20 percent of our needs, but that is
about where it ends. So, therefore, all this talk about
independence--you are not claiming independence today. We still
have a foreign policy going in both of your testimonies.
But in my opening statement, I am talking about some grim
facts, and that is, even if there is a lot of oil left on earth
and if, in fact, there are a lot of reserves that are still not
exploited, 77 percent plus are held by other governments. And
these are not benign people. Somebody that shuts off the tap to
Ukraine, for example, accomplishes something that you do not
have to send aircraft over or tanks or what have you to do. You
can obliterate a country this way. It is not advisable people
do this very often. And that is one reason that we are talking
about this because we have said as these things begin to close
in, the knives get sharper and the elbows, likewise. People in
a strategic position decide to use this aggressively against
others and maybe against us. People who do not understand the
existential problem here, not just for Ukraine, but,
ultimately, for the United States, really need to wise up.
You have pointed this out in different ways. Let me just
touch on some.
Both of you have mentioned, in one form or another, oil
sands, Canada, Alberta. Now, the Energy Minister was in last
week, and he said the problem there is that we cannot get
people to do the work. Literally this is very tough work. It is
very cold. It is very messy. It is very dirty. They cannot get
enough Canadians, Americans, Mexicans, anybody in the
hemisphere. The Mexican Energy Minister was there. They cannot
furnish enough people from Mexico to make that work. So,
theoretically, you have oil sands up there. We have,
unfortunately, some human problems. How do you get people to
work the oil sands? Now, eventually, we may get through that.
You have touched on the coal business. There is a lot of
coal underneath this country, all of it dirty from an
environmental standpoint. The whole clean coal technology
business, whether you finally get it into transportation fuel
or the more conventional power, really requires a sequestering
process. How do you do this? Where do you put the carbon? These
are critical measures. We talk today about the transportation
side principally, but the other side of heating, power, and so
forth is, obviously, equally important. And with great
resources here, there was no need really to think about it.
First of all, we still have people in denial that climate
change or global warming is a real problem. This is almost a
theological debate even with major newspapers and publications
in this country. So although you are in a group of people that
believe this is for real and we have to deal with it, as
politicians we find a lot of people who do not believe in this,
who think essentially it is sort of an elite group of people
who meet with the Foreign Relations Committee from time to time
and talk about things that are vaguely subversive to normal
American practice.
Senator Biden. To the oil industry. They think it is
subversive.
The Chairman. Now, finally, while I am spouting off about
all of my prejudices, which you have listened to, on the CAFE
standards, we have got a situation here. We debate this issue
all the time. In the House committee last week, by a vote of 28
to 26, they, at least, had a nominal CAFE standard. Democrats
on the committee, who voted en bloc against that--and they were
the 26--said, well, this does not amount to anything. What you
really need is a 33-miles-per-gallon standard. That was offered
by one gentleman and that lost 37 to 16, as I recall. I do not
know where they all stand now, but we go around and around with
this.
I am curious as to whether your view is that this is an
essential aspect almost in the way of pegging the price of oil.
You have suggested another way of getting at this, these
flexible credits, 20 to 80 cents and so forth. In other words,
you have to offer some certainty to the public. First of all,
the problem is not going to go away, and second, the oil
companies cannot subvert it, so it will not go away that way.
In essence, we are confronted with it. Is that basically the
strategy you have in mind in offering these pegs?
Mr. Grumet. I think you wrapped your arms around it very
aptly, Senator. I guess I would say that I do believe that
efficiency, whether you call it CAFE or by any other name, is
an instrumental component of the solution not only because of
the land issues and the need to actually reduce the amount of
biomass we need, but also because we have a global challenge
here. Not every country in the world is going to have the same
kinds of biomass attributes that we have, and so we have an
obligation for our own benefits, as well as to protect
ourselves from the kind of economic shocks as we transition
toward biofuels also to export these technologies to make our
fleet more efficient.
I guess I just point out again and again that this is not
about putting us all into little VW bugs from the 1970s. If we
simply capture the increases in vehicle technology that are
happening each and every year and are really now on a very
strong up-slope because of hybrids and were to direct those
increases toward fuel economy, that in and of itself would put
us on a 2- to 3-percent upward trajectory each year.
So I think the CAFE debate, like so many of these debates,
are stuck in these old, well-worn grooves. They are stuck in a
technology posture of the 1970s. They are stuck with an
economic policy of the 1970s. And if we think a little bit
creatively, I think the safety issue can be taken off the table
with intelligent reform. I think the jobs issues is something
that we have to grapple with as a nation, whether we are
increasing CAFE or not, and that there is a tough love metaphor
that both gets us better cars and better jobs. So we need to
bring these two ideas together. But absent strengthening fuel
economy standards, I do not think we can get the job done.
I would just note that it was bewildering to me that we
spent a lot of time debating whether the President and NHTSA
really needed the authority or not. Who cares? Give it to them
three times if, in fact, that is what they think they need, but
let us give them some direction as to how to apply it because I
think the reason why there was resistance in the House was that
the President was asking for the same authority they just
applied when regulating light duty trucks and they used that
authority with the assumption that a gallon of oil saved was
worth $1.70 and they raised the light duty truck standards by a
couple of miles per gallon.
So there is a sense that giving the administration the
authority without then giving them better tools and better
direction as to how to apply that authority is just kicking the
can down the road for 18 months. So I think that is where this
debate now needs to be put back together.
The Chairman. Now, as I yield to Senator Biden, I would say
to my colleague that earlier on, Mr. Grumet testified that his
group has been visiting with the automobile companies and the
UAW, both, because they take seriously the jobs issue, as both
of us do. Now, in my State, there is an article in the
Anderson, IN, paper today that states that the UAW is selling
its headquarters. The number of members is down by 80 percent,
and the jobs are gone. Ditto for the automobile industry,
basically, in a place that was totally auto. That is not unique
in our country.
So, as you are talking about tough love presently, we are
almost back to the situation we were in with the Chrysler
company in the 1970s and the question of how to save Chrysler.
The legislation that the Senate and the House passed, then, was
a tough love measure. President Carter had offered simply a
loan guarantee without many strings attached. The Congress said
you have got to do a lot of things. UAW's Woodcock came here
and said we have never backed down on any of these things,
period. Ditto for Lee Iacocca and those folks. But they made
some changes. They made huge changes. They paid off the whole
loan because Paul Volcker raised the interest rate and it was
very uncomfortable, rapidly, and there was still a Chrysler
until they merged.
So I mention that this is not hypothetical. We have been
down that trail before, many of us around here, and that is why
I was interested in your testimony.
Yes, sir.
Mr. Khosla. Senator, if I might comment on the question of
oil shales and alternative technologies. Today I proposed a
variable tax credit on ethanol. In fact, the superior way to do
it would be to have a price floor on gasoline. If we had a $40
floor on oil and I suggested in the past that if we use any
money anytime oil drops below $40 as a fee to be put into a
price stabilization fund, which can be used to reduce the price
of oil when the price goes high, it has multiple benefits. The
variable credit for ethanol would help the ethanol business.
I prefer the mechanism of a price floor because it would
encourage all alternative technologies, not just ethanol. It
would encourage the development of oil shale, coal to liquids,
and other opportunities. So, in fact, theoretically and from an
economic point of view, that is a superior option if we can
enact it.
I might also add, specifically, to the issue of oil shales.
Personally, I believe the biofuels approach, the ethanol
approach, is so much easier to do and so much more cost
effective and has so many side benefits. That arises from the
fact that we have three major problems here. We have an energy
problem. We have a climate crisis, and we have a terrorism
crisis. All those are coupled and all of them are
simultaneously addressed by the biofuels approach or any
renewable fuels approach. Oil from shales and sands does not
solve the climate issue.
I might also add on CAFE, as much as I completely agree
with Jason on increasing and pushing hard to increase CAFE
mileage, Senator Daschle and I coauthored an op-ed in the New
York Times, a week ago Monday, that suggested that we can
decouple the issue of how far we push CAFE up. And I am very
much in favor of doing that, but we decouple it from the issue
of measuring petroleum mileage, not mileage because that will
incentivize the automakers to reduce petroleum use in this
country.
So some people would suggest we couple reforming CAFE to
increase petroleum mileage to the issue of efficiency. I very
much favor pushing hard on both fronts, but I do favor
decoupling the two issues and solving the efficiency problem
separately from the issue of switching to petroleum mileage so
almost immediately the auto companies are aligned with the
environmentalists in reducing the use of petroleum.
The Chairman. Thank you.
Senator Biden.
Senator Biden. Thank you very much.
Let me ask you both, maybe you, Mr. Grumet, first. You
indicated, I am told, that the National Highway Transportation
Safety Administration, although it is well intended--the
discussion of CAFE standards may not produce the effect we
desire. What should we be doing here in Congress?
Mr. Grumet. Thank you, Senator Biden.
I think this really does come down to a question of
institutional capacity. The people at NHTSA are well-intended,
hard-working people, and when they imagine how to make the
optimum changes in CAFE, what they try to do is figure out what
is the total social value of saving a gallon of gasoline and
what is the cost of new technologies to achieve that, and they
try like any good economists to make the lines cross.
So what NHTSA just did was they reformed the structure of
CAFE in ways that I think bring greater economic efficiency to
the program. It gets you out of the idea that all cars have to
meet the same standards. So it is kind of a continuum of
weight-based results. And all of that is perfectly fine and
good.
But the key input was the number they put into the model to
say what is the total social value of saving a gallon of
gasoline over the next 10 years, and that was $1.70. They used,
by law, the EIA projections of the cost of a gallon of
gasoline, which are presumed to flatten out by around $2, and
they take the taxes off that. So we get $1.60 of real value of
a gallon of gasoline. And then when they looked through 50
different ways that gasoline and oil also affect our economy,
the sum total of the benefits of reducing a gallon, they come
up with is about 6 cents.
And they looked hard within the abilities of a guy with
green eyeshades and a computer. They looked actually at the
value of spending less time standing at a gasoline station
squeezing fuel into your tank. They looked at what they
perceived to be the value of reducing air pollution. They
looked at what they perceived to be the value of reducing the
vulnerability to price shocks. They looked at the value of
military, and I will read to you the quote from the regulatory
impact statement. ``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 duty truck CAFE standards.''
Now, I do not think that it is fair to say to the people at
NHTSA or Guy Caruso at EIA, ``tell me how much it costs and put
it in your model.'' I think it is fair to say to this
committee, ``you tell NHTSA how much it matters.'' One
suggestion was that when they put the number in their model, at
least they should look at the actual real cost of gasoline over
the last 12 months, that the idea of the price going forward
should be less than what people are actually paying might be
one floor, and then have Congress tell them to double it, tell
them to put 5 percent on it. But someone has to help NHTSA
think about tensions with China, foreign policy prerogative,
military costs, and things that are simply beyond their tools
and competence.
Senator Biden. You indicated that the idea of moving to
alternative fuels here, biomass fuels, biofuels, ethanol,
cellulosics, depends upon dealing with efficiency in
automobiles. What number do you have to get to in order to
reach the efficiency under whatever you want to call them, CAFE
standards or whatever the new standard may be? What do you have
to get to? How much do you have to save in the models you have
done to get you to the point where it intersects with the
amount that we can produce to render the outcome we are looking
for?
Mr. Grumet. There are a number of different ways to look at
that question. When we looked at the question of land mass,
which I agree most people see as the dominant constraint--and
we did similar analyses to Mr. Khosla--the conservative
assertion is it would take 180 million acres--this is based on
Carnegie Mellon analysis that has been around for 5 years--to
displace half of the petroleum supply. We were somewhat more
conservative in saying, well, let us say we just doubled the
yield of an acre, much less than I think Mr. Khosla suggests is
possible, that takes you down to 90 million acres. Let us say
we increased the efficiency of converting that mass to fuel by
50 percent, also I think very realistic to conservative. That
takes you down to 60 million acres. And then we said, well, let
us double the fuel economy. That takes you down to 30 million
acres.
Now, the reason that a doubling of fuel economy, I think is
notionally the right way to think about the issue, goes back
again to what we believe would be a useful goal, and that would
be to, again, halve the amount of oil we use per dollar GDP
over the next 20 years. We did it from 1975 to 2000. If we did
it again, we would make our economy twice as resilient to price
shocks so that we could get to the future that I think we both
want without suffering too much along the way.
To do that, would require about a 7.25 million barrel
reduction of oil a day over 20 years. If you brought fuel
economy of the country over that same timeframe up to about 45
miles per gallon, 50 miles per gallon, that would get you about
5 million barrels a day reduction.
One third way to think about it is if, in fact, you believe
that we can achieve about a 3-percent increase in efficiency
each year going forward and say, we are not going to tangle
with the questions about safety and making cars smaller and
lightweight materials, but we are just going to say put that 3
percent a year into efficiency, you compound 3 percent a year
over about 20 years, and you are also getting to about a
doubling. So there are a lot of different ways, both in terms
of technology and cost and goal and aspiration of doubling fuel
economy over 20 years, and is notionally, I think, the right
model to work toward.
Senator Biden. What percentage of oil consumed in the
country is transportation?
Mr. Grumet. About 70 percent.
Senator Biden. And how much natural gas and coal do we
consume in the nontransportation area?
Mr. Grumet. I guess, coal into locomotive engines and very,
very little amounts of natural gas; 97 percent of
transportation is petroleum.
Senator Biden. Mr. Khosla, you spoke about moving past
talking and moving toward making things happen. What needs to
get done? What do we have to do to get more flex fuel vehicles
on the road? Who do we talk to? Who do we call in to sit down
in front of us? You indicated that there are between 5 million
and 6 million flex fuel automobiles on the road right now. What
do we do from a Government standpoint that encourages a
significant change? What are the factors we have to----
Mr. Khosla. Sir, the most important role Government can do
is send the right signal, and that signal to Wall Street will
serve all our purposes. First, if you mandate 70 percent of new
cars be flex fuel cars, that is a relatively low-cost option. I
believe it costs an automaker about $35 to produce a flex fuel
car over a gasoline car. They will quote a higher number of
about $100 because they include a sensor that is also required
to meet pollution requirements. They include it in the cost of
conversion. So that is item number one.
Item number two is to mandate distribution of E85 stations.
I have chosen to push the idea of 10 percent. Higher numbers
would be better, but 10 percent could get us to the minimum
critical mass we need to get it started. Obviously, the more we
have, the faster----
Senator Biden. Excuse me. 10 percent?
Mr. Khosla. I'm sorry. Ten percent of all gas stations in
this country offer one E85 pump. Specifically, I am suggesting
that for any owner or brander of gas stations with more than 25
stations, to not put an undue burden on the mom-and-pop
stations, should be required to offer E85 at 10 percent of
their stations, which means at least one E85 pump.
The last thing I am suggesting is this variable credit on
ethanol, and what that does is protect ethanol producers and
investors if the oil companies were to manipulate the price of
oil down to, say, $30 a barrel. With this variable tax credit,
the actual amount of credit given out will probably decline.
The farmers will get no less, and they will have the benefit of
essentially getting insurance against price manipulation.
Senator Biden. What would you estimate the cost of that to
be?
Mr. Khosla. Today we have a 51-cent-a-gallon credit. I
expect with oil prices where they are likely to be in the next
5 or 10 years, it will be a net savings because I am suggesting
that that credit be dropped to 20 cents while oil prices are
high. If we have an 80-cent tax if oil prices are low, I think
it is highly unlikely the oil companies or the oil nations will
try and manipulate the price of oil down because they will
believe that ethanol will still be competitive. So just the
fact of instituting a variable tax will eliminate or discourage
the possibility of price manipulation down to low levels to
drive ethanol producers out of business. So I actually believe
it will be a net savings to Government.
None of the things I have recommended require Government
money, either the mandates on flex fuel cars or the
distribution or the variable tax credit. I think those three
would get us 90 percent of the way there.
Senator Biden. My time is about up. What would the floor of
$40 do? Would that be a fulsome way to deal with this?
Mr. Khosla. Absolutely. If we can enact that, that is not
only the simplest, but economically most efficient way to do
it. Once we have a floor--and frankly, I believe we will only
need a floor for about 10 years at the most--we will have
signaled to investors that they can invest in ethanol capacity
in this country without being subject to the manipulation of
oil prices.
Senator Biden. One of the things I have found in my
experience here, when you try to affect the economic impact on
average families out there, it is a lot easier to deal with
something and pass something that in the future may have an
impact than it is to deal with something that will have an
immediate impact. So a $40 floor now, it seems to me, would
be--not in terms of the politics down here, but the public at
large--a fairly painless suggestion.
Mr. Grumet. Many would welcome it as a problem they would
like to have.
Senator Biden. Exactly right. Seriously.
If I can editorialize for a second here, Mr. Chairman. I
think the American people are a lot smarter than we give them
credit for. I found it astounding that when the chairman began
to talk about--we had a discussion one day about 6-8 months ago
about the need for this committee--it took no urging from me. I
mean, it was just responding to the chairman's raising the
question about us beginning to focus very heavily in this
committee on energy. I saw a poll that absolutely reconfirmed
my faith in the instincts of the American people. About a month
ago, there was a poll--I think it was the New York Times and
whoever they do it with--that showed that slightly more people
thought that our security and our foreign policy flexibility
depended more upon energy and how we dealt with that issue than
upon the war in Iraq, for example. They happened to be right,
but it was really, I think, confirmation of the fact folks get
it.
We are all just sort of grappling with this in a very
fulsome way now. I think the American people are really ready
to take on some genuine challenges and I think they are
prepared to even make significant sacrifices long term. Imagine
if after 9/11 the President said, by the way, I am going to go
to the Congress in 2 weeks and introduce an energy bill to free
us from the grip of the oil oligarchs and it is going to be
painful and I expect your help. Who the heck would have said
no?
Mr. Khosla. I would completely agree with you. In fact, Tom
Friedman had an article in the latest issue of Foreign Policy
magazine that says there is a strong inverse relationship
between our energy dependence and human rights outside this
country.
I would suggest further, to reinforce what you said, that
we are very, very close to a tipping point of permanently
getting away from petroleum. And where I would like to disagree
with Jason is I believe we have the capacity in this country to
meet all of our needs within a relatively short period of time.
Bottoms-up forecast based on technologies I have seen in the
labs today, not even unimagined technologies, say we can
achieve our energy independence with less than 60 million acres
even with modest assumptions about efficiency. With 1 percent a
year demand-growth on oil, which would be modest energy
efficiency improvements, compared to the 2 percent a year
growth we are seeing today, we can get to energy independence
on less than 60 million acres. That is less land than we use
for export crops today by a lot; by half. It is almost equal to
the 40 million acres of CRP land that we have today, and
millions of acres would be returned to prairie grasses, which
is a wonderful thing to do.
So I will just suggest that these simple measures need very
little money but are focused, laser-like, and instead of
having, if I might be bold enough to say, 15 different versions
of bills, if we could have three or four simple things happen,
we will put ourselves past the tipping point. And 7 years from
now, we will be at a place where no oil company can decouple
the two. That is what I mean by irreversibly down this path
within 7 years.
Mr. Grumet. Senator Biden, if I could just add, we are
very, very good at framing a problem with great rhetorical
flourish and we then go to the American people and say, by the
way, here is a solution and it will not really cost anybody
anything and no one is going to mind, I do not think it is
credible. I think I agree with you that while we do not need to
tell people that they need to go have cold showers and warm
beer--this is not going back to the 16th century. What we need
to say to people is you can have the amenities that you are
used to, and you are going to have to pay a little bit of money
in order for all of these other amenities that we also care
about.
Senator Biden. Look, every single time in American history
we have been faced with a genuine crisis and people believe it
is genuine, that it is not manufactured, and that it is not
something that you are going to ask just one part of the
community, one part of the population to bear the burden of,
when have we ever not done it? We have never failed to do it.
People rode on bald tires for a long time during the war. A
safety hazard. But I do not get it. I do not get why we think
the American people are not prepared.
By the way, I apologize for taking the time, Mr. Chairman,
but I hope I have an opportunity to spend some time with each
of you off this podium here. Jason, I come from an autoworker
State. Ten years ago, we had the largest percentage of UAW
members of any State in the Union outside of Michigan, and as a
matter of fact, as a percent of population, probably higher. We
had a workforce, when I began in the Senate back in 1973, of
only 350,000 people; 31,000 were UAW members. That is a
gigantic percent. We now have grown. We have almost doubled our
population. We are close to 1 million now, and we were only
570,000 then, and our workforce is a lot larger and the
autoworkers are fewer. But guess what. They figured it out.
They get it.
I have the guys where we make the Durango. I have the guys
where we make a number of General Motors systems installed in
some other vehicles. Guess what. They are worried. They are the
ones raising the questions about we are not going to be able to
sell the vehicles we are making because of the fuel economy.
This is not a labor or management--I am not trying to have
sort of a theological debate about labor and management. But
the truth of the matter is labor does not get to make many of
these decisions. They do not get to vote on what product is
made. I am not suggesting they should. So the idea that there
is this resistance among autoworkers to moving in the direction
where 70 percent of the automobiles are flex fuel automobiles,
I think they see that as a way in which maybe they will
preserve more of their jobs instead of costing them their jobs.
I was here at the same time when we had the first Clean Air
Act. I will never forget a guy named Ricardo, who was chairman
of the board of Chrysler at the time--not Iacocca, Ricardo--and
a guy named Leonard Woodcock. I was a young Senator in this
building in a garret on the sixth floor. I remember them both
coming to see me, and I remember thinking is my office set up
nicely enough. I had been there several months. They both came
in to tell me how I could not possibly vote for the Clean Air
Act. And I ran on that issue. I said, no, no, no.
I remember Leonard Woodcock, who was a revered President of
the UAW, and Ricardo sitting there and Ricardo saying, look, we
are going to move from Chrysler having 18 percent of the large
car market to 30 percent of the large car market, and that is
our goal. We are going to build bigger cars, more of them. I
remember knowing nothing from nothing sitting there and saying,
that does not seem to make sense to me and Woodcock saying, it
is the only way we can preserve our jobs.
I did not listen to their advice, but the generic point I
am making is I think that everybody is a lot more
sophisticated. They may not know what you know, but they do
know certain basic things. There is no painless way to get from
here to there. They think there is a rational way to do it, and
they are prepared to do it and they think maybe their future
lies in the fact that our independence may generate other kinds
of technologies where we become a net exporter of energy of
sorts, and that is, energy technologies that work.
At any rate, I am really impressed with both your
testimonies, and I am happy to invite any comment you all have.
Again, I warn you. I am going to get to both of you, if I can,
to spend a little more time with you.
Mr. Khosla. Sir, if I might add a very hopeful sign to what
you just said. I believe GM management has decided, for lots of
business reasons, that flex fuel cars make a lot of sense for
them, and in fact, I believe the 2007 model year they will be
producing more flex fuel cars than the credit they get under
CAFE. So they are doing the right things for lots of good
business reasons. They have lost the branding for hybrids to
Toyota. The only other brand they can have is flex fuel, and
that helps America and American farmers. It is a very hopeful
sign. So I think it is not only something that the workers can
support, but I think management is well down that path and we
can accelerate it.
I think they are hurting themselves by saying we do not
like the idea of a 70-percent mandate because it will make so
much more ethanol available in the marketplace because
investors will believe the cars will be there, that their
competitive advantage over Toyota will go up substantially. And
that is what they should be doing if they were looking beyond
just the natural reaction saying, I do not want any mandate, no
matter what it is.
Mr. Grumet. I will just close, Senator, by saying that the
notion that we cannot effect the kinds of technological,
environmental, security outcomes we want without damaging the
domestic auto industry is so fundamentally at odds with the way
we imagine ourselves as a country. We cannot ignore it, but we
cannot let it stand.
I have many friends in the UAW and they hate coming down
here opposing these kinds of things because I think they know
that it is where they have to go. But they do have real fear. I
do not think they have any disadvantage when it comes to
flexible fuel vehicles. We made some bad choices and we are
behind the Japanese when it comes to hybrids. We are behind the
Europeans when it comes to diesels, and the domestic auto
industry does have to deal with things like health care costs
and other aspects of their business that are somewhat less
competitive with their competitors.
So we can, without, I think, tremendous effort, right that
ship and give them the tools so that they can, in fact, not
only make the cars we want but do it here in the United States.
I think that is where the UAW sees the future. It is where the
coal miners see the future on climate change. And it requires a
broader kind of economic policy consistent with our foreign
policy and our environmental interests.
I would very much welcome the opportunity to work with you
and your staff.
Senator Biden. Well, I thank you very much. I knew if I
stayed in this job long enough, Senator, I would live to see
the day where I have an issue that unites my autoworkers and my
farmers, literally. The largest industry in my State, as you
know, Mr. Chairman, is agriculture. Everybody thinks it is the
auto industry or the chemical industry. It is agriculture. This
is one of the uniting factors.
I will end with a strange little story. Mr. Chairman, you
will appreciate this. I got involved in politics because of the
civil rights movement, and my last campaign 2 years ago, I had
a meeting in August at a Boys and Girls Club in a town called
Bear, DE. I think I may warrant the Nobel Prize for this. I
drove up to the town meeting and the county police officers
were in the parking lot of this brand new Boys and Girls Club.
They said you cannot go in. I said why. They said the Ku Klux
Klan is in there.
This is the only area in my State where there is genuine
integration in the new developments. It is the only place you
can buy a new construction home that you can sell somewhere
between $125,000 and $200,000 in decent neighborhoods. They are
truly integrated. My State has the ninth largest black
population in the country.
So I went down and I said, no, no, I have to go in. In
summer garb, there were a dozen members of the Ku Klux Klan
there, and they wear blue pressed khaki pants, white shirts,
the grand kleagle emblem and a blue hat with a white middle.
They looked very orderly and they stand against the back wall.
Thirty to thirty-five percent of the audience of roughly 100
people were African-American. The first question I got asked
was about immigration. I have a view similar to President
Bush's view on immigration. That is what built this country and
we ought to be able to figure this out. I got finished my
answer and the guy who asked the question was a Ku Klux Klan
guy. He said, well, I totally disagree with you, Senator Biden,
and with that, 35 African-Americans stood up and clapped for
him. And I started laughing and no one quite got the humor. I
said I never thought I would live to see the day where I could
unite the Ku Klux Klan and the African-American community.
[Laughter.]
Now with the opportunity to do the same for the UAW and
farmers in my State, this job is getting much more exciting.
Thank you very much for your testimony. I appreciate it a
lot.
The Chairman. Senator Biden has demonstrated the affinity
between the ranking member and the chairman because corn
farmers have been talked about a bit today, also UAW members.
We even claim not a per capita basis but the second largest
number, aside from Michigan. We have been trying to help both.
You have offered some formulas. I just want to explore the
nitty-gritty of your three simple action items. The first one
is to require 70 percent of new cars to be flex fuel vehicles.
Just to get this straight, if we pass such a law, does that
mean that in 2007 car companies have got to produce 70 percent
of all the cars they are doing that year? Or is this a
graduated thing? Be more explicit, if you can, as to how
rapidly we arrive at this.
Mr. Khosla. Yes. Sir, the number I have suggested in my
written testimony is 20 percent by 2009 because they need the
time to adjust their models.
The Chairman. Why would they need that? If you have a
simple process, as you have described, $110 deal you think,
although the car companies might say $180 or whatever, why the
long delay?
Mr. Khosla. Sir, they probably do not, but they will argue
they do. So I used to use a 90-percent number and GM convinced
me because of certain esoteric testing requirements in
California, that I should use a lower number, and they
suggested the 60- to 70-percent range. So I did accommodate
them, to get their support, to suggest 70 percent. I think it
would be very, very conservative to say 2009 model year which
starts in 2008 should be 20 percent and we should increase it
10 percent a year to, by 2014, having 70 percent.
The Chairman. Let me stop you a second there because you
diplomatically were negotiating with these people trying to be
amicable. Let us say that Senator Biden and I say, listen, you
folks are headed to chapter XI bankruptcy. You may not get to
2009. You may not have that option at all, as a matter of fact.
All this may be decided by a judge in a court of law, as a
matter of fact, as to how in the world you even stay in
business. So as friends of the family, we are coming to say you
may have to wrench around your bureaucracy, the same way we may
have to wrench around our Department of Energy to get some
things straight.
We talk in terms of our vital national interests, how
predator countries are about to do us in, but then we say, but
we have a simple timetable. We incrementally, 10 percent, 20
percent at a time, go all the way out to 2009, 2015. I
understand how you, as an investor and a diplomatic person,
have to deal with these people. Perhaps we do, too, ultimately.
But, nevertheless, if this is serious, I just pick up your
70 percent thing and, just for sake of argument, have asked
you, why not in 2007 say 70 percent of the cars? Because then
you would say, well, that is great, but it takes 12 years to go
through the whole fleet. We have got a lot of cars out there.
So even if 70 percent of all the new cars are flex fuel, do the
math and this will barely get you a single digit number. That
is what worries me about this.
Mr. Khosla. Sir, the most aggressive number you would like
to support and enact, I will cheerlead and clap and support you
on. [Laughter.]
The only thing to keep in mind is they have an engine
testing requirement and they claim they have limited capacity
to retest these engines. So there is an engine certification
requirement because they have to recertify each engine, and
even, for example, the Ford----
Senator Biden. Excuse me. Would you explain that more? They
have to recertify each engine.
Mr. Khosla. Yes.
Senator Biden. They manufacture in the Chrysler plant in
Newark, DE, an engine for whatever vehicle. There are several
vehicles they make there. So as it goes off the line, they have
certified it. Correct?
Mr. Khosla. They have certified it for gasoline use.
Senator Biden. No, but if we mandated that 70 percent of
those vehicles going off that line had to be flex fuel, what is
the added difficulty of certifying it before it gets off the
assembly line?
Mr. Khosla. They claim it costs $1 million or $2 million to
recertify it to take ethanol and meet all EPA and California
requirements. Now, how long should that take?
Senator Biden. $1 million or $2 million per plant?
Mr. Khosla. No. Per engine.
Mr. Grumet. Per engine family.
Senator Biden. So they are talking about $50 million to $75
million total. Right?
Mr. Khosla. I believe they would do it by engine, not by
engine family because the Ford F-150, they have one of the
engines certified but not the others.
But if they were to prioritize this, which I believe is in
their interest, given how much of a branding benefit they get
from it, I think an aggressive time line would be to mandate
something in 2 to 3 years. Now, we know the same companies,
Ford and GM, have done that in Brazil already.
Senator Biden. Yes.
Mr. Khosla. So I would be a supporter of more aggressive
time lines.
The Chairman. Very well. Well, in any event, we are agreed
on that and we will see, pragmatically, what the tide will
bear, I guess.
Now, you have made some interesting comments today and in
your charts, Mr. Khosla. You have the hybrid business and
flexible fuel and point out how you get more for the dollar and
so forth with the flexible, which sounds good.
Now, then, I begin to ponder in my own mind, well, how do I
find one of these hybrid flexible fuel cars? Now, you have got
a picture of a Saab 9-5 launched May 2005. Are these cars
selling anywhere? Is this a case in which you are trying to
make also the point that you do not have to have a small car--I
do not know how large that car is--but you can have the regular
cars, to which we have become accustomed, and somehow change
the engines and what have you?
Mr. Khosla. Absolutely. Sir, let me give you the history of
Saab 9-5 because it is a very interesting car in many, many
respects. It is being sold in Sweden by General Motors.
The Chairman. In Sweden.
Mr. Khosla. Yes. And surprisingly for General Motors, it
has become one of the hot General Motors models in Sweden. So
it has been a commercially extremely successful car. It is a
regular car, a mid-sized sedan, lots of peppy performance.
What they did different in this car--and they often talk
about a 25-percent reduction in fuel mileage for ethanol--they
optimized it somewhat to accommodate ethanol, not just take a
standard engine and recertify it. Suddenly the mileage
reduction in the Saab 9-5 went to only an 18-percent reduction.
It went to an 18-percent reduction and they got in a 175-
horsepower car an extra 30 horsepower out of it.
If you were really designing it for ethanol, you would
design it to run at 175 horsepower with ethanol, which means
you would make the engine smaller, improving the mileage
efficiency with ethanol. Suddenly the difference to get 175
horsepower and a performance of 0 to 60 in, whatever their
specification is, 8 seconds, you would have almost the same
mileage, single digit percentage differences between an ethanol
car and a gasoline car. That is the kind of change that is not
figured into any of my projections or anybody else's
projections, and I believe that will start to happen because we
are starting to see it happen in Sweden. We are starting to see
examples of that in Brazil. And this is a car that is a
peppier, more hard-performing car than the gasoline version of
the same car. So it is very, very encouraging.
And the most encouraging thing to me is consumers are
demanding it. If they were to bring that car into this
country--and as of now, I know of no plans to do that, which is
a shame--it would be a hot-selling car in America.
The Chairman. Well, this is astonishing. That was the
question I was going to ask. Where are they? In other words, it
is a hot car in Sweden and elsewhere. It is General Motors, the
same General Motors to which we have become accustomed. I was
once an employee as a summer student. I would just say, why not
here? Do you have any idea, as you have queried your General
Motors friends, why has this car not ever appeared in the
United States?
Mr. Khosla. They gave me a long story. Sir, in a
bureaucracy, you can give an excuse to not do anything. It
takes time. It takes recertification, retesting. In fact,
General Motors is hurting from not having hot-selling models.
The Chairman. Well, that we have noticed.
Mr. Khosla. This could be that, and if I were CEO of
General Motors, I would make it my highest priority, especially
since long term they want flex fuel vehicles as their corporate
brand. This is brain-dead simple to me.
The Chairman. Yes. They are advertising that 250,000 will
be built this year, but that raised the question, why not
500,000, why not a million? If you have got problems moving
cars, that is a basic question. Hopefully, the chief executive
of General Motors will catch all this on C-SPAN and be advised
by your testimony.
Let me just ask this, because in a personal way I asked Jim
Woolsey, when he appeared before us, and you all know him. In
fact, he sort of preempted the situation. He knew that I bought
a Prius 14 months ago, but he wanted to disabuse me that I was
that much ahead of the curve. He said, Lugar, what you need is
a battery on that Prius that you can plug into the wall in your
garage. That way you can get enough juice in that car that you
can drive to the Hart Building every day and drive back, which
is essentially what I do in this car, and never use any
gasoline at all.
Now, we are going to see a demonstration, I understand,
here at the Senate in the next week, in which there will be
some batteries and a car and so forth, showing that the state
of the art is bumping ahead, I hope, a whole lot.
But what about all of this? Is there something to this sort
of thing in competition with the other ideas you have?
Mr. Grumet. Keeping up with Woolsey is no small feat,
Senator. So I think we should let him get one first.
But it is an absolutely intelligent design for the kind of
vehicle that we need in this country because it is a vehicle
that is a hybrid vehicle, but it allows you to operate the
entire driving cycle on the battery for some 30 or 40 miles,
which, as you said, is really in urban driving what we
generally do.
Five to ten years ago, the car companies said that hybrids
were not going to work because it was bringing two systems
together. You were going to have a gasoline engine and an
electric motor and it was too complicated and it was not going
to work. Now we are being told that plug-in hybrids are not
going to work because it is adding a third system. You have the
gasoline, you have the electric motor, and then you have this
demand for a larger battery. And it is true that you are
bringing three different ideas together.
My understanding is that the challenge is not that you
cannot drive around one of these cars, because you will figure
that out yourself next week. The challenge is creating a
battery that has longevity to stick with the car and the owner
for 130,000 or 140,000 miles. What the car companies will tell
you is that these batteries are going to be a couple thousand
dollar items and that they cannot get them to last more than 3
or 4 years. So, I think this is a challenge. It is well within
the ability, I would think, of this great Nation if we really
wanted to get batteries that could last three times as long.
So it is a vehicle that I think would have a great
possibility. Of course, if you really want to get Jim happy,
you then put E85 in that hybrid. Then you can get what is a
functional equivalent of 500 or 600 miles of distance per
gallon of petroleum. I think that is, for the moment at least,
the highest aspiration of automobility that we have been able
to describe.
The Chairman. That then brings your second point and that
is this E85 distribution. This only works for me or anybody
else if, in fact, there is such an E85 pump within 50 miles of
where I am. Now, all of us, whether it is in Delaware or
Indiana, we are all riding herd on this situation. We
celebrated the 30th such pump in Indiana last week. We know it
is the 30th because this is a big event. The Secretary of
Energy, himself, was in Indiana for the dedication of this one
pump.
Now, having said that, this has not impressed the oil
companies to whom this committee has written. They have written
back, respectfully, that you have to understand the impurities
of ethanol, the fact that you cannot just put one of these
pumps together with our pumps. It requires a very separate
situation. It is very expensive. Furthermore, we are not really
enthusiastic about the idea to begin with.
Now, it is almost like the automobile companies. You sort
of say, ``what century are you living in, what country are you
living in? Do you understand the foreign policy thing, getting
back to all of the grim situations?'' And surely they do, but,
nevertheless, this is cumbersome.
We have General Motors in Indiana now sponsoring E85
stations. So giving credit where credit is due, not the oil
companies, but in this case, the auto company and the UAW
people and the people who are our constituents. It is important
that there is a group interested in this sort of thing.
But I must say I am not sure how we move these situations
out. We have got charts of 92 counties in Indiana, explaining
how many flex fuel cars there are in the State of any kind,
about 160,000, and where they are positioned. Most of them are
not positioned very close to the 30 tanks. There may be 60 by
December. But even if there were, right now all the ethanol in
Indiana seems to be going to California and to New England to
solve the MTBE problem. The cost of the ethanol is $2.75, not
$1.50 or whatever we prophesied. Supply and demand.
Now, eventually all these places that we are all talking
about get built, but as working politicians now, we really are
riding all sorts of horses going off in different directions,
encouraging these pumps. We need a supply for the pumps. We are
encouraging the car that could use the pumps, and it is hard to
get people to build enough of these cars. Clearly, these are
the practical solutions, and we have these hearings really to
cheer ourselves up, I suppose, and try to find a few supporters
out there----
[Laughter.]
The Chairman [continuing]. Because this really works.
This can make a very large difference in the perception of
Vladimir Putin of the United States, or of other people who do
not wish us well, Hugo Chavez, Evo Morales, and so forth. For
the moment, they think we are on the run. In many ways they are
right because we are fixed in our own attitudes, as I cited,
yesterday, in a debate. The Wall Street Journal had an
editorial the other day sort of aimed at people like us. They
said, essentially, if you have a virtue feeling about a Prius,
go ahead. But nevertheless, in essence, real people want safe
cars and they are big. Therefore, cars save lives if they are
big cars. Now, of course, you are coming along and saying,
well, you can have a big car and save your life and still
perhaps have a flex fuel car, have a car with an engine that
gets mileage. These things are not altogether separate. But I
think that is the debate, and it is out there in print.
I am intrigued by your talking about South Dakota. You have
here a chart about South Dakota, which is fascinating. You say,
``Turning South Dakota,'' and you have got 44 million acres
today and tomorrow, and you have got tons per acre. Well, they
go up by three times presumably because they are doing
cellulose, switchgrass out there now in South Dakota in your
tomorrow chart. So there are thousands of barrels a day coming
out of South Dakota, 3,429,000.
Then you have a chart and you ask, is South Dakota a member
of OPEC. The only two countries that produce more at that point
per day are Saudi Arabia and Iran. South Dakota comes in third,
ahead of Kuwait, Venezuela, UAE, Nigeria, Iraq, all very
difficult cases. Now, that is astonishing. I am not sure South
Dakotans really have seen that chart.
Mr. Khosla. It could become the most valuable State in the
country.
Senator Biden. Who did you coauthor that article with
again? That was a joke.
The Chairman. Yes; our dear colleague of South Dakota.
But in any event, now let us have a reality course. When
does South Dakota become third in the batting order with OPEC?
What is tomorrow here and what has to happen?
Mr. Khosla. Sir, practically it will not happen this way.
The 44 million acres we are talking about would be spread
throughout the Midwest and probably throughout most of the
country. There are good biomass regions in Florida, in the
South, in California, in the Northwest in terms of our forests
and wood chips that are a great source of cellulosic ethanol,
even in Canada. So this was more for illustration. It was a
chart done by a friend of mine that I chose to use for
illustrative purposes.
But practically, these numbers are achievable. In fact, I
talked earlier about getting to 3,000 gallons per acre. When I
talk to my plant biologist friends from what they can actually
yield with 25 years of biomass development geared toward
producing more energy, the numbers I hear are more like 45 tons
per acre, best case, and then you are talking about 5,000
gallons, and even with modest demand increases over the next 25
years, that would mean our energy needs with 40 million acres
or some small number like that. Those are astonishing numbers.
I would only add that ex-Secretary of State, George Shultz,
and Jim Woolsey have coauthored an article that talks about
over 60 million acres. So the land use requirements are not
humongous. In fact, they are relatively modest because we now
have 72 million acres of soybean crop in this country, which
did not exist some time ago. Our corn crop has gone from 120
million acres to 80 million acres over the last 75 years or so.
So we have more than enough land.
We do need to enforce--back to your second question--
distribution. I have recommended a very modest number of 10
percent. I would love to see it be like Sweden which has a 50-
percent requirement by 2009. I think the independent gasoline
operators are dying to do this if they are not obstructed.
Governor Pataki last week introduced a bill in New York State
that could ban all franchises like Chevron and Exxon from
discouraging the adoption of E85 by independent gas station
owners. I think that is a wonderful idea and I think we should
do it for the whole country, and I would love to see a more
aggressive target than the 10 percent I have recommended.
The Chairman. Well, I appreciate very much your chart,
imaginative or not, with regard to South Dakota. I would just
observe that they might not want to put all of their acreage
into ethanol production. Some people might still want wheat or
corn or other items, at least that will be the claim of the
turkey growers, the cattle people and so forth.
Mr. Khosla. This was more fun than anything.
The Chairman. Leaving aside that point, however, it
illustrates what could occur--and this is another story
altogether--in terms of wealth production in our own country. I
was in Jasper County, IN, giving a commencement speech at St.
Joseph College, a Sunday ago. I went down the road to the
ethanol plant that should be completed by December. I pray that
it will be completed by December so that somehow the ethanol
gets out to these E85 stations, few as they may be. But 40
million is the tag for this one. It is a fairly small plant,
but 40 million times $2.75 is a lot of new wealth into Jasper
County, a county of 31,000 people. People have no idea of the
impact that this is going to have. When you talk about the
impact in South Dakota, 44 million acres into this sort of
thing, that is extraordinary.
One of the reasons we talk about OPEC is because this has
made some rulers very wealthy, not necessarily the people of
the country, but somebody in Saudi Arabia and Iran and so forth
is, as a matter of fact, stowing away a lot of cash. Our
problem, as a country, is that sometimes this cash is not used
to our benefit. In the case of Iran right now, we are going to
have a hearing tomorrow, and a part of the reason we are having
the hearing is because of the subject we are discussing today.
And Tom Friedman, right in this article that you have
cited, shows a graph that political scientists have helped him
with. As the price of oil went from $20 to $40 to $60, civil
liberties in each of the countries involved went down,
precipitously, almost by the same amount. There was no need for
democracy. There was no need for anybody else. In fact, the
rulers of the country had the stuff. And we can talk until we
are blue in the face about democracy in the Middle East or in
these countries, but we will be blue in the face and there will
not be much democracy simply because that is where the wealth
is, the patronage, all of the sinews that keep the system
going. That is very serious.
That is why I highlight the illustration of specific States
and specific locations in the United States--and I would
encourage you and those who work with you on these publications
to do much more of this because the reality of this makes a big
difference when we are saying to our constituents this is for
real and we believe we have an idea here.
Mr. Khosla. I want to just reiterate these three simple
things that do not cost very much money and are not too much of
a burden on any industry, not the auto industry or the oil
industry, and do not take Government money. These three simple
things can completely forever change the face of America in a
way that is hard to imagine. If we have 200 billion gallons of
ethanol coming out of America even at $1.50 a gallon production
cost, we are talking about 300 billion dollars' worth of extra
GDP in rural America. That is transformative in this world.
I might also, since this is a Foreign Relations hearing,
refer you to a chart that has a map of the world.
The Chairman. That is equivalent almost to the $320 million
deficit we have in our foreign accounts from imported oil.
Mr. Khosla. If you can imagine going beyond America,
because it is transformative of rural America, it will repeat
that phenomena all over the world. If one was to address the
question of poverty, another question I am personally very
interested in--and microfinance is my other area of endeavors--
and you draw a poverty belt, it is all around the equator. The
poverty belt runs 20 degrees north and 20 degrees south of the
equator. That is the part of the world that will be rejuvenated
completely by a switch to biomass fuels. We will address the
poverty question much more effectively with this transformation
and have global impact.
Also, if one might imagine a map of the world, one can see
America meeting its needs and Canada's needs, sort of North
America meeting its needs; South America supplying South
America and Europe; Australia with lots of land supplying
China; India being relatively self-sufficient; and Africa sort
of being a big buffer zone for biomass. So one can almost paint
a global picture of supply and demand and the regional and
local balances that I am happy to elaborate in more detail, if
you would like. That to me is the most exciting part of this
transformation beyond just meeting our energy independence
goals. It changes the planet beyond changing the face of rural
America, and that is exciting. That is very exciting.
The Chairman. It certainly is.
Mr. Khosla. And it is very doable. It is not esoteric.
The Chairman. Senator Biden.
Senator Biden. This is one of the most interesting hearings
I think we have ever had. Mr. Chairman, I think whether you and
I do it or not, but I just think that we should be, with your
leadership, just setting the standard here, just taking these
three things and putting them in the form of legislation and
laying them out there and start to make the case. Every single
major change, since you and I have been here in the Senate, on
any area, whether it has been domestic or foreign, has begun
with a couple of our colleagues being out front and setting a
goal and forcing a debate around those issues.
I cannot tell you how much I appreciate the time and the
effort that you fellows have put into this because, again, the
thing that excites me about this is the attitude of the
American people is one that they are wondering where their
leaders are. They are looking for some hope. They understand
that things, as they are now, if the status quo remains, look
relatively bleak for them. They look bleak for them in terms of
jobs. They look bleak in terms of rural development. They look
bleak to them in terms of our dependence. They look bleak to
them in terms of our current account deficit. They look bleak
to them, and they are an optimistic people. They are
optimistic. They know there is something else out there. They
know it does not have to be that way.
I just think merely by raising the expectation of the
American people that there is a way, a path, it will unleash a
whole lot of energy. It will unleash a whole lot of energy in
the States. It will unleash a whole lot of energy from the
Governors. It will unleash a whole lot of energy from local
communities. You will find in my State and I suspect in yours,
Mr. Chairman, you will have everyone from city councils to
county councils deciding that they want to figure out how to
promote the access, that 10 percent. Was it Thomas Paine who
said we have the ability to remake the world? I am paraphrasing
it. We really do. I do not want to make this sound too
grandiose.
Mr. Khosla. Absolutely. I want to stress again how much
support we can get among normal people. Not only that, for the
first time in this issue, we can involve a whole new
generation. It is the one thing I have worked on in my career--
and I have four children between the ages of 13 and 18--that
they are really excited that I am working on it. Every time
there is a story, they share it with their friends. It is
hugely motivating when young people care enough and get excited
about the idea to share it with their friends. Many in my
daughter's class watched the Dateline piece with their parents.
That is very exciting, but it also tells us how much potential
we have to mobilize people who you would not think are normally
part of effecting a change like this.
I think this has implications all over and completely
changing even the way the youth of America look at these kinds
of issues. Otherwise, they are boring, old issues decided in
Senate Chambers, but they can get involved this time. I just
see my own children and that is all the energy I need to keep
doing this.
The Chairman. Well, you have stimulated not only your own
children, but both of us, and we thank you both for
extraordinary testimony. Senator Biden and I will be thinking
together about how we can proceed with the important ideas and
objectives you had, and this is why we have tried to explore
the nitty-gritty of some of these to understand better in our
own mind's eye the negotiations you already had in your public
lives, as well as the ones we must have. We thank you very much
for coming.
Senator Biden. Gentlemen, thank you very much.
Mr. Khosla. Thank you very much, sir.
The Chairman. The hearing is adjourned.
[Whereupon, at 12:03 p.m., the committee was adjourned.]
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Additional Statement Submitted for the Record
Prepared Statement of Hon. Russell D. Feingold, U.S. Senator From
Wisconsin
I appreciate the Chair's unfailing commitment to the issue of
energy security. He has been a constant voice, using this committee's
area of jurisdiction, warning us about the implications of our energy
choices and today's hearing continues these efforts.
As we all know, our current over-dependence on oil poses grave
risks for our country--for our national security, for our economy, and
for our environment. While I remain saddened that we didn't use last
year's energy bill to really push the envelope, I am optimistic that we
will soon get it right and provide an energy vision to bring us into
the 21st century.
Today's hearing should prove useful as we look for ways to move
forward and I am thankful for both witnesses, Vinod Khosla and Jason
Grumet, joining us this morning.