Fast Company
Charles Fishman
Sitting humbly on shelves in stores everywhere is a product, priced at less than $3, that will change the world. Soon. It is a fairly ordinary item that nonetheless cuts to the heart of a half-dozen of the most profound, most urgent problems we face. Energy consumption. Rising gasoline costs and electric bills. Greenhouse-gas emissions. Dependence on coal and foreign oil. Global warming.
The product is the compact fluorescent lightbulb, a quirky-looking twist of frosted glass. In the energy business, it is called a "CFL," or an "energy saver." One scientist calls it an "ice-cream-cone spiral," because in its most-advanced, most-appealing version, it looks like nothing so much as a cone of swirled soft-serve ice cream.
Most people have some experience with swirl bulbs, but typically it hasn't been happy. In the early 1990s, you would step into a room in a business traveler's hotel, flip on the lights by the door and between the beds, turn on the desk lamp and the floor lamp, then stand in the gloom looking around and thinking, "There must be another switch somewhere that actually turns on the light." Every one of the bulbs flickering to life was a compact fluorescent--and five of them together didn't provide enough light to read the card listing the lineup of cable-TV channels.
For two decades, CFLs lacked precisely what we expect from lightbulbs: strong, unwavering light; quiet; not to mention shapes that actually fit in the places we use bulbs. Now every one of those problems has been conquered. The bulbs come on quickly; their light is bright, white, steady, and silent; and the old U-shaped tubes--they looked like bulbs from a World War II submarine--have mostly been replaced by the swirl. Since 1985, CFLs have changed as much as cell phones and portable music players.
One thing hasn't changed: the energy savings. Compact fluorescents emit the same light as classic incandescents but use 75% or 80% less electricity.
What that means is that if every one of 110 million American households bought just one ice-cream-cone bulb, took it home, and screwed it in the place of an ordinary 60-watt bulb, the energy saved would be enough to power a city of 1.5 million people. One bulb swapped out, enough electricity saved to power all the homes in Delaware and Rhode Island. In terms of oil not burned, or greenhouse gases not exhausted into the atmosphere, one bulb is equivalent to taking 1.3 million cars off the roads.
That's the law of large numbers--a small action, multiplied by 110 million.
The single greatest source of greenhouse gases in the United States is power plants--half our electricity comes from coal plants. One bulb swapped out: enough electricity saved to turn off two entire power plants--or skip building the next two.
Just one swirl per home. The typical U.S. house has between 50 and 100 "sockets" (astonish yourself: Go count the bulbs in your house). So what if we all bought and installed two ice-cream-cone bulbs? Five? Fifteen?
Says David Goldstein, a PhD physicist, MacArthur "genius" fellow, and senior energy scientist with the Natural Resources Defense Council: "This could be just what the world's been waiting for, for the last 20 years."
Swirl bulbs don't just work, they pay for themselves. They use so little power compared with old reliable bulbs, a $3 swirl pays for itself in lower electric bills in about five months. Screw one in, turn it on, and it's not just lighting your living room, it's dropping quarters in your pocket. The advantages pile up in a way to almost make one giddy. Compact fluorescents, even in heavy use, last 5, 7, 10 years. Years. Install one on your 30th birthday; it may be around to help illuminate your 40th.
In an era when political leaders and companies are too fainthearted to ask Americans to sacrifice anything for the greater good, the modern ice-cream swirl bulb requires no sacrifice. Buying and using it helps save the world--and also saves the customer money--with no compromise on quality. Selflessness and self-satisfaction, twirled into a single $3 purchase.
So far, the impact of compact fluorescents has been trivial, for a simple reason: We haven't bought them. In our outdated experience, they don't work well and they cost too much. Last year, U.S. consumers spent about $1 billion to buy about 2 billion lightbulbs--5.5 million every day. Just 5%, 100 million, were compact fluorescents. First introduced on March 28, 1980, swirls remain a niche product, more curiosity than revolution.
But that's about to change. It will change before our very eyes. A year from now, chances are that you yourself will have installed a swirl or two, and will likely be quite happy with them. In the name of conservation and good corporate citizenship, not to mention economics, one unlikely company is about haul us to the lightbulb aisle, reeducate us, and sell us a swirl: Wal-Mart.
In the next 12 months, starting with a major push this month, Wal-Mart wants to sell every one of its regular customers--100 million in all--one swirl bulb. In the process, Wal-Mart wants to change energy consumption in the United States, and energy consciousness, too. It also aims to change its own reputation, to use swirls to make clear how seriously Wal-Mart takes its new positioning as an environmental activist.
It's a bold goal, a remarkable declaration of Wal-Mart's intention to modernize and green up a whole line of business using market oomph. Teaming up with General Electric, which owns about 60% of the residential lightbulb market in the United States, Wal-Mart wants to single-handedly double U.S. sales for CFLs in a year, and it wants demand to surge forward after that.
Diane Lindsley, the hardware buyer who decides what goes in the lightbulb aisles at Wal-Mart, thinks 100 million swirls is perfectly reasonable. "Yes," she says, "it's rational, I think." Before she started buying bulbs for Wal-Mart just three years ago, Lindsley didn't even know what CFLs were. Now she pauses in a way that suggests the kind of determination Wal-Mart can bring to bear when its buyers decide they are going to sell Americans something. "We have plans in place to where it may not take that long."
"Think how many games Wal-Mart has changed. There's no reason they can't change this game."
Which presents a daunting challenge: Wal-Mart's push into swirls won't just help consumers and the environment; it will shatter a business--its own lightbulb business, and that of every lightbulb manufacturer. Because swirls last so long, every one that's sold represents the loss of 6 or 8 or 10 incandescent bulb sales. Swirls will remake the lightbulb industry--dominated by familiar names GE, Philips, Sylvania--the way digital-music downloads have remade selling albums on CD, the way digital cameras revolutionized selling film and envelopes of snapshots. CFLs are a classic example of creative destruction.
GE, facing the prospect of mothballing a centurylong franchise in lightbulbs--well, GE is smiling and swallowing hard. "CFLs are taking off," says Robert Stuart, who heads consumer marketing at GE for lightbulbs. "No one has been as vocal about this recently as Wal-Mart. One hundred million bulbs in a year? It's an aggressive goal. GE will find a way to make sure they are able to do that."
GE, too, has launched a green business initiative: ecomagination, an effort to make environmentally sustainable technologies an ever-larger part of GE's business. Swirls fit well, despite the inevitable cannibalization. "The real issue is, if we don't do it, someone else will," says GE's ecomagination vice president, Lorraine Bolsinger, of Wal-Mart's effort to push CFLs. "It's old thinking to imagine that you can hold on to a business model and outsmart the consumer. You can't."
Steven Hamburg is an associate professor at Brown University, an expert on energy consumption and global warming who helped Wal-Mart think through the spiral-bulb strategy. "Can they change the game? Think how many games Wal-Mart has changed. There's no reason they can't change this game."
Fan-Fare
For Chuck Kerby, it was ceiling fans that made the impact of energy-saving swirl bulbs dramatically clear.
Kerby is a vice president and divisional merchandise manager at Wal-Mart for hardware and paint (and ceiling fans) for all of Wal-Mart's U.S. stores and supercenters. Lindsley is one of 12 buyers working for him. Kerby, who started out collecting shopping carts from the parking lot of Wal-Mart #189 in Kirksville, Missouri, 23 years ago, has known about CFLs for years. "I became aware of them when I would travel and go into a hotel room."
Last year, conversations started in Wal-Mart around the potential of swirls to save customers money on utility bills. "Somebody asked, 'What difference would it make if we changed the bulbs in the ceiling-fan display to CFLs?'" says Kerby. A typical Wal-Mart has 10 models of ceiling fans on display, each with four bulbs. Forty bulbs per store, 3,230 stores.
"Someone went off and did the math," says Kerby. "They told me we could save $6 million in electric bills by changing the incandescents to CFLs in more than 3,000 Wal-Marts. I couldn't believe it. I didn't know I was paying $6 million to light those fixtures. I said, that can't be right, go back and do the math again." The numbers came out the same the second time: savings of $6 million a year. "That, for me, was an 'I got it' moment."
It was Lee Scott, Wal-Mart's CEO, who started Kerby and Lindsley thinking about lightbulbs. "Last fall," says Kerby, "we had had two hurricanes"--Katrina and Rita--"we had oil production disrupted, we had millions of people displaced in the South, and at a Friday officer's meeting not long after Katrina, Lee Scott said, 'Our customers are hurting, our customers' dollar is not going as far as it could.' He challenged everyone in the room to find relevant rollbacks, to lower the price of living and make a difference for our customers." (Wal-Mart-ers really talk that way among themselves.)
In the wake of Katrina, Scott had asked his staff for a briefing on environmental issues, including global warming. One of the people he sat down with was Hamburg, the Brown professor who has won an award from the EPA for his ability to explain climate change.
"It was a very frank conversation," says Hamburg. Not much of a Wal-Mart shopper, he had looked at one piece of Wal-Mart's environmental performance before. In 1994, he critiqued Wal-Mart's first environmentally sensitive store. "As I told Lee, it was a lot of green-wash. He needed to do better....I said, 'What really matters is what's on the shelves. Wal-Mart's influence is much greater in the marketplace than in the built environment.'"
Hamburg has been working with CFLs since the 1980s, so that subject naturally was on the table with Scott. "I think he knew what they were," says Hamburg. "I said, 'It's a very direct return to your consumers, and it has a big positive impact on reducing carbon emissions. So let's do it. You do it.'"
The spirals, you could say, were converging. After Scott's exhortation at the Friday officers meeting, Kerby did what a lot of Wal-Mart-ers do when they need to think and reconnect. He went shopping at Wal-Mart.
"I went across the street to #100," says Kerby. "I thought about what people rebuilding would need, I thought about energy costs, I filled the cart, and I brought it all back to the office. I challenged the buyers to look for ways to save money on these important products." One item in his cart: a three-pack of GE compact fluorescents, 60-watt equivalents, for $9.58--$3.19 each. You could buy three four-packs of classic GE 60-watt bulbs for that price, 12 regulars for the price of one spiral.
To Diane Lindsley, her boss's point was crystal clear. "I called GE," says Lindsley. "We started negotiating."
Within two weeks, the price on a three-pack of GE spirals at Wal-Marts across the country was "rolled back" to $7.58. It was a 21% cut--although the bulbs were still $2.53 each, 10 times the cost of an ordinary bulb. The agreement with GE was for a 90-day price cut, to help out after Katrina.
Did it make a difference in CFL sales?
"Absolutely," says Lindsley. "Faster than I've ever seen it before. In days."
Then, in late October, says Kerby, "Our friend Oprah had a segment on her show talking about CFL lightbulbs. We didn't ask her to do that or anything. But there certainly is an Oprah factor out there. That show led to a tremendous sales increase in the category that we have maintained to this day." Month over month, Lindsley is selling double the number of spirals she did before Katrina.
It was a perfect swirl: Katrina, Rita, $70-a-barrel oil, price-chopping, corporate consciousness-raising, with Oprah's lightbulb club thrown in.
"What had started as, 'Let's do something to help the consumer for 90 days,' well, it became obvious this wasn't a 90-day strategy," says Kerby. "World events had changed the lightbulb category. The time had come for the energy-saving lightbulbs. It was going to be a different kind of product going forward."
Inside the Bulb
Incandescent lightbulbs and spiral lightbulbs make light in entirely different ways, and it is that difference that makes spirals so potent. In a classic 60-watt incandescent bulb, light comes from the little metal filament quivering inside the sealed glass bulb. Electricity passes through the metal thread, heating it to 2,300 degrees Celsius, and the filament glows with the heat and throws off light. Electricity creates heat, heat creates light. It's why incandescent bulbs are so hot--the glass is often 300 degrees. In the trade, incandescents are sometimes known as "a hot wire in a bottle."
Compact fluorescents are something else again. In a fluorescent bulb, the glass tube is filled with gas and a tiny dot of mercury. Electricity leaps off electrodes on either end of the tube and excites the mercury molecules, which have a special property: When so excited, they emit ultraviolet light. That invisible UV light strikes the bulb's phosphor coating, which itself gets excited and emits visible light, which shines out through the tube. Heat is much less of a factor--CFLs run at about 100 degrees.
Making the ionized fog bottled inside a CFL dance to the same steady tune as an incandescent has required a lot of research, and an electronics revolution. Early CFLs cost $25 per bulb (and still paid for themselves in electricity savings). The light they produced was bluish or pinkish, or varied; the phosphor coating had to be refined. The ballast--built into the bulb rather than in a separate fixture, as with traditional fluorescent tubes--hummed and didn't cycle the electricity quickly enough; it had to be made electronic and miniaturized. Costs came down, as did size. The same wizardry that gives us Hallmark birthday cards that play "Love and Happiness" makes possible CFLs at $2.60 instead of $25.
It is this--the way swirls make light--that saves so much energy. In an incandescent, only 5% to 10% of the electricity passing through the wire becomes visible light; the rest becomes heat and invisible UV light. The vibrating mercury vapor atoms in a fluorescent bulb produce light more efficiently than a tungsten filament. You get more photons for every watt of electricity pumped in. An old-fashioned incandescent makes 15 lumens per watt; a 60-watt bulb shines with 900 lumens. In a CFL, you get 60 lumens per watt. To get 900 lumens--to get the light you expect from a 60-watt bulb--you need only 15 watts.
A 60-watt classic bulb and a 15-watt swirl are identically bright--the swirl just uses 45 fewer watts.
The Swirl Cascade
What really revolutionizes the lightbulb experience, and the business itself, is a second quality of swirls, beyond their ability to squeeze more light from a kilowatt: their longevity.
The compact fluorescents that GE, Philips, and Sylvania are putting on shelves are rated to run for 8,000, 10,000, or 12,000 hours. Few bulbs in a home are lit more than four hours a day; at that rate, an 8,000-hour bulb lasts five-and-a-half years; a 12,000-hour bulb lasts eight years and three months. As swirls take hold, it will be a surprise, a novel event, when a lightbulb goes dark. Imagine all those hard-to-reach bulbs that need to be replaced every three months. From four times a year, to once a decade.
"This is about selling lightbulbs, but it's far bigger. This has huge implications for the world."
And the impact of swirls cascades outward. Since every CFL has the life span of 6, or 8, or 10 equivalent incandescent bulbs, if Wal-Mart alone sells 100 million swirls in the next year, it does away with the need for 100 million old-fashioned bulbs to be manufactured, packaged, shipped, bought, and discarded next year--and every year until 2012 or beyond.
How much is 100 million bulbs? It's 25 million classic GE four-packs. That many boxes of bulbs would fill 262 Wal-Mart tractor trailers, a ghost convoy of Wal-Mart trucks, loaded with nothing but lightbulbs, stretching 3.5 miles--a convoy that will never roll. Every year for six years--just from one bulb, this year. Not to mention the line of garbage trucks necessary to cart 100 million burned-out incandescent bulbs to the landfill.
What you don't make, of course, you never get to sell. As enthusiasm for compact fluorescents mounted in Bentonville, there were multiple strategy meetings between the Wal-Mart lightbulb people and the GE lightbulb people--including a conversation January 12 between Lee Scott and GE CEO Jeffrey Immelt in which swirls were a significant topic.
GE had launched its ecomagination business push in May 2005--neatly summarized by Lorraine Bolsinger: "Green can be green." Scott launched Wal-Mart's sustainability repositioning last October in a speech to his own executives. Understanding the power of the CFL, Scott told them, had helped him see that environmental problems are really a disaster like "Katrina in slow motion." Pledging to take Wal-Mart and its customers and suppliers down a new path, he declared, "Environmental problems are our problems."
Immelt and Scott agreed in January that a major push on swirls was in order. But strategic enthusiasm doesn't change a simple short-term fact: Every new energy-saving swirl you sell obliterates sales of six or eight of your classic product. Incandescents won't ever go away--we still use candles--in part because there are some places CFLs simply don't work well. They are not tiny or elegant enough to be chandelier bulbs. They do not work as accent lighting. But in as little as five years, if Wal-Mart sparks a significant conversion to swirls, the lightbulb business will be rocked.
Total unit sales could be half what they are now. In the short run, there's a bonanza: 95% of sockets in U.S. homes don't have swirls in them, and a billion of them, or more, could. At the moment, with CFLs selling for 10 times what regular bulbs do, there's no immediate loss of revenue or profit. But prices won't stay where they are for long. At Sam's Club, Wal-Mart's club-store division, GE swirls already sell at $12.73 for an eight-pack--$1.59 per bulb, or just six times the cost of old-fashioned bulbs. At that price, the economics change. Competition from other retailers will force the price even lower--especially because of what happens next.
Once a third of the sockets in U.S. homes have compact fluorescents--once you sell the bulge of conversion replacements--both incandescent sales and CFL sales will fall off a cliff. Incandescent bulb sales could be cut in half, because we won't use them any more. And after we've installed 1.5 billion swirls, we'll only be buying perhaps 200 million a year, because they're on a six- or eight-year replacement cycle. Executives at Wal-Mart are already imagining a day when the shelf space for lightbulbs is cut by 30% or 40%.
For Wal-Mart, the appeal of swirls is clear, even to GE executives. "Wal-Mart sees its customer putting more money in the gas tank, more into electrical bills--their customer is saying, 'I need some help,'" says Bolsinger. "They are very close to that. If they can help a customer save money in the long haul, that's money that comes back to Wal-Mart."
Once Wal-Mart decides to make swirls an important product, the appeal for GE also becomes clear. It's the power of the big dog: GE can either help Wal-Mart sell swirls, or some other lightbulb company will. In either case, GE's regular-bulb business shrivels. "The business case is pretty clear," says Bolsinger. "If we don't grab the market share of CFLs, we lose." The only way to survive creative destruction, in fact, is to get out in front of the tsunami, to catch the wave.
In the spring, Diane Lindsley changed the way she stocks her 60 feet of lightbulb shelves. Like other merchants, she has struggled for years with whether to group energy-saving bulbs in their own section for conservation geeks, or to mix them in with regular bulbs in the hope more customers will try them. Either way, particularly for a shopper schooled by Wal-Mart itself to focus on price, CFLs that cost 10 times what a dependable 60-watt cost are a hard sell.
Inspired by last fall's rush of swirl sales, Lindsley moved dramatically to emphasize them on her shelves. She decided to have it both ways--to group CFLs together and mix them with regular bulbs. She has made swirls the most prominent bulbs in the store: They are now on the top two or three shelves, at eye level, with the old-fashioned bulbs on the bottom. The prominence is eye-catching--three or four sections of shelves, with bright yellow and green packages of GE CFLs. Horizontally, the swirls form a band of energy savers that stretch down a third of the aisle. Vertically, each shelf unit is both energy savers and incandescents -- 60-watt-equivalent swirls on top, old-fashioned 60-watts below.
For bulbs, "that's the most coveted shelf space in the entire store," says Bolsinger. "It was a bold move on Wal-Mart's part to put it there." Lindsley was taking a risk, giving swirls shelf space their sales didn't quite justify. She was positioning them prominently to drive sales, and in anticipation of more growth.
An even more dramatic push is coming this month, when Wal-Mart will roll out a lightbulb education center in every U.S. store. The display, developed with GE, shows 10 categories of lightbulbs, organized by room through a typical home, with a box showing the CFL appropriate in that area, the equivalent incandescent, and the energy savings a customer can reap from switching. Each category features a warm lifestyle photo of the room in question. Each box is color-coded to match color-coding on the shelves of CFL bulbs.
For a company that measures sales of its merchandise per running foot of shelf space, giving up 12 feet of stock space to a static display, however entrancing, represents a significant investment. Lindsley is evaluated in part based on the bulbs she sells, and "I have to perform, of course," she says. "I have to have my sales. I think about it differently. I think about it daily. But this is absolutely the right thing to do."
This is at least as big a deal for GE. Between 2004 and 2005, it tripled its manufacturing capacity for compact fluorescents. By the end of 2006, GE will have tripled capacity again. Anticipating the shift to swirls, it plans to close an incandescent bulb factory in St. Louis.
Making compact fluorescents is expensive and complicated, compared with incandescents, in part because of the electronic controls each bulb contains, and in part because swirls remain partly handcrafted. To make each spiral, a Chinese worker wearing gloves takes a tube of glass, holds it over an open flame, then wraps the heat-softened tube around a metal form. The job requires a deft touch so the tube doesn't become flattened while getting its spiral shape.
"For us," says Bolsinger, "the opportunity is to sell enough of them, to get down the [manufacturing] cost curve. We're still pretty early in the learning curve." Greater automation would allow GE to both continue to reduce the price of swirls and keep a margin that softens the blow to the incandescent side of the business.
This fall, GE will rebrand its CFLs as "energy smart" bulbs--in an effort to give them a clear identity equivalent to "soft white"--and launch a major print advertising campaign to support the Wal-Mart push. Working with Wal-Mart, GE has made its bulb packaging both more dramatic and more explicit--it promises that the 60-watt equivalent "saves $38 in energy." Spend $2.60, earn $38. These days, that's a great return.
At the Wal-Mart home office, they talk about swirls with a zeal that goes beyond product promotion, as if the bulbs are a pioneering product, a new way of thinking about retailing. Says Andrew Ruben, Wal-Mart's vice president of sustainability: "We realize that we can influence big things. Energy usage. Efficiency. Dependence on foreign oil. And we realized that if we're really going to move things, it's not about our direct footprint--our stores, our offices--it's about our supply chain and our customers. So this is about selling lightbulbs, but it's far bigger. This has huge implications for the world."
Chuck Kerby did swap out the ceiling-fan bulbs, at least in most Wal-Marts. The idea surfaced in November; it was executed in February. And Kerby has a clear vision of the future.
"It's certainly possible to see a day when a cartoonist will draw a cartoon with a character having an idea," says Kerby, "you know, with the traditional-shaped incandescent lightbulb going on over the character's head--and my grandchildren will look at that and not know what it means. And that's not a bad thing, because we'll be living in a much better world."
Charles Fishman (cnfish@mindspring.com) is a Fast Company senior writer.
Thursday, August 31, 2006
Peak Oil Forecasters Win Converts on Wall Street to $200 Crude
Bloomberg
By Deepak Gopinath
Aug. 31 (Bloomberg) -- On a sweltering Tuesday in mid-July, in the fields outside Pisa, Italy, Willem Kadijk scribbles notes as a ragtag troupe of doomsayers predict the end of the Oil Age.
With his shaved head, jeans and sandals, Kadijk, 48, blends into a crowd gathered under a white tent to hear of the coming calamity. The death of cheap, abundant crude, the forecasters warn, might unleash war and plunge the world into a second Great Depression.
That's not the prophecy of some apocalyptic cult. Kadijk, a hedge fund adviser, had flown from Amsterdam to attend a conference on a geologic theory known as peak oil.
Proponents of this controversial idea say global oil production is now at or near its zenith. Once the flow crests and starts to decline -- and some geologists say it already has -- oil will no longer be able to slake the world's growing thirst for energy. The result will be the oil shock to end all oil shocks. The price of a barrel of crude will spiral to $200 -- and keep rising. To the peaksters, today's energy crunch is nothing next to the pain that will follow.
``Peak oil is a reality,'' says Kadijk, a senior equity salesman at Kepler Equities, an Amsterdam-based brokerage. He plans to start a fund to capitalize on what he sees as a looming crisis for the world's fossil fuel-based economy and the ultimate bull market in oil.
As energy prices soar and violence convulses the Middle East, the peak-oil movement -- an unlikely alliance of geologists, physicists, oil industry consultants and environmental activists -- is winning converts. Peak-oil ideas are bubbling up from scientific journals and offbeat Web sites, much the way warnings of global warming did a decade ago. For the first time, the peaksters have begun to grab the attention of Washington and Wall Street.
Congressional Caucus
U.S. Energy Secretary Samuel Bodman, former boss of Boston- based Cabot Corp., an oil and chemicals company, has asked the National Petroleum Council, which advises him, to investigate whether oil supplies can keep pace with demand. The U.S. Government Accountability Office, the nonpartisan congressional watchdog, is due to release a study on peak oil this November. Rep. Roscoe Bartlett, a Maryland Republican, has formed the Congressional Peak Oil Caucus to sound the alarm.
``The world has never faced a problem like this,'' Bartlett says.
Everyone agrees we'll run out of crude eventually. Oil, after all, is a finite resource: The Earth holds only so much of it. The controversial issue is when a global peak will occur -- and what will happen then.
Colin Campbell, a British geologist who popularized the peak- oil theory in his book ``The Coming Oil Crisis'' (Multi-Science Publishing Co. and Petroconsultants SA, 1997, 210 pages) says world production of conventional oil, the kind that comes from gushing wells, is reaching its apex.
End of Oil Age
Society isn't prepared for the consequences, Campbell, 75, says. It's too late to develop alternative sources of power, such as solar cells, nuclear reactors and windmills, to fill the oil gap before energy prices soar, says Campbell, who has a doctorate in geology from the University of Oxford and more than 40 years of experience in the oil industry.
``We have come to the end of the first half of the Oil Age,'' Campbell says.
Nonsense, says Russ Roberts, a spokesman for Exxon Mobil Corp., the world's largest oil company. Exxon Mobil, which has reaped record profits as the price of oil has surged, has taken out ads dismissing peak oil in U.S. newspapers such as the New York Times.
The Irving, Texas-based oil giant says the peaksters are being alarmist. In all, the world probably has 4 trillion barrels of oil left, four times the amount we have used so far, the ad says.
Time to Think
``The world is nowhere near running out of oil,'' Roberts says. Exxon Mobil geologists believe global oil production will keep rising through 2030, he says.
Cambridge Energy Research Associates, whose chairman, Daniel Yergin, is a leading peak-oil critic, says production will reach an ``undulating plateau'' sometime in the future.
``Our outlook goes to 2020, and we see no evidence of a peak,'' CERA geologist Peter Jackson says. ``Eventually, we will start to see a decline. There is still time to think about alternatives.''
Predictions of an imminent oil famine are as old as the industry itself. When production at the first U.S. wells, located in western Pennsylvania, began to decline in the late 19th century, some people predicted the country would soon run out of oil. Then crude was discovered in east Texas, whose oil fields yielded so much black gold that the Texas Railroad Commission capped production to support prices.
Peak Moment
In the past, Campbell or his disciples have forecast the oil peak down to the year or even the day only to push back the fateful moment. In 1997, Campbell said it would occur in 2001. Now, he says total production, which includes oil from deep-water wells and fuel derived from natural gases, will reach its height sometime after 2010.
Kenneth Deffeyes, a geologist and professor emeritus at Princeton University, first pinpointed Nov. 24, 2005, as the peak- oil date and then revised it to Dec. 16, 2005.
Campbell says the exact day or year isn't important. What matters is that peak oil is coming, and soon. Almost a century and a half after the first U.S. wells were drilled in Titusville, Pennsylvania, production has begun to decline in more than a dozen countries, including the U.S., according to the BP Statistical Review of World Energy. Production at the giant Cantarell oil field in Mexico is likely to decline 8 percent this year, according to Mexican state oil monopoly Petroleos Mexicanos.
U.S. Addiction
At a time when U.S. President George W. Bush has urged the country to break its addiction to foreign oil, the fact is, the U.S. is becoming ever more dependent on overseas crude. U.S. oil production peaked 36 years ago, in 1970, at 11.3 million barrels a day. Since then, output has fallen 39 percent, to 6.8 million barrels a day, or 8 percent of the world total, in 2005, according to BP.
Investors have started to listen to the peaksters. Billionaire Boone Pickens says he's a peak believer. So does Peter Thiel, who co-founded PayPal Inc. and now runs Clarium Capital Management LLC, a $2.1 billion hedge fund firm. Pickens, Thiel and other investors are positioning themselves to profit from what they say will be the biggest oil squeeze of all time.
Even some oil companies and industry veterans sound nervous. Chevron Corp. has run a series of full-page ads in U.S. newspapers that highlight surging oil consumption and declare, ``The era of easy oil is over.''
Chicken Littles
Thierry Desmarest, chief executive officer of Paris-based Total SA, told the World Gas Conference in Amsterdam in June that global oil production would peak in 2020. Matthew Simmons, whose Houston-based investment bank, Simmons & Co., trades oil and gas stocks, says Saudi Arabia's production may decline soon.
Alex Cranberg, chairman of Denver-based independent oil company Aspect Energy LLC, calls the peaksters Chicken Littles -- misguided souls who think the sky is falling.
In fact, Cranberg hired two people to dress in chicken costumes and hand out fliers dismissing peak oil at the conference Kadijk attended in July.
Like many oil-industry vets, Cranberg, 51, says market forces and technological advances will ultimately cure our energy ills. As oil prices rise, companies will be more willing to hunt for crude and extract it. They'll invest in expensive deep-water wells and new technologies to wring more oil from existing fields. Consumers will start conserving energy. Even now, stock market investors and Silicon Valley venture capitalists are pouring billions of dollars into companies developing ethanol, solar power and other alternative sources of energy.
$3-a-Gallon Gas
More and more, however, the peaksters are drowning out everyone else, Cranberg says. ``You can't turn around without seeing or hearing these ideas,'' he says. ``I think they are gaining.''
You don't have to be a geologist to understand why. The price of crude has tripled since 2000. In the U.S., $3-a-gallon gasoline has sapped consumers' confidence. Nearly half of Americans believe the economy is doing poorly, according to a July 28-Aug. 1 Bloomberg/Los Angeles Times poll. Fifty-nine percent of Americans expressed a negative view of Bush's handling of the economy.
``If oil was still at $20, no one would be talking about peak oil,'' says Manouchehr Takin, senior petroleum upstream analyst at the Centre for Global Energy Studies, a London-based consulting firm.
High oil prices are only part of the story, however. The world is straining to feed its energy habit. Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration (EIA). By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers.
Big Question Mark
No one knows for sure how much oil the world has. That's a big question mark because the peaksters say production will max out once half of the oil has been pumped. So far, we've extracted about 1 trillion barrels in all. In 2000, the U.S. Geological Survey estimated global resources at 3 trillion barrels, enough to push peak production out to 2037, according to the EIA. Campbell puts the total lower, at 2.5 trillion barrels.
Oil is certainly getting harder -- and more expensive -- to find and extract. Oil discoveries plummeted to 5 billion barrels in 2005 from 90 billion barrels in 1964, according to Campbell.
``Discovery is in long-term decline, and spending more money won't increase it,'' says Chris Skrebowski, editor of the London- based Petroleum Review, an industry journal.
OPEC's Stash
Oil companies have to find enough crude to offset dwindling production at existing fields, which can decline by more than 8 percent a year, and to keep pace with rising demand. Most of that increase will have to come from members of the Organization of Petroleum Exporting Countries, which are often cauldrons of discontent, war and terror.
The cartel's members -- Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela -- together sit atop 75 percent of the world's reserves and account for about 42 percent of total production, according to BP.
OPEC countries are hardly paragons of economic and political stability. Most of the terrorists who attacked the U.S. on Sept. 11, 2001, came from Saudi Arabia. The war in Iraq has hurt that country's ability to pump oil. Bush says Iran is trying to develop nuclear weapons. In Venezuela, President Hugo Chavez has said he wants to diversify oil exports away from the U.S.
In its 2005 Energy Outlook, Exxon Mobil says the combined production of non-OPEC countries will peak sometime from 2010 to 2020. OPEC will be able to fill the gap, the report says. OPEC produced about 30 million barrels a day in 2005; by 2030, OPEC would have to churn out 47 million barrels a day -- almost 57 percent more than it did last year -- to satisfy the world's needs, the report says.
Meeting the Call
``We believe the resource base will support this increase, assuming that investments in development are made in a timely fashion,'' the report says.
OPEC countries will invest a combined $100 billion in the five years through 2010 so they can increase output, OPEC spokesman Omar Ibrahim says. ``We are set to meet the extra call on OPEC to 2030,'' Ibrahim says.
Yet even now, OPEC nations are struggling to keep up. Since 2000, OPEC has gradually lost the spare pumping capacity its members can use as an emergency reserve to moderate prices. The cushion has dwindled to about 1.5 million barrels a day from 6 million barrels a day, Takin says.
What's more, neither the peaksters nor oil industry executives know for sure how much oil OPEC has and how much it can actually produce. OPEC countries haven't been transparent about their reserves or production capacity, says Mike Rodgers, a partner at PFC Energy, a Washington-based oil industry consulting firm. ``OPEC is the big unknown,'' he says.
Overstated Reserves
Many energy analysts believe OPEC nations began overstating their resources in the 1980s, when the cartel linked members' production quotas to the size of their reserves, says Mamdouh Salameh, an independent oil economist. In the late '80s, cartel members raised their reserve estimates by a combined 300 billion barrels even though none of them had actually found much more oil.
In his 2005 book ``Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy'' (John Wiley & Sons, 448 pages, $24.95), Simmons says the Saudis have pumped so much oil so fast that the country's biggest oilfields face declining output.
``Saudi Arabia is keeping everything in the dark,'' Simmons, 63, says.
Saudi officials have dismissed peak-oil theorists and suggestions that their country is running on empty.
Saudi Assurances
``We currently manage approximately 260 billion barrels of oil,'' Abdallah Jum'ah, CEO of Saudi Aramco, the government-owned oil giant, said at an oil and gas conference in June. ``We continue to expand our reserve base, and conservatively estimate our additional potential of recoverable oil to be in the range of 200 billion barrels. At Saudi Aramco's present production levels, that means we will have well over a century's worth of oil to produce.''
Herman Franssen, former chief economist at the Paris-based International Energy Agency, says some OPEC members, such as Iran, Iraq, Kuwait and Venezuela, may be reluctant or unable to produce more oil even as prices soar, largely for political reasons.
``We may never see the volumes of conventional oil production that we see in official forecasts,'' says Franssen, who's now an oil industry consultant in Chevy Chase, Maryland.
Sadad al-Husseini, who spent 35 years working for Saudi Aramco, says Saudi Arabia's reserves are sound but that Kuwait, which says it has reserves of 101.5 billion barrels, probably has half that much. Iran, with official reserves of 132.5 billion barrels, has likewise overstated its reserves, says Husseini, who was an executive vice president at Saudi Aramco before retiring in 2004.
Assume the Worst
``Even with high prices, it will be very difficult for world production of conventional oil to exceed 90 million barrels per day within the next 10 years,'' he says. That's millions of barrels a day short of what the EIA says the world will need in 2015.
Political leaders, business executives and investors should assume OPEC won't be able to satisfy future demand, Rodgers says. ``From an energy-security point of view, if you believe in a non- OPEC peak and OPEC is not being transparent, we have to assume they don't have it,'' he says.
The precarious balance of supply and demand in the oil markets became even clearer in early August when London-based BP Plc announced it would temporarily shut down its Prudhoe Bay oil field on the North Slope of Alaska because of pipeline corrosion. The news drove already-high oil prices up more than $2 to almost $77.
Alaskan Decline
Prudhoe Bay, the largest oil field in the U.S., is part of the peak-oil story. The field was discovered in 1968 and came onstream in 1977. Since then, it has yielded more than 11 billion barrels of oil.
Yet even before the August mishap, this vast field had begun to die. Its output has fallen 73 percent to 400,000 barrels a day from a height of 1.5 million barrels a day in 1989.
Prudhoe Bay is following the life cycle of oil fields across the U.S. and around the world, a phenomenon known as the Hubbert Curve, which takes its name from M. King Hubbert.
Fifty years ago, Hubbert, then a geologist at Shell Oil Co.'s research lab in Houston, postulated that U.S. oil production would follow a bell-shaped curve.
At the 1956 meeting of the American Petroleum Institute in San Antonio, Hubbert predicted that total annual U.S. output would climb steadily, level off sometime between 1965 and '70 and then decline after about half of the country's reserves had been depleted.
Hubbert's Peak
The U.S. reached what geologists now refer to as Hubbert's Peak in 1970. Hubbert died in 1989 at the age of 86.
It wasn't until the late 1990s when Hubbert's ideas, which had percolated for decades in academia and oil circles, began to reach a wide audience via Campbell, the British geologist.
Now in his eighth decade, Campbell is a grandfatherly man with a shock of gray hair. He hardly comes across as a doom- monger. He works out of a two-story house in Ballydehob, a village on the western edge of Ireland.
Campbell spent 40 years exploring for oil for Amoco Corp. and other companies. He helped Amoco search for oil in Ecuador and then, during the 1980s, led its exploration in Norway. He later joined PetroFina SA, the oil exploration company now owned by Total.
After retiring from PetroFina in 1990, Campbell joined forces with Jean Laherrere, a retired French geophysicist who had spent 25 years working at Total, to analyze production profiles for the world's countries.
Campbell says he and Laherrere, now 75, looked at their data and concluded global oil production was approaching its zenith. In 1998, they co-wrote an article for Scientific American magazine titled ``The End of Cheap Oil'' that helped popularize their cause.
Coming Crunch
``The world is not running out of oil -- at least not yet,'' Campbell and Laherrere wrote. ``What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.''
In 2000, Campbell founded the Association for the Study of Peak Oil and Gas, an informal organization for fellow travelers. Now known as ASPO International, the group has sponsored five annual conferences, including the one in Pisa in July, which drew more than 230 people. It's now run by Kjell Aleklett, a physics professor at Uppsala University in Sweden. Twenty independent national ASPO groups have sprung up around the world, from Australia to France, to the U.S.
Many peaksters are driven by a moral imperative to spread the word. Campbell says he's a scientist, not a social or environmental crusader. Even so, he says he's worried that oil has harmed human society and the planet. Since the Oil Age dawned, nearly 150 years ago, the Earth's population has soared six-fold, he says.
Man Alone
``Man is the only animal that uses external energy,'' Campbell says.
Asked why he has championed the peak-oil theory, Laherrere quotes Antoine de Saint-Exupery, author of ``The Little Prince'': ``We don't inherit the Earth from our ancestors; we borrow it from our children.''
Activists have jumped on the peak-oil bandwagon and added their own, often strident, voices to the debate over the future of oil.
Jim Kunstler, a writer-activist who lives in Saratoga Springs, New York, says peak oil will ultimately destroy suburbia and plunge the U.S. into a violent dark age of feudalism.
``The question is, Can we run our shit the way we are running our shit?'' Kunstler, 57, says. In 2005, Kunstler wrote ``The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century'' (Atlantic Monthly Press, 320 pages, $23), which warns of the havoc to come.
Dieoff.com
Lifeaftertheoilcrash.net, a Web site run by lawyer and peak- oil entrepreneur Matt Savinar, warns, ``Civilization as we know it is coming to an end soon.'' The site sells peak-inspired books and products, including an investor's guide to peak oil.
Another site, dieoff.com, says wars over oil and other natural resources will eventually erupt and millions of people will be wiped out.
Stephen Andrews, a Denver-based energy consultant who founded ASPO-USA in June 2005, says the alarmists have hurt the peak-oil movement.
``The peak-oil tent has different voices -- some shrill, some more sober -- reaching different conclusions from the same facts,'' Andrews, 59, says.
Andrews has attracted more-sober voices to the movement. Last November, Denver Mayor John Hickenlooper helped co-sponsor a two- day peak-oil conference organized by Andrews.
``I think the people most exuberant about peak oil underestimate how much unconventional sources of oil will help flatten the peak, but to say that there is no peak is shortsighted,'' Hickenlooper says.
Crash Program
The world would have to embark on a crash mitigation program 20 years in advance to prevent peak oil from hobbling the global economy, says Robert Hirsch, a senior energy program adviser at San Diego-based research and engineering firm Science Applications International Corp. ``And I consider myself an optimist,'' says Hirsch, 71, who included his findings in a 2005 study on peak oil for the U.S. Department of Energy and estimates such a program would cost the world $1 trillion a year.
Some investors and analysts see lots of opportunities in a post-peak world.
Charles Maxwell, senior energy analyst at Weeden & Co., an independent research firm based in Greenwich, Connecticut, says high oil prices will spur companies to invest in unconventional sources. Few people, however, realize how much such projects will cost or how long they will take to come onstream, he says.
Take the Canadian oil sands. This region in Alberta holds 175 billion barrels of oil, according to the Canadian Association of Petroleum Producers (CAPP), the world's second-largest reserves.
`Really Big'
``It's big. It's really big,'' Neil Camarta, senior vice president for oil sands at Calgary-based Petro-Canada, says of the region. ``It can keep America going for 25 years.''
The oil sands hold vast stores of bitumen, a tarlike substance that is mined, rather than pumped, and then processed into oil that can be refined. The process is expensive -- and getting more so. Rising operating and capital costs have driven the price of mining and upgrading bitumen to as much as $40 a barrel, Camarta says.
By 2020, Canada's oil sands will yield 4 million barrels a day, almost four times what they do now, according to CAPP. That sounds like a lot until you realize that 4 million barrels is just over a third of what Saudi Arabia produced per day in 2005.
Pickens, who built Mesa Petroleum Co. into one of the world's largest independent oil and gas producers, says he sees trouble -- and opportunity -- in peak oil. Pickens, who collected a degree in geology from Oklahoma State University in 1951, has called for the construction of more nuclear power plants and the promotion of alternative energy. He says he's invested in the Canadian oil sands.
Pickens's Picks
``I'm a disciple of Hubbert,'' Pickens, 77, says. ``I think we've peaked and we are going to see an undersupply of oil.''
Clarium Capital's Thiel says he began thinking about peak oil in 1999. As the Internet bubble grew that year, Thiel, 38, says he started to wonder about other risks that investors might be ignoring and seized on the uncertain future of oil.
``Energy will be systematically undervalued until peak oil is priced in,'' Thiel says. He's bought shares of Calgary-based EnCana Corp., which has invested in exploration and new production, and of oil services companies like New York-based Schlumberger Ltd. and Houston-based Weatherford International Ltd., which stand to profit as explorers hunt for oil and drill wells. Thiel says he's leery of U.S. oil majors, such as Exxon Mobil, because they may become targets of new taxes once the government wakes up to peak oil.
Thiel himself says the peak will come by 2008 -- if it hasn't already. ``Geology will trump technology,'' he says.
Coal, Uranium
Eric Sprott, CEO of Toronto-based Sprott Asset Management Inc., says he became a peak-oil convert after hearing Campbell speak in 2004. Sprott, who helps manage 3.6 billion Canadian dollars (US$3.2 billion), says the bull market in energy has only just begun. He's invested 36 percent of his firm's assets in a variety of areas that could benefit from peak oil. His flagship hedge fund returned 41 percent in 12 months ended July 31, he says.
Sprott's investments include St. Louis-based Arch Coal Inc. and Brisbane, Australia-based Macarthur Coal Ltd. His oil and gas picks include Halifax, Nova Scotia-based Corridor Resources Inc.; Denver- based Delta Petroleum Corp.; and Houston-based Ultra Petroleum Corp. He has also invested in Australian uranium companies Energy Resources of Australia Ltd. and Paladin Resources Ltd.
Midnight Ride
Meanwhile, the peaksters aren't about to let up. They'll convene in Boston on Oct. 25-27 to sound their alarm at a conference called ``Time for Action: A Midnight Ride for Peak Oil.'' The title is a reference to the American patriot Paul Revere, whose horse ride in 1775 warned Massachusetts colonists that British soldiers were advancing. The battle that followed, at Lexington and Concord, marked the beginning of the American Revolution.
It was just 84 years after Revere took his ride, on Aug. 27, 1859, that Edwin Drake struck oil in Titusville, ushering in the Oil Age. Exxon Mobil says the era of oil isn't about to end. In one of its ads, the company says, ``Oil is a finite resource, but because it is so incredibly large, a peak will not occur this year, next year or for decades to come.'' The ad depicts a man looking through binoculars at a snowcapped mountain whose summit is hidden by clouds.
Campbell says the illustration actually drives home the point Exxon Mobil is trying to avoid. ``Even though it is obscured by clouds, we know there is a peak,'' Campbell says. His investor followers are betting he's right.
To contact the reporter on this story: Deepak Gopinath in New York at dgopinath@bloomberg.net .
By Deepak Gopinath
Aug. 31 (Bloomberg) -- On a sweltering Tuesday in mid-July, in the fields outside Pisa, Italy, Willem Kadijk scribbles notes as a ragtag troupe of doomsayers predict the end of the Oil Age.
With his shaved head, jeans and sandals, Kadijk, 48, blends into a crowd gathered under a white tent to hear of the coming calamity. The death of cheap, abundant crude, the forecasters warn, might unleash war and plunge the world into a second Great Depression.
That's not the prophecy of some apocalyptic cult. Kadijk, a hedge fund adviser, had flown from Amsterdam to attend a conference on a geologic theory known as peak oil.
Proponents of this controversial idea say global oil production is now at or near its zenith. Once the flow crests and starts to decline -- and some geologists say it already has -- oil will no longer be able to slake the world's growing thirst for energy. The result will be the oil shock to end all oil shocks. The price of a barrel of crude will spiral to $200 -- and keep rising. To the peaksters, today's energy crunch is nothing next to the pain that will follow.
``Peak oil is a reality,'' says Kadijk, a senior equity salesman at Kepler Equities, an Amsterdam-based brokerage. He plans to start a fund to capitalize on what he sees as a looming crisis for the world's fossil fuel-based economy and the ultimate bull market in oil.
As energy prices soar and violence convulses the Middle East, the peak-oil movement -- an unlikely alliance of geologists, physicists, oil industry consultants and environmental activists -- is winning converts. Peak-oil ideas are bubbling up from scientific journals and offbeat Web sites, much the way warnings of global warming did a decade ago. For the first time, the peaksters have begun to grab the attention of Washington and Wall Street.
Congressional Caucus
U.S. Energy Secretary Samuel Bodman, former boss of Boston- based Cabot Corp., an oil and chemicals company, has asked the National Petroleum Council, which advises him, to investigate whether oil supplies can keep pace with demand. The U.S. Government Accountability Office, the nonpartisan congressional watchdog, is due to release a study on peak oil this November. Rep. Roscoe Bartlett, a Maryland Republican, has formed the Congressional Peak Oil Caucus to sound the alarm.
``The world has never faced a problem like this,'' Bartlett says.
Everyone agrees we'll run out of crude eventually. Oil, after all, is a finite resource: The Earth holds only so much of it. The controversial issue is when a global peak will occur -- and what will happen then.
Colin Campbell, a British geologist who popularized the peak- oil theory in his book ``The Coming Oil Crisis'' (Multi-Science Publishing Co. and Petroconsultants SA, 1997, 210 pages) says world production of conventional oil, the kind that comes from gushing wells, is reaching its apex.
End of Oil Age
Society isn't prepared for the consequences, Campbell, 75, says. It's too late to develop alternative sources of power, such as solar cells, nuclear reactors and windmills, to fill the oil gap before energy prices soar, says Campbell, who has a doctorate in geology from the University of Oxford and more than 40 years of experience in the oil industry.
``We have come to the end of the first half of the Oil Age,'' Campbell says.
Nonsense, says Russ Roberts, a spokesman for Exxon Mobil Corp., the world's largest oil company. Exxon Mobil, which has reaped record profits as the price of oil has surged, has taken out ads dismissing peak oil in U.S. newspapers such as the New York Times.
The Irving, Texas-based oil giant says the peaksters are being alarmist. In all, the world probably has 4 trillion barrels of oil left, four times the amount we have used so far, the ad says.
Time to Think
``The world is nowhere near running out of oil,'' Roberts says. Exxon Mobil geologists believe global oil production will keep rising through 2030, he says.
Cambridge Energy Research Associates, whose chairman, Daniel Yergin, is a leading peak-oil critic, says production will reach an ``undulating plateau'' sometime in the future.
``Our outlook goes to 2020, and we see no evidence of a peak,'' CERA geologist Peter Jackson says. ``Eventually, we will start to see a decline. There is still time to think about alternatives.''
Predictions of an imminent oil famine are as old as the industry itself. When production at the first U.S. wells, located in western Pennsylvania, began to decline in the late 19th century, some people predicted the country would soon run out of oil. Then crude was discovered in east Texas, whose oil fields yielded so much black gold that the Texas Railroad Commission capped production to support prices.
Peak Moment
In the past, Campbell or his disciples have forecast the oil peak down to the year or even the day only to push back the fateful moment. In 1997, Campbell said it would occur in 2001. Now, he says total production, which includes oil from deep-water wells and fuel derived from natural gases, will reach its height sometime after 2010.
Kenneth Deffeyes, a geologist and professor emeritus at Princeton University, first pinpointed Nov. 24, 2005, as the peak- oil date and then revised it to Dec. 16, 2005.
Campbell says the exact day or year isn't important. What matters is that peak oil is coming, and soon. Almost a century and a half after the first U.S. wells were drilled in Titusville, Pennsylvania, production has begun to decline in more than a dozen countries, including the U.S., according to the BP Statistical Review of World Energy. Production at the giant Cantarell oil field in Mexico is likely to decline 8 percent this year, according to Mexican state oil monopoly Petroleos Mexicanos.
U.S. Addiction
At a time when U.S. President George W. Bush has urged the country to break its addiction to foreign oil, the fact is, the U.S. is becoming ever more dependent on overseas crude. U.S. oil production peaked 36 years ago, in 1970, at 11.3 million barrels a day. Since then, output has fallen 39 percent, to 6.8 million barrels a day, or 8 percent of the world total, in 2005, according to BP.
Investors have started to listen to the peaksters. Billionaire Boone Pickens says he's a peak believer. So does Peter Thiel, who co-founded PayPal Inc. and now runs Clarium Capital Management LLC, a $2.1 billion hedge fund firm. Pickens, Thiel and other investors are positioning themselves to profit from what they say will be the biggest oil squeeze of all time.
Even some oil companies and industry veterans sound nervous. Chevron Corp. has run a series of full-page ads in U.S. newspapers that highlight surging oil consumption and declare, ``The era of easy oil is over.''
Chicken Littles
Thierry Desmarest, chief executive officer of Paris-based Total SA, told the World Gas Conference in Amsterdam in June that global oil production would peak in 2020. Matthew Simmons, whose Houston-based investment bank, Simmons & Co., trades oil and gas stocks, says Saudi Arabia's production may decline soon.
Alex Cranberg, chairman of Denver-based independent oil company Aspect Energy LLC, calls the peaksters Chicken Littles -- misguided souls who think the sky is falling.
In fact, Cranberg hired two people to dress in chicken costumes and hand out fliers dismissing peak oil at the conference Kadijk attended in July.
Like many oil-industry vets, Cranberg, 51, says market forces and technological advances will ultimately cure our energy ills. As oil prices rise, companies will be more willing to hunt for crude and extract it. They'll invest in expensive deep-water wells and new technologies to wring more oil from existing fields. Consumers will start conserving energy. Even now, stock market investors and Silicon Valley venture capitalists are pouring billions of dollars into companies developing ethanol, solar power and other alternative sources of energy.
$3-a-Gallon Gas
More and more, however, the peaksters are drowning out everyone else, Cranberg says. ``You can't turn around without seeing or hearing these ideas,'' he says. ``I think they are gaining.''
You don't have to be a geologist to understand why. The price of crude has tripled since 2000. In the U.S., $3-a-gallon gasoline has sapped consumers' confidence. Nearly half of Americans believe the economy is doing poorly, according to a July 28-Aug. 1 Bloomberg/Los Angeles Times poll. Fifty-nine percent of Americans expressed a negative view of Bush's handling of the economy.
``If oil was still at $20, no one would be talking about peak oil,'' says Manouchehr Takin, senior petroleum upstream analyst at the Centre for Global Energy Studies, a London-based consulting firm.
High oil prices are only part of the story, however. The world is straining to feed its energy habit. Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration (EIA). By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers.
Big Question Mark
No one knows for sure how much oil the world has. That's a big question mark because the peaksters say production will max out once half of the oil has been pumped. So far, we've extracted about 1 trillion barrels in all. In 2000, the U.S. Geological Survey estimated global resources at 3 trillion barrels, enough to push peak production out to 2037, according to the EIA. Campbell puts the total lower, at 2.5 trillion barrels.
Oil is certainly getting harder -- and more expensive -- to find and extract. Oil discoveries plummeted to 5 billion barrels in 2005 from 90 billion barrels in 1964, according to Campbell.
``Discovery is in long-term decline, and spending more money won't increase it,'' says Chris Skrebowski, editor of the London- based Petroleum Review, an industry journal.
OPEC's Stash
Oil companies have to find enough crude to offset dwindling production at existing fields, which can decline by more than 8 percent a year, and to keep pace with rising demand. Most of that increase will have to come from members of the Organization of Petroleum Exporting Countries, which are often cauldrons of discontent, war and terror.
The cartel's members -- Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela -- together sit atop 75 percent of the world's reserves and account for about 42 percent of total production, according to BP.
OPEC countries are hardly paragons of economic and political stability. Most of the terrorists who attacked the U.S. on Sept. 11, 2001, came from Saudi Arabia. The war in Iraq has hurt that country's ability to pump oil. Bush says Iran is trying to develop nuclear weapons. In Venezuela, President Hugo Chavez has said he wants to diversify oil exports away from the U.S.
In its 2005 Energy Outlook, Exxon Mobil says the combined production of non-OPEC countries will peak sometime from 2010 to 2020. OPEC will be able to fill the gap, the report says. OPEC produced about 30 million barrels a day in 2005; by 2030, OPEC would have to churn out 47 million barrels a day -- almost 57 percent more than it did last year -- to satisfy the world's needs, the report says.
Meeting the Call
``We believe the resource base will support this increase, assuming that investments in development are made in a timely fashion,'' the report says.
OPEC countries will invest a combined $100 billion in the five years through 2010 so they can increase output, OPEC spokesman Omar Ibrahim says. ``We are set to meet the extra call on OPEC to 2030,'' Ibrahim says.
Yet even now, OPEC nations are struggling to keep up. Since 2000, OPEC has gradually lost the spare pumping capacity its members can use as an emergency reserve to moderate prices. The cushion has dwindled to about 1.5 million barrels a day from 6 million barrels a day, Takin says.
What's more, neither the peaksters nor oil industry executives know for sure how much oil OPEC has and how much it can actually produce. OPEC countries haven't been transparent about their reserves or production capacity, says Mike Rodgers, a partner at PFC Energy, a Washington-based oil industry consulting firm. ``OPEC is the big unknown,'' he says.
Overstated Reserves
Many energy analysts believe OPEC nations began overstating their resources in the 1980s, when the cartel linked members' production quotas to the size of their reserves, says Mamdouh Salameh, an independent oil economist. In the late '80s, cartel members raised their reserve estimates by a combined 300 billion barrels even though none of them had actually found much more oil.
In his 2005 book ``Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy'' (John Wiley & Sons, 448 pages, $24.95), Simmons says the Saudis have pumped so much oil so fast that the country's biggest oilfields face declining output.
``Saudi Arabia is keeping everything in the dark,'' Simmons, 63, says.
Saudi officials have dismissed peak-oil theorists and suggestions that their country is running on empty.
Saudi Assurances
``We currently manage approximately 260 billion barrels of oil,'' Abdallah Jum'ah, CEO of Saudi Aramco, the government-owned oil giant, said at an oil and gas conference in June. ``We continue to expand our reserve base, and conservatively estimate our additional potential of recoverable oil to be in the range of 200 billion barrels. At Saudi Aramco's present production levels, that means we will have well over a century's worth of oil to produce.''
Herman Franssen, former chief economist at the Paris-based International Energy Agency, says some OPEC members, such as Iran, Iraq, Kuwait and Venezuela, may be reluctant or unable to produce more oil even as prices soar, largely for political reasons.
``We may never see the volumes of conventional oil production that we see in official forecasts,'' says Franssen, who's now an oil industry consultant in Chevy Chase, Maryland.
Sadad al-Husseini, who spent 35 years working for Saudi Aramco, says Saudi Arabia's reserves are sound but that Kuwait, which says it has reserves of 101.5 billion barrels, probably has half that much. Iran, with official reserves of 132.5 billion barrels, has likewise overstated its reserves, says Husseini, who was an executive vice president at Saudi Aramco before retiring in 2004.
Assume the Worst
``Even with high prices, it will be very difficult for world production of conventional oil to exceed 90 million barrels per day within the next 10 years,'' he says. That's millions of barrels a day short of what the EIA says the world will need in 2015.
Political leaders, business executives and investors should assume OPEC won't be able to satisfy future demand, Rodgers says. ``From an energy-security point of view, if you believe in a non- OPEC peak and OPEC is not being transparent, we have to assume they don't have it,'' he says.
The precarious balance of supply and demand in the oil markets became even clearer in early August when London-based BP Plc announced it would temporarily shut down its Prudhoe Bay oil field on the North Slope of Alaska because of pipeline corrosion. The news drove already-high oil prices up more than $2 to almost $77.
Alaskan Decline
Prudhoe Bay, the largest oil field in the U.S., is part of the peak-oil story. The field was discovered in 1968 and came onstream in 1977. Since then, it has yielded more than 11 billion barrels of oil.
Yet even before the August mishap, this vast field had begun to die. Its output has fallen 73 percent to 400,000 barrels a day from a height of 1.5 million barrels a day in 1989.
Prudhoe Bay is following the life cycle of oil fields across the U.S. and around the world, a phenomenon known as the Hubbert Curve, which takes its name from M. King Hubbert.
Fifty years ago, Hubbert, then a geologist at Shell Oil Co.'s research lab in Houston, postulated that U.S. oil production would follow a bell-shaped curve.
At the 1956 meeting of the American Petroleum Institute in San Antonio, Hubbert predicted that total annual U.S. output would climb steadily, level off sometime between 1965 and '70 and then decline after about half of the country's reserves had been depleted.
Hubbert's Peak
The U.S. reached what geologists now refer to as Hubbert's Peak in 1970. Hubbert died in 1989 at the age of 86.
It wasn't until the late 1990s when Hubbert's ideas, which had percolated for decades in academia and oil circles, began to reach a wide audience via Campbell, the British geologist.
Now in his eighth decade, Campbell is a grandfatherly man with a shock of gray hair. He hardly comes across as a doom- monger. He works out of a two-story house in Ballydehob, a village on the western edge of Ireland.
Campbell spent 40 years exploring for oil for Amoco Corp. and other companies. He helped Amoco search for oil in Ecuador and then, during the 1980s, led its exploration in Norway. He later joined PetroFina SA, the oil exploration company now owned by Total.
After retiring from PetroFina in 1990, Campbell joined forces with Jean Laherrere, a retired French geophysicist who had spent 25 years working at Total, to analyze production profiles for the world's countries.
Campbell says he and Laherrere, now 75, looked at their data and concluded global oil production was approaching its zenith. In 1998, they co-wrote an article for Scientific American magazine titled ``The End of Cheap Oil'' that helped popularize their cause.
Coming Crunch
``The world is not running out of oil -- at least not yet,'' Campbell and Laherrere wrote. ``What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.''
In 2000, Campbell founded the Association for the Study of Peak Oil and Gas, an informal organization for fellow travelers. Now known as ASPO International, the group has sponsored five annual conferences, including the one in Pisa in July, which drew more than 230 people. It's now run by Kjell Aleklett, a physics professor at Uppsala University in Sweden. Twenty independent national ASPO groups have sprung up around the world, from Australia to France, to the U.S.
Many peaksters are driven by a moral imperative to spread the word. Campbell says he's a scientist, not a social or environmental crusader. Even so, he says he's worried that oil has harmed human society and the planet. Since the Oil Age dawned, nearly 150 years ago, the Earth's population has soared six-fold, he says.
Man Alone
``Man is the only animal that uses external energy,'' Campbell says.
Asked why he has championed the peak-oil theory, Laherrere quotes Antoine de Saint-Exupery, author of ``The Little Prince'': ``We don't inherit the Earth from our ancestors; we borrow it from our children.''
Activists have jumped on the peak-oil bandwagon and added their own, often strident, voices to the debate over the future of oil.
Jim Kunstler, a writer-activist who lives in Saratoga Springs, New York, says peak oil will ultimately destroy suburbia and plunge the U.S. into a violent dark age of feudalism.
``The question is, Can we run our shit the way we are running our shit?'' Kunstler, 57, says. In 2005, Kunstler wrote ``The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century'' (Atlantic Monthly Press, 320 pages, $23), which warns of the havoc to come.
Dieoff.com
Lifeaftertheoilcrash.net, a Web site run by lawyer and peak- oil entrepreneur Matt Savinar, warns, ``Civilization as we know it is coming to an end soon.'' The site sells peak-inspired books and products, including an investor's guide to peak oil.
Another site, dieoff.com, says wars over oil and other natural resources will eventually erupt and millions of people will be wiped out.
Stephen Andrews, a Denver-based energy consultant who founded ASPO-USA in June 2005, says the alarmists have hurt the peak-oil movement.
``The peak-oil tent has different voices -- some shrill, some more sober -- reaching different conclusions from the same facts,'' Andrews, 59, says.
Andrews has attracted more-sober voices to the movement. Last November, Denver Mayor John Hickenlooper helped co-sponsor a two- day peak-oil conference organized by Andrews.
``I think the people most exuberant about peak oil underestimate how much unconventional sources of oil will help flatten the peak, but to say that there is no peak is shortsighted,'' Hickenlooper says.
Crash Program
The world would have to embark on a crash mitigation program 20 years in advance to prevent peak oil from hobbling the global economy, says Robert Hirsch, a senior energy program adviser at San Diego-based research and engineering firm Science Applications International Corp. ``And I consider myself an optimist,'' says Hirsch, 71, who included his findings in a 2005 study on peak oil for the U.S. Department of Energy and estimates such a program would cost the world $1 trillion a year.
Some investors and analysts see lots of opportunities in a post-peak world.
Charles Maxwell, senior energy analyst at Weeden & Co., an independent research firm based in Greenwich, Connecticut, says high oil prices will spur companies to invest in unconventional sources. Few people, however, realize how much such projects will cost or how long they will take to come onstream, he says.
Take the Canadian oil sands. This region in Alberta holds 175 billion barrels of oil, according to the Canadian Association of Petroleum Producers (CAPP), the world's second-largest reserves.
`Really Big'
``It's big. It's really big,'' Neil Camarta, senior vice president for oil sands at Calgary-based Petro-Canada, says of the region. ``It can keep America going for 25 years.''
The oil sands hold vast stores of bitumen, a tarlike substance that is mined, rather than pumped, and then processed into oil that can be refined. The process is expensive -- and getting more so. Rising operating and capital costs have driven the price of mining and upgrading bitumen to as much as $40 a barrel, Camarta says.
By 2020, Canada's oil sands will yield 4 million barrels a day, almost four times what they do now, according to CAPP. That sounds like a lot until you realize that 4 million barrels is just over a third of what Saudi Arabia produced per day in 2005.
Pickens, who built Mesa Petroleum Co. into one of the world's largest independent oil and gas producers, says he sees trouble -- and opportunity -- in peak oil. Pickens, who collected a degree in geology from Oklahoma State University in 1951, has called for the construction of more nuclear power plants and the promotion of alternative energy. He says he's invested in the Canadian oil sands.
Pickens's Picks
``I'm a disciple of Hubbert,'' Pickens, 77, says. ``I think we've peaked and we are going to see an undersupply of oil.''
Clarium Capital's Thiel says he began thinking about peak oil in 1999. As the Internet bubble grew that year, Thiel, 38, says he started to wonder about other risks that investors might be ignoring and seized on the uncertain future of oil.
``Energy will be systematically undervalued until peak oil is priced in,'' Thiel says. He's bought shares of Calgary-based EnCana Corp., which has invested in exploration and new production, and of oil services companies like New York-based Schlumberger Ltd. and Houston-based Weatherford International Ltd., which stand to profit as explorers hunt for oil and drill wells. Thiel says he's leery of U.S. oil majors, such as Exxon Mobil, because they may become targets of new taxes once the government wakes up to peak oil.
Thiel himself says the peak will come by 2008 -- if it hasn't already. ``Geology will trump technology,'' he says.
Coal, Uranium
Eric Sprott, CEO of Toronto-based Sprott Asset Management Inc., says he became a peak-oil convert after hearing Campbell speak in 2004. Sprott, who helps manage 3.6 billion Canadian dollars (US$3.2 billion), says the bull market in energy has only just begun. He's invested 36 percent of his firm's assets in a variety of areas that could benefit from peak oil. His flagship hedge fund returned 41 percent in 12 months ended July 31, he says.
Sprott's investments include St. Louis-based Arch Coal Inc. and Brisbane, Australia-based Macarthur Coal Ltd. His oil and gas picks include Halifax, Nova Scotia-based Corridor Resources Inc.; Denver- based Delta Petroleum Corp.; and Houston-based Ultra Petroleum Corp. He has also invested in Australian uranium companies Energy Resources of Australia Ltd. and Paladin Resources Ltd.
Midnight Ride
Meanwhile, the peaksters aren't about to let up. They'll convene in Boston on Oct. 25-27 to sound their alarm at a conference called ``Time for Action: A Midnight Ride for Peak Oil.'' The title is a reference to the American patriot Paul Revere, whose horse ride in 1775 warned Massachusetts colonists that British soldiers were advancing. The battle that followed, at Lexington and Concord, marked the beginning of the American Revolution.
It was just 84 years after Revere took his ride, on Aug. 27, 1859, that Edwin Drake struck oil in Titusville, ushering in the Oil Age. Exxon Mobil says the era of oil isn't about to end. In one of its ads, the company says, ``Oil is a finite resource, but because it is so incredibly large, a peak will not occur this year, next year or for decades to come.'' The ad depicts a man looking through binoculars at a snowcapped mountain whose summit is hidden by clouds.
Campbell says the illustration actually drives home the point Exxon Mobil is trying to avoid. ``Even though it is obscured by clouds, we know there is a peak,'' Campbell says. His investor followers are betting he's right.
To contact the reporter on this story: Deepak Gopinath in New York at dgopinath@bloomberg.net .
Wednesday, August 30, 2006
Fuels of the future
Indy Star
August 27, 2006
Reducing America's dependence on foreign oil isn't just about the current pain at the pump. More important, it's about national security, economic expansion, conservation of natural resources and environmental protection.
Which alternative fuels hold the most promise? How quickly must the U.S. convert to new fuels? What are the long-term strategic and economic implications? At the request of Sen. Richard Lugar, experts will gather for a national energy summit Tuesday at Purdue University to discuss those questions and more.
In advance of the summit, we asked Purdue President Martin Jischke, Amy Myers Jaffe of Rice University's Baker Institute for Public Policy and Sue Cischke, vice president of environmental and safety engineering at Ford Motor Co., to explore issues surrounding the nation's energy needs.
By Martin C. Jischke
U.S. must break its addiction to foreign oil
The time is now to chart a strategic plan to make America less dependent on foreign oil.
The reasons -- geopolitical and economic -- have never been so clear or so compelling. As Sen. Richard Lugar states, "We must do it if for no other reason than our own security. A majority of the world's oil reserves are controlled by troubled nations, leaving the world vulnerable to manipulation."
The United States -- with 4.6 percent of the world's population -- produces 17.5 percent of our planet's energy, but it consumes 23.6 percent. Events of the past several years have made it clear that we cannot continue to tolerate this domestic undersupply and over consumption.
Fortunately, we have the means to correct this imbalance -- if we make a strong commitment to the solution. We depend on oil for about 40 percent of our energy, and we have both the technology and the resources to reduce that dependency. America is blessed with the richest farmland anywhere. We also have ample supplies of coal. These vast resources can be converted to liquid fuels to run our vehicles, factories and farms. If we move with enough conviction, America -- with Indiana leading the way -- can produce enough bio-based and coal-derived energy to significantly reduce the need for oil imports.
This reduction ultimately would reduce the price of oil on the world market and decrease the enormous costs of security now needed to keep oil moving through global markets. American farmers and the coal industry would benefit from the increased demand for their products. Because biofuels are a renewable resource and coal supplies are so large, this would not be a short-term fix. It can change the numbers in America's favor permanently.
As Gov. Mitch Daniels points out in his recent message about our state's energy strategy, Indiana already has more than 40 gasoline pumps that offer E85 fuel, several ethanol plants and the world's largest soy biodiesel facility. The state recently established a "BioTown," in Reynolds, a town in White County that strives to use biofuels for all its energy needs.
Biofuels transform renewable plant materials -- such as corn, soybeans, trees and even manure -- into transportation fuels and gas. Our state's ethanol fuel industry already is a role model for others. Just two years ago, Indiana had one ethanol-producing plant. This year, we have 11 ethanol plants, three biodiesel plants, and more are planned. The Purdue College of Agriculture and our Laboratory for Renewable Resources Engineering lead the Midwest University Consortium for Sustainable Biobased Products and Bioenergy.
Ethanol is produced from fermentation of starch and sugars and, in the United States, about 90 percent of ethanol comes from corn. During the past 25 years, ethanol has been an industry that existed on government subsidies -- now $2.5 billion annually nationwide. However, with oil prices around $70 a barrel, for ethanol to be profitable we need only modest price guarantees, not subsidies.
Indiana is rich in coal resources, too. The Hoosier state is part of the Illinois Coal Basin Deposits, which hold more than 130 billion tons of coal, representing 25 percent of the national coal reserves and enough to meet the current U.S. coal demands for more than 100 years. Coal can be converted to various forms of energy.
Clean-coal technology research at Purdue's Coal Transformation Laboratory in Discovery Park's Energy Center shares an $85 million federal Department of Energy grant with Illinois and Kentucky to further develop clean coal technologies. Research also is focusing on developing liquid coal for transportation and other uses.
Indiana is doing more than studying clean-coal technology and biofuels to make America less dependent on foreign oil. Purdue and other universities, as well as the state and industry, are investing expertise, time and funding to develop or convert:
Biomass conversion to biogas. Using technology to produce electricity from animal waste and other biomass.
Wind turbines for high-efficiency wind power and decreased noise.
Nuclear power that uses "passive cooling systems," that will keep operating during electrical power interruptions.
Solar energy efficiency improvements with low-cost production of solar cells that collect sunlight and generate electrical energy.
Electrochemical methods and hydrogen energy systems that change the way we generate, store and use energy.
The state's political, educational and business leaders are ready to create a new future of alternative fuels. Indiana can lead the way, but we need a national commitment as well. Together we can make the future secure.
It's time for a declaration of energy independence.
Martin C. Jischke is the president of Purdue University and serves on the U.S. President's Council of Advisers on Science and Technology.
Security at risk without changes
By Amy Myers Jaffe
It's pretty scary to think that American mobility could become more vulnerable to Middle East instability than ever before, but that's a real possibility. Security of U.S. energy supply will be highly influenced by international events in the coming years. Recent terrorist schemes and military conflicts in the Middle East have thrown a spotlight on the inherent risks associated with heavy reliance on oil supplies from the Middle East. But, disturbingly, experts agree that world dependence on Middle East oil is likely to grow rapidly in the future.
America imported 12.9 million barrels in 2004, or about 63 percent of total consumption of roughly 20.5 million barrels. That is up from 35 percent in 1973. The share of imported oil is projected to grow close to 70 percent by 2020, with the United States becoming increasingly dependent on Persian Gulf supply. U.S. imports from the Persian Gulf are expected to rise from 2.5 million barrel (22 percent of total U.S. imports) in 2003 to 4.2 million barrels (62 percent) by 2020, according to forecasts by the U.S. Department of Energy.
Previously, the industrialized West counted on the countries of the Persian Gulf and Venezuela to make the billion-dollar investments needed to meet rising global demand. But those countries are no longer investing sufficient amounts to meet the expected rise in oil demand in the United States, China and elsewhere. Expecting this reluctance to invest to change suddenly because that would suit American drivers is absurd; refusing to prepare for the opposite is clear folly.
Many Persian Gulf nations currently face both internal instability and future succession problems, boding poorly for future security of supply. Al-Qaeda has targeted vitally important oil facilities in Saudi Arabia, and Iranian assertiveness on its pursuit of nuclear weapons and international terrorism hangs over oil markets like a sword of Damocles. Any broadening of the conflict between Sunni and Shia populations in Iraq and beyond would be particularly threatening to oil supplies since large Shia populations sit on top of oil production not only in Iraq, but also in Saudi Arabia, parts of Kuwait and in Iran.
The rise in future U.S. oil imports will center squarely on the transportation sector that represents more than two-thirds of total petroleum use and will constitute over 70 percent of the increase in demand. Rather than leave American mobility at the mercy of events in the Middle East we cannot control (a fact that the war in Iraq so painfully demonstrates), we need to mobilize backup alternative fuel solutions as quickly as possible. The fact that this cannot be implemented overnight isn't an excuse to do nothing.
We are a can-do nation. Americans would like a choice of automotive fuels -- one that mirrors the way we currently can select from over a dozen energy sources to generate household electricity. The technology already exists. We have the capability to create hybrid automobiles that can run more efficiently on more than one energy source, including a combination of electric battery, gasoline and biofuels. Our car companies are producing flexible fuel vehicles that can run on biofuels for Brazil, but could do more to get such cars on the road in the United States at an added cost of only $40 per vehicle. If I could plug my car in at home and charge my battery, an Arab oil cutoff would not leave me stranded because almost all electricity is generated in this country without oil. If someday we could generate that electricity with solar roof panels, we could kiss Middle East oil goodbye.
Given the high stakes, waiting for the market to deliver energy security seems like a long process. California has passed emission targets that would force automakers to pony up better technologies more quickly. Japan both subsidized its car companies and poured federal dollars into public and private research and development to get hybrid cars off the drawing board and into car dealerships. A levy on a portion of energy company profits not being reinvested to create future supplies might be one way to fund a national effort. A large consumer tax on purchases of gas-guzzling vehicles would be another way to find the revenues for a serious energy program.
We cannot ensure that Middle East oil supplies will be there to meet world demand. But we can control our own consumption through regulation, conservation and technology development. The longer we wait, the more likely the transition will be forced by painful events instead of national will.
Jaffe is the Wallace S. Wilson Fellow in Energy Studies at Rice University's Baker Institute for Public Policy.
Infrastructure needed to support hybrids
By Sue Cischke
Energy powers the industrial and manufacturing growth of the United States. The energy supply disruptions of last summer, increases in global demand, and geopolitical concerns have led to significantly higher energy prices and consumer angst at the fuel pump.
Our nation's energy challenges can be properly addressed only by an integrated approach: a partnership of all stakeholders, including the automotive industry, the fuel industry, government and consumers.
From an industry viewpoint, it is critical to note the significant steps already taken to improve the fuel efficiency of our products. Fuel economy rates in cars increased by more than 100 percent since the mid 70s, for trucks and SUVs the rates increased by 53 percent. We are now moving ahead with a range of technological solutions simultaneously, because there is simply no single solution, no "silver bullet." We are working to accelerate the commercial application of advanced vehicle technologies, including flexible fuel vehicles (FFVs), hybrids, advanced clean diesels, hydrogen-powered internal combustion engines and fuel cell vehicles.
Two years ago, Ford launched the world's first gasoline electric full hybrid SUV and we will expand that technology to other vehicles in our lineup. In addition to hybrids, we believe that greater use of renewable fuels like ethanol, a domestically produced, renewable fuel, will help reduce reliance on foreign oil. FFVs are able to operate on up to 85 percent ethanol, or gasoline, or any mixture in between -- providing customers with an option to choose between E85 and gasoline.
As a whole, U.S. automakers will have produced a total of nearly 6 million FFVs by the end of this year. If all of these vehicles were operated on E85, over 3.6 billion gallons of gasoline a year could be saved. That's like saving a full year of gasoline consumption in a state such as Missouri or Tennessee. E85 can play an increasingly significant role in addressing our nation's energy concerns. It is a pathway for today with the ability to make an impact now.
Recently, the auto industry has committed to doubling the number of bio-fuel capable vehicles by 2010. But there is a problem. Even though the volume of E85 vehicles continues to grow rapidly, there are less than 800 E85 fueling stations in the U.S, out of more than 170,000 retail gasoline stations nationwide. The infrastructure must be expanded, but without the strong support of fuel providers, we cannot move forward far enough or fast enough.
Policy makers also have a key role. We would like to see government incentives to encourage the oil industry or others to accelerate E85 infrastructure investment as well as more research and development for advanced vehicle technologies and renewable fuels.
There is even a role for the consumer, because in the end, it will ultimately be consumers' choice of vehicles, how many miles they drive and their driving behaviors that will determine how much motor fuel we consume.
The challenges are considerable, but not insurmountable. We have to ensure that our business is sustainable by making vehicles that continue to meet the changing needs of the 21st century. That's a responsibility all automakers owe customers, shareholders and employees. But at another level, all of us have the opportunity to do something about energy independence, and that's a responsibility we owe to future generations.
Cischke is vice president of environmental and safety engineering at Ford Motor Co.
August 27, 2006
Reducing America's dependence on foreign oil isn't just about the current pain at the pump. More important, it's about national security, economic expansion, conservation of natural resources and environmental protection.
Which alternative fuels hold the most promise? How quickly must the U.S. convert to new fuels? What are the long-term strategic and economic implications? At the request of Sen. Richard Lugar, experts will gather for a national energy summit Tuesday at Purdue University to discuss those questions and more.
In advance of the summit, we asked Purdue President Martin Jischke, Amy Myers Jaffe of Rice University's Baker Institute for Public Policy and Sue Cischke, vice president of environmental and safety engineering at Ford Motor Co., to explore issues surrounding the nation's energy needs.
By Martin C. Jischke
U.S. must break its addiction to foreign oil
The time is now to chart a strategic plan to make America less dependent on foreign oil.
The reasons -- geopolitical and economic -- have never been so clear or so compelling. As Sen. Richard Lugar states, "We must do it if for no other reason than our own security. A majority of the world's oil reserves are controlled by troubled nations, leaving the world vulnerable to manipulation."
The United States -- with 4.6 percent of the world's population -- produces 17.5 percent of our planet's energy, but it consumes 23.6 percent. Events of the past several years have made it clear that we cannot continue to tolerate this domestic undersupply and over consumption.
Fortunately, we have the means to correct this imbalance -- if we make a strong commitment to the solution. We depend on oil for about 40 percent of our energy, and we have both the technology and the resources to reduce that dependency. America is blessed with the richest farmland anywhere. We also have ample supplies of coal. These vast resources can be converted to liquid fuels to run our vehicles, factories and farms. If we move with enough conviction, America -- with Indiana leading the way -- can produce enough bio-based and coal-derived energy to significantly reduce the need for oil imports.
This reduction ultimately would reduce the price of oil on the world market and decrease the enormous costs of security now needed to keep oil moving through global markets. American farmers and the coal industry would benefit from the increased demand for their products. Because biofuels are a renewable resource and coal supplies are so large, this would not be a short-term fix. It can change the numbers in America's favor permanently.
As Gov. Mitch Daniels points out in his recent message about our state's energy strategy, Indiana already has more than 40 gasoline pumps that offer E85 fuel, several ethanol plants and the world's largest soy biodiesel facility. The state recently established a "BioTown," in Reynolds, a town in White County that strives to use biofuels for all its energy needs.
Biofuels transform renewable plant materials -- such as corn, soybeans, trees and even manure -- into transportation fuels and gas. Our state's ethanol fuel industry already is a role model for others. Just two years ago, Indiana had one ethanol-producing plant. This year, we have 11 ethanol plants, three biodiesel plants, and more are planned. The Purdue College of Agriculture and our Laboratory for Renewable Resources Engineering lead the Midwest University Consortium for Sustainable Biobased Products and Bioenergy.
Ethanol is produced from fermentation of starch and sugars and, in the United States, about 90 percent of ethanol comes from corn. During the past 25 years, ethanol has been an industry that existed on government subsidies -- now $2.5 billion annually nationwide. However, with oil prices around $70 a barrel, for ethanol to be profitable we need only modest price guarantees, not subsidies.
Indiana is rich in coal resources, too. The Hoosier state is part of the Illinois Coal Basin Deposits, which hold more than 130 billion tons of coal, representing 25 percent of the national coal reserves and enough to meet the current U.S. coal demands for more than 100 years. Coal can be converted to various forms of energy.
Clean-coal technology research at Purdue's Coal Transformation Laboratory in Discovery Park's Energy Center shares an $85 million federal Department of Energy grant with Illinois and Kentucky to further develop clean coal technologies. Research also is focusing on developing liquid coal for transportation and other uses.
Indiana is doing more than studying clean-coal technology and biofuels to make America less dependent on foreign oil. Purdue and other universities, as well as the state and industry, are investing expertise, time and funding to develop or convert:
Biomass conversion to biogas. Using technology to produce electricity from animal waste and other biomass.
Wind turbines for high-efficiency wind power and decreased noise.
Nuclear power that uses "passive cooling systems," that will keep operating during electrical power interruptions.
Solar energy efficiency improvements with low-cost production of solar cells that collect sunlight and generate electrical energy.
Electrochemical methods and hydrogen energy systems that change the way we generate, store and use energy.
The state's political, educational and business leaders are ready to create a new future of alternative fuels. Indiana can lead the way, but we need a national commitment as well. Together we can make the future secure.
It's time for a declaration of energy independence.
Martin C. Jischke is the president of Purdue University and serves on the U.S. President's Council of Advisers on Science and Technology.
Security at risk without changes
By Amy Myers Jaffe
It's pretty scary to think that American mobility could become more vulnerable to Middle East instability than ever before, but that's a real possibility. Security of U.S. energy supply will be highly influenced by international events in the coming years. Recent terrorist schemes and military conflicts in the Middle East have thrown a spotlight on the inherent risks associated with heavy reliance on oil supplies from the Middle East. But, disturbingly, experts agree that world dependence on Middle East oil is likely to grow rapidly in the future.
America imported 12.9 million barrels in 2004, or about 63 percent of total consumption of roughly 20.5 million barrels. That is up from 35 percent in 1973. The share of imported oil is projected to grow close to 70 percent by 2020, with the United States becoming increasingly dependent on Persian Gulf supply. U.S. imports from the Persian Gulf are expected to rise from 2.5 million barrel (22 percent of total U.S. imports) in 2003 to 4.2 million barrels (62 percent) by 2020, according to forecasts by the U.S. Department of Energy.
Previously, the industrialized West counted on the countries of the Persian Gulf and Venezuela to make the billion-dollar investments needed to meet rising global demand. But those countries are no longer investing sufficient amounts to meet the expected rise in oil demand in the United States, China and elsewhere. Expecting this reluctance to invest to change suddenly because that would suit American drivers is absurd; refusing to prepare for the opposite is clear folly.
Many Persian Gulf nations currently face both internal instability and future succession problems, boding poorly for future security of supply. Al-Qaeda has targeted vitally important oil facilities in Saudi Arabia, and Iranian assertiveness on its pursuit of nuclear weapons and international terrorism hangs over oil markets like a sword of Damocles. Any broadening of the conflict between Sunni and Shia populations in Iraq and beyond would be particularly threatening to oil supplies since large Shia populations sit on top of oil production not only in Iraq, but also in Saudi Arabia, parts of Kuwait and in Iran.
The rise in future U.S. oil imports will center squarely on the transportation sector that represents more than two-thirds of total petroleum use and will constitute over 70 percent of the increase in demand. Rather than leave American mobility at the mercy of events in the Middle East we cannot control (a fact that the war in Iraq so painfully demonstrates), we need to mobilize backup alternative fuel solutions as quickly as possible. The fact that this cannot be implemented overnight isn't an excuse to do nothing.
We are a can-do nation. Americans would like a choice of automotive fuels -- one that mirrors the way we currently can select from over a dozen energy sources to generate household electricity. The technology already exists. We have the capability to create hybrid automobiles that can run more efficiently on more than one energy source, including a combination of electric battery, gasoline and biofuels. Our car companies are producing flexible fuel vehicles that can run on biofuels for Brazil, but could do more to get such cars on the road in the United States at an added cost of only $40 per vehicle. If I could plug my car in at home and charge my battery, an Arab oil cutoff would not leave me stranded because almost all electricity is generated in this country without oil. If someday we could generate that electricity with solar roof panels, we could kiss Middle East oil goodbye.
Given the high stakes, waiting for the market to deliver energy security seems like a long process. California has passed emission targets that would force automakers to pony up better technologies more quickly. Japan both subsidized its car companies and poured federal dollars into public and private research and development to get hybrid cars off the drawing board and into car dealerships. A levy on a portion of energy company profits not being reinvested to create future supplies might be one way to fund a national effort. A large consumer tax on purchases of gas-guzzling vehicles would be another way to find the revenues for a serious energy program.
We cannot ensure that Middle East oil supplies will be there to meet world demand. But we can control our own consumption through regulation, conservation and technology development. The longer we wait, the more likely the transition will be forced by painful events instead of national will.
Jaffe is the Wallace S. Wilson Fellow in Energy Studies at Rice University's Baker Institute for Public Policy.
Infrastructure needed to support hybrids
By Sue Cischke
Energy powers the industrial and manufacturing growth of the United States. The energy supply disruptions of last summer, increases in global demand, and geopolitical concerns have led to significantly higher energy prices and consumer angst at the fuel pump.
Our nation's energy challenges can be properly addressed only by an integrated approach: a partnership of all stakeholders, including the automotive industry, the fuel industry, government and consumers.
From an industry viewpoint, it is critical to note the significant steps already taken to improve the fuel efficiency of our products. Fuel economy rates in cars increased by more than 100 percent since the mid 70s, for trucks and SUVs the rates increased by 53 percent. We are now moving ahead with a range of technological solutions simultaneously, because there is simply no single solution, no "silver bullet." We are working to accelerate the commercial application of advanced vehicle technologies, including flexible fuel vehicles (FFVs), hybrids, advanced clean diesels, hydrogen-powered internal combustion engines and fuel cell vehicles.
Two years ago, Ford launched the world's first gasoline electric full hybrid SUV and we will expand that technology to other vehicles in our lineup. In addition to hybrids, we believe that greater use of renewable fuels like ethanol, a domestically produced, renewable fuel, will help reduce reliance on foreign oil. FFVs are able to operate on up to 85 percent ethanol, or gasoline, or any mixture in between -- providing customers with an option to choose between E85 and gasoline.
As a whole, U.S. automakers will have produced a total of nearly 6 million FFVs by the end of this year. If all of these vehicles were operated on E85, over 3.6 billion gallons of gasoline a year could be saved. That's like saving a full year of gasoline consumption in a state such as Missouri or Tennessee. E85 can play an increasingly significant role in addressing our nation's energy concerns. It is a pathway for today with the ability to make an impact now.
Recently, the auto industry has committed to doubling the number of bio-fuel capable vehicles by 2010. But there is a problem. Even though the volume of E85 vehicles continues to grow rapidly, there are less than 800 E85 fueling stations in the U.S, out of more than 170,000 retail gasoline stations nationwide. The infrastructure must be expanded, but without the strong support of fuel providers, we cannot move forward far enough or fast enough.
Policy makers also have a key role. We would like to see government incentives to encourage the oil industry or others to accelerate E85 infrastructure investment as well as more research and development for advanced vehicle technologies and renewable fuels.
There is even a role for the consumer, because in the end, it will ultimately be consumers' choice of vehicles, how many miles they drive and their driving behaviors that will determine how much motor fuel we consume.
The challenges are considerable, but not insurmountable. We have to ensure that our business is sustainable by making vehicles that continue to meet the changing needs of the 21st century. That's a responsibility all automakers owe customers, shareholders and employees. But at another level, all of us have the opportunity to do something about energy independence, and that's a responsibility we owe to future generations.
Cischke is vice president of environmental and safety engineering at Ford Motor Co.
Japan makes plans for greener cars, batteries
Reuters
Monday, August 28, 2006; 9:02 AM
TOKYO (Reuters) - Japan has drawn up an action plan to spearhead efforts to develop the next generation of more environmentally friendly vehicles and batteries to help reduce its reliance on oil.
Under the plan, Japan aims to foster the introduction of state-of-the-art environmentally friendly vehicles in stages, a panel set up by the Ministry of Economy, Trade and Industry said in a report on Monday.
The government should also set up a project to develop next-generation batteries to power such automobiles, through cooperation with local battery makers and research institutes, it said. It also plans to offer incentives to make such vehicles widespread in Japan, in addition to developing infrastructure, it added.
By 2010, Japan will aim to mass produce two-seater electric vehicles capable of running about 80 kilometers (50 miles) per charge, as well as 30 percent more fuel-efficient hybrid vehicles, the panel said.
The panel also hoped that after 2030 local car makers would start full-scale mass production of electric vehicles, powered by batteries manufactured at a 40th of the cost of current versions.
Japan, which has a target of 50,000 fuel-cell vehicles on Japanese roads in 2010, aims to raise the number of such vehicles in use to 5 million by 2020.
Japan, the world's third-largest oil consumer, wants to cut its transportation sector's reliance on oil to around 80 percent by 2030 from about 100 percent now.
Monday, August 28, 2006; 9:02 AM
TOKYO (Reuters) - Japan has drawn up an action plan to spearhead efforts to develop the next generation of more environmentally friendly vehicles and batteries to help reduce its reliance on oil.
Under the plan, Japan aims to foster the introduction of state-of-the-art environmentally friendly vehicles in stages, a panel set up by the Ministry of Economy, Trade and Industry said in a report on Monday.
The government should also set up a project to develop next-generation batteries to power such automobiles, through cooperation with local battery makers and research institutes, it said. It also plans to offer incentives to make such vehicles widespread in Japan, in addition to developing infrastructure, it added.
By 2010, Japan will aim to mass produce two-seater electric vehicles capable of running about 80 kilometers (50 miles) per charge, as well as 30 percent more fuel-efficient hybrid vehicles, the panel said.
The panel also hoped that after 2030 local car makers would start full-scale mass production of electric vehicles, powered by batteries manufactured at a 40th of the cost of current versions.
Japan, which has a target of 50,000 fuel-cell vehicles on Japanese roads in 2010, aims to raise the number of such vehicles in use to 5 million by 2020.
Japan, the world's third-largest oil consumer, wants to cut its transportation sector's reliance on oil to around 80 percent by 2030 from about 100 percent now.
Professor: Future looks bright for bio-based alternative fuels
DesMoines Register
ERRY PERKINS
August 29, 2006
Ames, Ia. — The future is now for farm crops and other potential substitutes for petroleum products, Dartmouth College engineering professor Lee Lynd said Monday at the Biobased Industry Outlook Conference at Iowa State University.
Lynd, 48, a widely recognized expert on alternative energy sources, said "a newfound sense of potential" for crops and other forms of alternative energy has set in among the public, the media and investors.
"There have been more changes in the past year than in the previous 25 years," Lynd said. "I see big changes."
Agriculture needs to capitalize on this interest to cut American dependence on foreign oil, lessen the impact of fossil fuels on the environment and improve the farm economy, Lynd said.
He cited biofuels processed from biomass crops or biological waste materials such as wood chips as the best alternative to displace gasoline.
Biomass crops like switchgrass "are very, very cost-competitive raw materials" for fuel production.
Lynd is also chief science officer at Mascoma Corp., a company that wants to make ethanol from cellulose, the woody or fibrous parts of plants or plant-based waste.
In an interview after his speech, Lynd said cellulosic ethanol plants will start to be built as soon as next year. Many pilot plants are under construction.
Existing ethanol plants that now use kernels of corn as a feedstock will be able to be retrofitted to handle biomass materials like corn stalks and cobs, he said.
Retrofitting ethanol plants will be cheaper than building cellulosic plants, he said.
"Capital investment (in a cellulosic ethanol plant) needs to be smaller, rather than larger, because of the risk," Lynd said.
By mixing new biomass sources with more traditional ethanol feedstocks, such as corn kernels, the risk is also lessened, he said.
Biodiesel made from oil seeds, such as soybeans, has less promise as an alternative fuel, Lynd said, because it probably won't displace as much petroleum as cellulosic ethanol will.
ERRY PERKINS
August 29, 2006
Ames, Ia. — The future is now for farm crops and other potential substitutes for petroleum products, Dartmouth College engineering professor Lee Lynd said Monday at the Biobased Industry Outlook Conference at Iowa State University.
Lynd, 48, a widely recognized expert on alternative energy sources, said "a newfound sense of potential" for crops and other forms of alternative energy has set in among the public, the media and investors.
"There have been more changes in the past year than in the previous 25 years," Lynd said. "I see big changes."
Agriculture needs to capitalize on this interest to cut American dependence on foreign oil, lessen the impact of fossil fuels on the environment and improve the farm economy, Lynd said.
He cited biofuels processed from biomass crops or biological waste materials such as wood chips as the best alternative to displace gasoline.
Biomass crops like switchgrass "are very, very cost-competitive raw materials" for fuel production.
Lynd is also chief science officer at Mascoma Corp., a company that wants to make ethanol from cellulose, the woody or fibrous parts of plants or plant-based waste.
In an interview after his speech, Lynd said cellulosic ethanol plants will start to be built as soon as next year. Many pilot plants are under construction.
Existing ethanol plants that now use kernels of corn as a feedstock will be able to be retrofitted to handle biomass materials like corn stalks and cobs, he said.
Retrofitting ethanol plants will be cheaper than building cellulosic plants, he said.
"Capital investment (in a cellulosic ethanol plant) needs to be smaller, rather than larger, because of the risk," Lynd said.
By mixing new biomass sources with more traditional ethanol feedstocks, such as corn kernels, the risk is also lessened, he said.
Biodiesel made from oil seeds, such as soybeans, has less promise as an alternative fuel, Lynd said, because it probably won't displace as much petroleum as cellulosic ethanol will.
Sen. Lugar Says Imported Oil Makes U.S. Vulnerable; Outlines Energy Program for America
WEST LAFAYETTE, Ind., Aug. 29 (AScribe Newswire) -- The comments below were made today (Tuesday, Aug. 29) at the Sen. Richard G. Lugar - Purdue University Summit on Energy Security. The summit drew more than 600 leaders to the Purdue campus in West Lafayette, Ind. to discuss national energy issues and policy. A goal of the summit is to discuss ways to reduce America's dependence on foreign oil and to develop new strategies for alternative fuels. Among those joining Sen. Lugar, R-Ind. for the daylong event include Indiana Gov. Mitch Daniels, Purdue President Martin C. Jischke and U.S. Rep. Pete Visclosky, D-Ind. The summit also includes a panel discussion, "Implementing Strategies to Reduce Foreign Oil Dependence." Panelists include Sue Cischke, Ford Motor Co. vice president; Carol Battershell, vice president for alternative energy for BP Inc.; and Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies at the James A. Baker III Institute for Public Policy of Rice University. Brian Lamb, president and CEO of C-SPAN, will serve as panel moderator.
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In the keynote address this morning to the Richard G. Lugar-Purdue University Summit on Energy Security, at Purdue University, West Lafayette, Ind., U.S. Senate Foreign Relations Committee Chairman Dick Lugar calls for dramatic and immediate action to address U.S. energy vulnerability.
"Neither American oil companies, nor American car companies have shown an inclination to dramatically transform their businesses in ways that will achieve the degree of change we need to address a national security emergency," Lugar says in the address. "Most importantly, the federal government is not treating energy vulnerability as a crisis, despite an increase in energy related proposals."
"To this end, the United States should adopt a national program that would make virtually every new car sold in America a flexible fuel vehicle. We should ensure that at least one quarter of filling stations in America have E85 pumps. We should expand ethanol production to 100 billion gallons a year by 2025, a figure that could be achieved by doubling output every five years. We should also create an approximate $45 per barrel price floor on oil through a variable ethanol tax credit to ensure that investments keep flowing to alternatives. And we should enact stricter vehicle mileage standards to point automobile innovation toward conservation. The plan I am proposing today would achieve the replacement of 6.5 million barrels of oil per day by volume - the rough equivalent of one third of the oil used in America and one half of our current oil imports," he says.
"Our failure to act will be all the more unconscionable given that success would bring not only relief from the geopolitical threats of energy-rich regimes, but also restorative economic benefits to our farmers, rural areas, automobile manufacturers, high technology industries, and many others," concludes Lugar. "We must be very clear that this is a political problem. We now have the financial resources, the industrial might, and the technological prowess to shift our economy away from oil dependence. What we are lacking is coordination and political will. We have made choices, as a society, which have given oil a near monopoly on American transportation. Now we must make a different choice in the interest of American national security and our economic future."
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Below is the full text of the speech:
I am honored to address this assembly, which will explore an aggressive agenda to reduce our nation's dependence on foreign energy sources. I appreciate the opening words of my good friend, Governor Mitch Daniels. He and his administration have given priority to energy issues in Indiana. They are attempting to maximize the opportunities that our state has to become a leader in a broad gamut of energy technologies. I also want to thank our host, Purdue University, and President Martin Jischke for promoting this energy summit. President Jischke has provided brilliant direction to this university. His advice on energy, agriculture, education, and many other topics has been of great benefit to me personally. I will deeply miss his leadership at Purdue when he steps down as President next June, but I look forward to a very productive year immediately ahead and many mutual endeavors in years to come. I am also delighted that Congressman Pete Visclosky will address the summit conference this noon. Pete has been a great partner on numerous issues, ranging from local projects of special importance to Hoosiers, to the global search for an AIDS vaccine.
It is exciting to be surrounded by so many talented individuals who are committed to the objective of greater energy independence for the United States. I believe that in the future, the United States can be energy self sufficient or nearly so. Over the long term, we have the resources and the ingenuity to achieve this goal.
The crucial question is what happens between now and then. Will we achieve this goal rapidly through a coherent and resolute national policy that takes advantage of America's natural assets to create new economic opportunities, a cleaner environment, and improved national security? Or will we achieve our objective only after many years of widespread economic pain and national vulnerability caused by scarcity, terrorist attacks, market shocks, and foreign manipulation of our energy supplies?
We must move now to address our energy vulnerability because sufficient investment cannot happen overnight, and it will take years to build supporting infrastructure and to change behavior. In other words, by the time a sustained energy crisis fully motivates market forces, we are likely to be well past the point where we can save ourselves from extensive suffering. Our motivation will come too late and the resulting investment will come too slowly to prevent the severe economic and national security consequences of our oil dependence. This is the very essence of a problem requiring citizen, business, and governmental action.
SIX THREATS
I will describe our energy dilemma as a six-pronged threat to national security. First, oil supplies are vulnerable to natural disasters, wars, and terrorist attacks that can disrupt the lifeblood of the international economy. Within the last year, the international flow of oil has been disrupted by hurricanes, unrest in Nigeria, and continued sabotage in Iraq. In late February of this year, terrorists penetrated the outer defenses of Saudi Arabia's largest oil processing facility with car bombs before being repulsed. Al-Qaeda and other terrorist organizations have openly declared their intent to attack oil facilities to inflict pain on Western economies.
Second, as large industrializing nations such as China and India seek new energy supplies, oil and natural gas will become more expensive. In the long run we will face the prospect that the world's supply of oil may not be abundant and accessible enough to support continued economic growth in both the industrialized West and in large rapidly growing economies. As we approach the point where the world's oil- hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict.
Third, adversarial regimes from Venezuela, to Iran, to Russia are using energy supplies as leverage against their neighbors. We are used to thinking in terms of conventional warfare between nations, but energy is becoming a weapon of choice for those who possess it. Nations experiencing a cutoff of energy supplies, or even the threat of a cutoff, may become desperate, increasing the chances of armed conflict, terrorism, and economic collapse.
Fourth, the revenues flowing to authoritarian regimes often increase corruption in those countries and allow them to insulate themselves from international pressure and the democratic aspirations of their own peoples. We are transferring hundreds of billions of dollars each year to some of the least accountable regimes in the world. Some are using this money to invest abroad in terrorism, instability, or demagogic appeals to populism.
Fifth, the threat of climate change has been made worse by inefficient and unclean use of non-renewable energy. In the long run this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability.
Sixth, much of the developing world is being hit hard by rising energy costs, which often cancel the benefits of our foreign assistance. Without a diversification of energy supplies that emphasizes environmentally friendly energy sources that are abundant in most developing countries, the national incomes of energy poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism.
Each of these six threats from energy dependence is becoming more acute as time passes. Any of them could be a source of catastrophe for the United States and the world.
THE VULNERABILITY OF A SUPERPOWER
The vulnerability of the United States rests on some basic factors. With less than 5 percent of the world's population, our nation consumes 25 percent of its oil. World demand for oil and other forms of energy is rapidly increasing. Within 25 years, the world will need 50 percent more energy than it does now. If oil prices average $60 a barrel through 2006 - a figure that we are currently well above - we will spend about $320 billion on oil imports this year. This is roughly the same amount that the United States has spent on the war and reconstruction effort in Iraq during the first three years of conflict.
These conditions might be negotiable in the short and medium terms if oil resided with responsible, secure producers who maximize production during periods of elevated demand. But just the opposite is true. According to PFC Energy, about 79 percent of the world's oil supply is controlled by state-run oil companies. These governments profoundly affect prices through politicized investment and production decisions. The vast majority of these oil assets are afflicted by at least one of three problems: lack of investment, political manipulation, or the threat of instability and terrorism.
As recently as four years ago, spare production capacity exceeded world oil consumption by about 10 percent. As world demand for oil has rapidly increased in the last few years, spare capacity has declined to less than 2 percent. Thus, even minor disruptions of oil can drive up prices. Earlier this month, a routine inspection found corrosion in a section of BP's Prudhoe Bay oil pipeline that shut down 8 percent of U.S. oil output, causing a $2 spike in oil prices. That the oil market is this vulnerable to something as mundane as corrosion in a pipeline is evidence of the precarious conditions in which we live.
Our current dependence on imported oil has put the United States in a position that no great power should tolerate. Our economic health is subject to forces far beyond our control, including the decisions of hostile countries. We maintain a massive military presence overseas, partly to preserve our oil lifeline. One conservative estimate puts U.S. oil-dedicated military expenditures in the Middle East at $50 billion per year. But there is no guarantee that even our unrivaled military forces can prevent an energy disaster. We have lost leverage on the international stage and are daily exacerbating the problem by participating in an enormous wealth transfer to authoritarian nations that happen to possess the commodity that our economy can least do without.
THE NEW ENERGY REALISM
Rising energy prices, news reports of hostile oil producers, and the energy shocks experienced after the Katrina and Rita hurricanes, have awakened Americans to our energy vulnerability.
Almost six months ago, I delivered an address at the Brookings Institution in which I described "a shifting balance of realism" from those who believe in the immutability of oil domination of our economy and a laissez faire approach to energy policy to those who recognize that our nation has no choice but to seek a major reorientation in the way we get our energy. With oil at $72 a barrel and multiple crises flaring in the Middle East, fewer pro-oil commentators still assert that dependence on oil is simply a choice of the marketplace and government can and should do little to change it.
I believe that there is a growing consensus behind the new energy realism. There are clear signs that policy makers and a majority of the public recognize that our oil dependence is dangerously unsustainable.
The media is filled with examples of enterprising individuals who are making ethanol or biodiesel, erecting windmills, installing solar panels, or otherwise establishing personal control over their energy resources. A review of the nation's five largest newspapers revealed that twice as many energy-related stories appeared in July 2006 as appeared in July 2003.
Gasoline prices are beginning to have some effect on the automobile choices of American consumers. Sales of SUVs were down 15 percent in the first half of 2006 compared with the same period in 2005. Sales of compact cars, by comparison, rose 8 percent. These statistics were reinforced by a May 2006 Consumer Reports survey, which found that 37 percent of Americans were considering trading in their current cars for more fuel efficient cars. Almost half of these consumers were considering the purchase of a hybrid car or another alternative to traditional gasoline powered cars.
Progress is also appearing in the investment world. The entrepreneurial vanguard that brought us the internet and transformed telecommunications is turning its attention to alternative energy. According to data compiled by VentureOne, venture capital targeted at alternative energy projects more than tripled to $315 million in the first half of 2006 compared to the first half of 2005. Alternative energy investment is no longer just a niche area for environmental idealists and companies trying to improve their public image.
As a political issue, energy has been elevated to a status that is roughly equivalent to health care or education. A check of all one hundred Senators' websites in early August found that at least 85 of them had either issued a press release on energy this summer or had an energy section prominently displayed on their homepage. No politician on the national scene can afford to ignore energy.
EMBRACING REALISM, BUT AVOIDING ACTION
Unfortunately, although many Americans are embracing the idea of changing our energy destiny, they have not committed themselves to the action steps required to achieve an alternative future. This is an important distinction, because although national acceptance that there is a problem is a necessary condition for solving the problem, it does not guarantee that the problem will be solved.
In fact, advancements in American energy security have been painfully slow during 2006, and political leadership has been defensive, rather than pro-active. One can point with appreciation to a few positive trends, as I have just done, but these are small steps forward in the context of our larger vulnerability. If our economy is crippled by an oil embargo, if terrorists succeed in disrupting our oil lifeline, or if we slide into a war because oil wealth has emboldened anti- American regimes, it will not matter that before disaster struck, the American public and its leaders gained a new sense of realism about our vulnerability. It will not matter that we were producing marginally more ethanol than before or that consumers are more willing to consider hybrids and other alternative vehicles.
Not all indices and measures of energy progress are even moving in the right direction. The American people are angered by $3.00 gasoline, but they are still buying it in record quantities. In a recent Business Week article, writer Peter Coy points out that gasoline consumption during the 2006 July 4 holiday was up 2 percent from a year earlier and consumers bought 10 percent more gasoline in the first half of 2006 than they did in the first half of 2000, even though the price of gasoline was 75 percent higher.
Neither American oil companies, nor American car companies have shown an inclination to dramatically transform their businesses in ways that will achieve the degree of change we need to address a national security emergency. In fact, a number of the major oil companies have written to me to explain why they are not enthusiastic about installing pumps that can accommodate E85 - a blend of gasoline and up to 85 percent ethanol. Some are distinctly hostile to any such idea.
General Motors launched a new "Live Green, Go Yellow" ad campaign to promote the purchase of flexible fuel vehicles. But its strategy for overall corporate recovery appears to depend on the sale of pickup trucks. Earlier this month, General Motors CEO Richard Wagoner called a new redesigned line of pickup trucks "the most important part of our North American turnaround plan." According to the New York Times, to counter GM's new line, Ford Motors plans to cut the price of its 2007 F-Series pickups, add two more body styles, and increase towing capacity. Moreover, earlier in the summer, GM attempted to tap into consumer worries about gasoline costs by offering to subsidize gasoline for purchasers of certain gas guzzlers in Florida and California. Under the deal, GM would cap the price of gasoline at $1.99 per gallon for one year for buyers of Hummers, Yukons, Tahoes, and other large vehicles.
Within state governments, dropping speed limits or raising gas taxes are non-starters almost everywhere. In fact, speed limits are rising in some states. Recently, Texas raised speed limits on some sections of rural interstate highways to 80 miles per hour, effectively ensuring that many motorists will be traveling closer to 90 miles per hour on those stretches and using more gasoline per mile.
Most importantly, the federal government is not treating energy vulnerability as a crisis, despite an increase in energy related proposals. Consider that the only major energy legislation taken up by Congress so far this year was legislation to encourage offshore oil and gas production in the Gulf of Mexico. I supported passage of the bill, but it was offered in a format that did not allow for amendments, and no bill has emerged from a House-Senate conference. If the bill passes, we would be addressing only a small corner of the energy picture. Issues such as energy efficiency, renewable fuels, and alternative energy technology had no chance to be discussed.
Even when the Congress and the President establish programs that would produce meaningful results, bureaucratic inertia and turf- consciousness within the federal agencies have added delays. Groundbreaking for the first commercial-scale cellulosic ethanol plant has been on hold for a year while investors wait for the Federal government to establish the regulations and application procedure for a loan guarantee program that was passed last summer. The program was meant to jump start the commercialization of cellulosic ethanol - a key goal of President Bush and Congress. But despite the urgency of this mission, the Energy Department's glacial implementation of the program has frustrated potential investors and those of us who are urging the transition to gasoline alternatives. In fairness, Secretary Bodman announced in early August that the Energy Department will accept proposals this fall for cellulosic plant pilot projects, even before regulations are complete. The Department estimates that construction of the first plants could begin early next year.
We could all take our time if this were merely a matter of accomplishing an industrial conversion to more cost effective technologies. Unfortunately, in the absence of far-reaching changes in energy policy, we are risking multiple disasters for our country.
DEMOSCLEROSIS IN THE ENERGY DEBATE
The energy debate is afflicted with what writer Jonathan Rauch has called "Demosclerosis" - the phenomenon of competing interest groups protecting their perceived interests so effectively that policy can achieve only least common denominator outcomes that do not solve the problem threatening the whole nation. Rauch used the concept of demosclerosis to describe the gridlock afflicting efforts to cut the federal budget and restructure entitlement programs. But it is also applicable to the energy debate. The competing interests of oil companies, car companies, environmentalists, truckers, farmers, consumers, and governmental agencies cancel out initiatives or compromises that serve the broader public interest.
Even in California, where voters tend to be environmentally sensitive and where pollution provides a strong extra impetus to cut gasoline use, entrenched business interests have succeeded in discouraging alternative fuels and transportation technologies. Since 1979, California lawmakers have tried a variety of approaches, only to be frustrated by the oil and auto industries that resisted change. A proposal there to cut oil use 15 percent by 2020 is supported by Governor Schwarzenegger, but opposed by the major oil companies, and has not made it through the legislature. California consumes more gasoline than any other state. Yet the number of E85 stations open to the public, after all the conflicting cross-currents, is exactly one.
Overlaying these elements of gridlock are memories of President Jimmy Carter's unpopular energy program from the 1970s. His dour calls for sacrifice remain a cautionary example for many office holders, editorial writers, and political strategists. Conventional political wisdom holds that the American public will punish anyone who forces significant energy sacrifices on them. This is a major oversimplification, but it is true that Americans are not eager to pay higher prices for energy, wait in gas lines, or see their driving or horsepower curtailed. A recent Bloomberg/Los Angeles Times poll asked about 1,500 people which of five options were "the best way to reduce U.S. reliance on foreign oil." Two percent chose increasing the gas tax. Building new nuclear plants or enforcing stricter mileage standards fared little better at 6 and 8 percent respectively. Respondents gravitated toward general trends that were unlikely to affect them personally, with 52 percent endorsing increased government investments in alternative energy sources and 20 percent choosing to relax environmental standards for oil and gas drilling.
Breaking through a political logjam often requires a crisis that focuses the nation in a way that achieves a consensus. But consider that the combination of September 11, 2001, the war in Iraq, the conflict on the Israeli-Lebanese border, the nuclear standoffs with Iran and North Korea, the Katrina and Rita hurricanes, sustained $3 per gallon gasoline, and several other severe problems have not created a consensus on energy policy. This leads one to the sobering conclusion that a disaster capable of sufficiently energizing public opinion and our political structures will have to be something worse than the collective maladies I just mentioned - perhaps extreme enough to push the price of oil to triple digits and set in motion a worldwide economic downturn. None of us want to experience this or any of the nightmare scenarios that await us. It is time to summon the political will to overcome the energy stalemate.
ESTABLISHING MEANINGFUL GOALS
In most areas of national policy we are concerned far more with trends than with a discernable national goal. For example, we watch the effects of President Bush's "No Child Left Behind Act" and debate whether more American school children are reading at grade level than before. Despite the name of that bill, we realize that not every school or every child will succeed. We measure success or failure in trends and those trends have meaning because they can be translated into progress for real individuals. The same is true for most aspects of health care policy, environmental protection, job creation, highway construction, and numerous other policy areas. Even when goals aren't met completely, we are rarely disappointed if we achieve measurable improvements.
Our energy dilemma is different. Although every gallon of ethanol, every E-85 pump, every flex fuel vehicle that comes on line moves us closer to safety, they do not necessarily make us safer right now. Marginally reducing our reliance on imported oil over the course of the next few decades will be welcome, but we will still be vulnerable to disaster at any time, and our national security and economic policy options will be constrained accordingly.
Our energy vulnerability is analogous to rowing a boat to shore in rough seas. Each stroke moves us closer to safety, but until we reach the shore, we can be capsized. We have to measure progress not against where we have been, but against the distance to our goals. Achieving a positive trend line is almost inevitable as long as energy costs remain high, because these costs will lead to some improvements in investment and conservation. We need to have the discipline to understand that a modestly positive trend line is not enough. With the storm bearing down on them, the occupants of a threatened boat do not put up their oars and relax because the current has caused them to drift a little closer to shore.
To bolster public motivation and to connect our efforts to rational outcomes, we must work much harder to establish meaningful goals. Americans need to know exactly what the plan is and how we will achieve it. We not only must understand how to bring alternatives to the market, we must establish what degree of change would improve our national security situation, then tailor national policy to achieve that goal.
A PROGRAM FOR AMERICA
Although the energy debate is multifaceted, the heart of our geostrategic problem is reliance on imported oil in a market that is dominated by volatile and hostile governments. This is where we must devote our national effort, because it is our most intense short term vulnerability. It also could bring the most collateral benefits, including reinvigorating the American automobile and agricultural industries and helping to reduce carbon emissions. This is not to minimize the challenges facing our electricity grid or other energy problems, but as we marshal our political capital for a difficult task, this should be our first focus.
To this end, the United States should adopt a national program that would make virtually every new car sold in America a flexible fuel vehicle. We should ensure that at least one quarter of filling stations in America have E85 pumps. We should expand ethanol production to 100 billion gallons a year by 2025, a figure that could be achieved by doubling output every five years. We should also create an approximate $45 per barrel price floor on oil through a variable ethanol tax credit to ensure that investments keep flowing to alternatives. And we should enact stricter vehicle mileage standards to point automobile innovation toward conservation. The plan I am proposing today would achieve the replacement of 6.5 million barrels of oil per day by volume - the rough equivalent of one-third of the oil used in America and one half of our current oil imports.
I am aware that these are ambitious goals, and that achieving them will take political breakthroughs and intensive government oversight. But if we have the political will, America can end its oil addiction through technology, the new economics of energy, and targeted government incentives and regulations to focus market forces on the problem.
As former Federal Reserve Chairman Alan Greenspan told the Senate Foreign Relations Committee earlier this year, almost one out of every seven barrels of oil produced in the world is consumed on American highways. To break oil's monopoly on American roads, some experts favor a giant leap in technology to hydrogen. But that will require new engines, new distribution systems, new production technologies, and is decades away from commercialization. Instead, we can start to break petroleum's grip right now. The key is making ethanol as important as gasoline in our transportation fuel mix.
To start with, every new car can be easily fitted with proven technology that enables it to burn E85. Millions of these cars are on the road today, and the factory cost of making each vehicle capable of burning E85 is probably less than $150. Because these flex-fuel cars can run on either gasoline or E85, or any combination, the driver can fill up with E85 when it is available, and with regular gasoline when it is not. So the first step should be to require that all new cars sold in America be flex-fuel vehicles.
We applaud the efforts of American automakers to increase their flexible fuel offerings. On June 28, Daimler-Chrysler, Ford, and General Motors issued a statement announcing that they will double their production of flexible fuel vehicles by 2010. This pledge is significant within the context of the auto company's business objectives, but it is inadequate in the context of pursuing the national security benefits of replacing a large share of gasoline with ethanol. The federal government should work with both foreign and domestic car companies on a plan to rapidly achieve the goal of equipping all new vehicles sold in America with flex-fuel technology. The federal government should be willing to offer incentives to help make a voluntary plan work. But if car manufacturers do not respond with a sufficient plan in a short time period, Congress should mandate that all new autos sold in the United States have flex-fuel capability.
I do not suggest this lightly. But my observations of the post- Katrina response by car companies, oil companies, and consumers is that in the short run, the evolution of market forces won't be capable of producing the progress that we need to achieve our national security goals, particularly since the car fleet turns over slowly.
Next, we need to make E85 more widely available. Major oil companies have resisted installing E85 pumps. Indeed, most of the 897 E85 fuel stations in the country are independently-owned. As the profits of oil companies have increased with the price of oil, members of Congress have discussed increasing taxes on oil companies or requiring that a certain percentage of profits be devoted to research, exploration, or alternative energy sources. Some of these ideas may have merit. I would suggest, however, that our first requirement of oil companies should be to use some of their recent profits to install E85 pumps in at least 25 percent of the nation's fuel stations within ten years. Unfortunately, this may also require an outright mandate. The majors have, thus far, shown little willingness to take this step.
The oil companies have argued that installing these pumps is too expensive and should wait until sufficient supplies of ethanol and flex-fuel vehicles are available. It does cost money to turn a gas pump into an E85 pump, primarily to replace the underground storage tank. But the cost is generally far less than the oil companies have portrayed. A recent Wall Street Journal article cited Chevron as estimating that installing an E85 pump costs $200,000. In fact, last year I helped inaugurate an E85 outlet in Terre Haute, and the owner said it cost her less than $5,000 to retrofit her station. Moreover, according to oil industry sources, installing a new E85 pump costs only about $5,000 more than installing a new gasoline pump. This suggests that stations on the drawing board would be low-cost candidates for E85 pumps. Conversion of some pumps will be much more expensive, and there are numerous price variables to consider. But by making use of retrofits and by devoting one pump to E85 at newly constructed fuel stations, the average conversion cost nationwide would be a fraction of what oil companies have implied.
In addition, gasoline companies can take advantage of an existing tax credit for the installation of renewable fuel pumps. I would support increasing this tax credit if a mandate were enacted. Gasoline companies also would be able to hold costs down by selecting the least expensive locations for adding E85 pumps, as long as they met geographic distribution requirements.
If the six largest gasoline companies installed E85 pumps in half of their stations, we would get to the 25 percent fuel station goal. For the sake of argument, if we estimated that the average marginal cost of opening an E85 pump after tax credits was $15,000, then establishing the pumps at one quarter of the nation's 170,000 fuel stations would cost approximately $637 million over 10 years. That is just 1 percent of the combined $64 billion profit made during 2005 alone by the three largest American oil companies - Exxon-Mobil, Chevron, and Conoco-Phillips. Even if the average cost is somewhat more than $15,000, these figures illustrate that the cost of a nationwide E85 pump conversion for the major oil companies would be far from prohibitive.
My intent here is not to punish the oil companies. As a Senator who has favored new drilling and other initiatives designed to help the oil companies produce more domestic oil, I am suggesting that they need to alter their thinking. In the best circumstances, they would embrace ethanol and work hard to diversify their investments and operations - partly for the good will they would receive from Congress and the public - but also to prepare for the coming decades of greater American prosperity and security.
If the mandate can be effectively linked to the increasing availability of ethanol, so much the better. But to achieve our larger goal, we must be prepared to tolerate a certain level of disconnect between cars, pumps, and ethanol in the early stages of this effort. Some pumps may be underutilized at first, but this cannot be an excuse not to move forward.
Incidentally, virtually every gas-powered vehicle in America today can run on gasoline blended with 10 percent ethanol, or E10. By requiring that all gasoline be E10 as ethanol supplies become available, we could accommodate significantly more ethanol production even before most flex-fuel vehicles and E85 pumps are in place. Our neighbors in Illinois have passed such legislation, and I have urged my friends in Indianapolis to follow suit.
Now how do we produce enough ethanol to supply these stations and fuel these cars? The good news is we can let the market do a lot of the work. When oil is above $70 a barrel, making ethanol from corn or sugar, even before subsidies, is less costly than producing gasoline. That is true even if oil drops substantially from today's level.
But the long term advancement of ethanol as a national transportation fuel requires a focused effort to perfect and commercialize cellulosic technology, which will enable us to make ethanol from switch grass, agricultural waste and other inexpensive biomass. The addition of cellulosic ethanol has the potential to substantially reduce the overall production cost of ethanol, while greatly expanding the volume produced. Although scientists and technicians are confident of the possibilities for cellulosic ethanol, efforts at commercialization have lagged behind basic research. The time is long past due for the Federal government to step in and prime the pump for commercial production through an aggressive loan program. The experience gained by the first production plants will provide the knowledge we need to rapidly expand the cellulosic industry.
Studies have shown that we will have enough land for energy crops, given the expected increases in yields and improvements in processing efficiency. If we could reach a target of 100 billion gallons of ethanol a year - a 13-fold increase over current capacity in operation or under construction - that would be equivalent to 71 percent of current gasoline consumption by volume. The two are not directly comparable because ethanol has lower energy content than gasoline, but over time, I expect automakers will improve the efficiency of their engines for E85 fuel.
Although many investors are currently lining up to jump into the ethanol business, many are still hesitating to take the plunge. They fear that foreign oil producers might, as they have before, manipulate the oil market to temporarily cut the price and drive ethanol producers out of business. Therefore, another step we should take is to ensure market certainty for investors by setting a price floor for crude oil at about $45 a barrel through a variable ethanol tax credit that would rise as the price of oil dropped. I am developing legislation to achieve this goal and have benefited from the contributions of Dr. Wallace Tyner of Purdue University, who will appear in the afternoon panel.
Finally, it will be far easier to alter the mix of fuel supplies if we can slow or stop the growth in overall fuel demand. It has been more than twenty years since there was a change in the Corporate Average Fuel Efficiency standards for cars. Over that time, American gas mileage has largely stagnated. In 1987, the average light duty vehicle got 22.1 miles per gallon, according to the EPA. Nineteen years later, in 2006, the figure has fallen to 21 miles per gallon. Yet during that time, automobile technology has greatly advanced, only in other directions. For instance, today a family car like the Toyota Camry has faster acceleration than a muscle car of the 1970s.
We need to channel the technical prowess of America's auto industry in the direction of greater fuel efficiency so that we can grow our economy without growing our fuel consumption. Therefore, Congress should enact modern mileage standards that set a target of steadily improving fuel economy every year. It should also continue to encourage research, development, and deployment of hybrids, plug-in technology, ultra-light auto materials, biodiesel, and coal-based transportation fuels, among other promising technologies.
This package of proposals would dramatically improve America's security posture. It would not dismantle the automobile culture that Americans cherish, nor would it create a vast bureaucracy with a bottomless appetite for taxpayer dollars. In fact, if it is accompanied by strong leadership and thoughtful explanation, I am confident that Americans will recognize that this is the way that we will preserve our cars and our economy over the long run. It would provide more jobs for Americans instead of sending a deluge of money to hostile countries, support our farmers instead of foreign terrorists, and promote green fuels over fossil fuels.
It should not surprise you to learn that I have proposed or co- sponsored legislation on these ideas. But this is just a start. None of these bills has passed, or even been put to a vote in the Senate. For instance, the Fuel Economy Reform Act, which I co-sponsored with my friend Sen. Barack Obama and other Democrats and Republicans, seeks a 4 percent annual increase in fuel economy. Last month, Sen. Obama tried to amend the offshore oil drilling bill with our legislation, but Senate procedures prevented him from doing so. While we are asking for greater statesmanship from our automobile and oil companies, we must demand the same from our federal legislators and administrators.
CONCLUSION
Far in the future, historians may point to the energy policy of the last several decades as the major national security failing of the American government in this era. In the absence of decisive policy changes, historians will rightly ask how the wealthiest and most powerful nation on earth with abundant land, a magnificent industrial infrastructure, and the world's best universities and research institutions simply would not reorient itself over the course of decades despite repeated warning signs. Our failure to act will be all the more unconscionable given that success would bring not only relief from the geopolitical threats of energy-rich regimes, but also restorative economic benefits to our farmers, rural areas, automobile manufacturers, high technology industries, and many others.
We must be very clear that this is a political problem. We now have the financial resources, the industrial might, and the technological prowess to shift our economy away from oil dependence. What we are lacking is coordination and political will. We have made choices, as a society, which have given oil a near monopoly on American transportation. Now we must make a different choice in the interest of American national security and our economic future. As the vanguard of concerned and informed experts in this field, I call upon each of you to apply your talents and energies to solving this fundamental problem threatening the well-being of our nation. I look forward to working with you as we achieve this goal.
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CONTACT: Andy Fisher, Sen. Lugar's press secretary, 202-224-2079, andy_fisher@lugar.senate.gov
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In the keynote address this morning to the Richard G. Lugar-Purdue University Summit on Energy Security, at Purdue University, West Lafayette, Ind., U.S. Senate Foreign Relations Committee Chairman Dick Lugar calls for dramatic and immediate action to address U.S. energy vulnerability.
"Neither American oil companies, nor American car companies have shown an inclination to dramatically transform their businesses in ways that will achieve the degree of change we need to address a national security emergency," Lugar says in the address. "Most importantly, the federal government is not treating energy vulnerability as a crisis, despite an increase in energy related proposals."
"To this end, the United States should adopt a national program that would make virtually every new car sold in America a flexible fuel vehicle. We should ensure that at least one quarter of filling stations in America have E85 pumps. We should expand ethanol production to 100 billion gallons a year by 2025, a figure that could be achieved by doubling output every five years. We should also create an approximate $45 per barrel price floor on oil through a variable ethanol tax credit to ensure that investments keep flowing to alternatives. And we should enact stricter vehicle mileage standards to point automobile innovation toward conservation. The plan I am proposing today would achieve the replacement of 6.5 million barrels of oil per day by volume - the rough equivalent of one third of the oil used in America and one half of our current oil imports," he says.
"Our failure to act will be all the more unconscionable given that success would bring not only relief from the geopolitical threats of energy-rich regimes, but also restorative economic benefits to our farmers, rural areas, automobile manufacturers, high technology industries, and many others," concludes Lugar. "We must be very clear that this is a political problem. We now have the financial resources, the industrial might, and the technological prowess to shift our economy away from oil dependence. What we are lacking is coordination and political will. We have made choices, as a society, which have given oil a near monopoly on American transportation. Now we must make a different choice in the interest of American national security and our economic future."
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Below is the full text of the speech:
I am honored to address this assembly, which will explore an aggressive agenda to reduce our nation's dependence on foreign energy sources. I appreciate the opening words of my good friend, Governor Mitch Daniels. He and his administration have given priority to energy issues in Indiana. They are attempting to maximize the opportunities that our state has to become a leader in a broad gamut of energy technologies. I also want to thank our host, Purdue University, and President Martin Jischke for promoting this energy summit. President Jischke has provided brilliant direction to this university. His advice on energy, agriculture, education, and many other topics has been of great benefit to me personally. I will deeply miss his leadership at Purdue when he steps down as President next June, but I look forward to a very productive year immediately ahead and many mutual endeavors in years to come. I am also delighted that Congressman Pete Visclosky will address the summit conference this noon. Pete has been a great partner on numerous issues, ranging from local projects of special importance to Hoosiers, to the global search for an AIDS vaccine.
It is exciting to be surrounded by so many talented individuals who are committed to the objective of greater energy independence for the United States. I believe that in the future, the United States can be energy self sufficient or nearly so. Over the long term, we have the resources and the ingenuity to achieve this goal.
The crucial question is what happens between now and then. Will we achieve this goal rapidly through a coherent and resolute national policy that takes advantage of America's natural assets to create new economic opportunities, a cleaner environment, and improved national security? Or will we achieve our objective only after many years of widespread economic pain and national vulnerability caused by scarcity, terrorist attacks, market shocks, and foreign manipulation of our energy supplies?
We must move now to address our energy vulnerability because sufficient investment cannot happen overnight, and it will take years to build supporting infrastructure and to change behavior. In other words, by the time a sustained energy crisis fully motivates market forces, we are likely to be well past the point where we can save ourselves from extensive suffering. Our motivation will come too late and the resulting investment will come too slowly to prevent the severe economic and national security consequences of our oil dependence. This is the very essence of a problem requiring citizen, business, and governmental action.
SIX THREATS
I will describe our energy dilemma as a six-pronged threat to national security. First, oil supplies are vulnerable to natural disasters, wars, and terrorist attacks that can disrupt the lifeblood of the international economy. Within the last year, the international flow of oil has been disrupted by hurricanes, unrest in Nigeria, and continued sabotage in Iraq. In late February of this year, terrorists penetrated the outer defenses of Saudi Arabia's largest oil processing facility with car bombs before being repulsed. Al-Qaeda and other terrorist organizations have openly declared their intent to attack oil facilities to inflict pain on Western economies.
Second, as large industrializing nations such as China and India seek new energy supplies, oil and natural gas will become more expensive. In the long run we will face the prospect that the world's supply of oil may not be abundant and accessible enough to support continued economic growth in both the industrialized West and in large rapidly growing economies. As we approach the point where the world's oil- hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict.
Third, adversarial regimes from Venezuela, to Iran, to Russia are using energy supplies as leverage against their neighbors. We are used to thinking in terms of conventional warfare between nations, but energy is becoming a weapon of choice for those who possess it. Nations experiencing a cutoff of energy supplies, or even the threat of a cutoff, may become desperate, increasing the chances of armed conflict, terrorism, and economic collapse.
Fourth, the revenues flowing to authoritarian regimes often increase corruption in those countries and allow them to insulate themselves from international pressure and the democratic aspirations of their own peoples. We are transferring hundreds of billions of dollars each year to some of the least accountable regimes in the world. Some are using this money to invest abroad in terrorism, instability, or demagogic appeals to populism.
Fifth, the threat of climate change has been made worse by inefficient and unclean use of non-renewable energy. In the long run this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability.
Sixth, much of the developing world is being hit hard by rising energy costs, which often cancel the benefits of our foreign assistance. Without a diversification of energy supplies that emphasizes environmentally friendly energy sources that are abundant in most developing countries, the national incomes of energy poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism.
Each of these six threats from energy dependence is becoming more acute as time passes. Any of them could be a source of catastrophe for the United States and the world.
THE VULNERABILITY OF A SUPERPOWER
The vulnerability of the United States rests on some basic factors. With less than 5 percent of the world's population, our nation consumes 25 percent of its oil. World demand for oil and other forms of energy is rapidly increasing. Within 25 years, the world will need 50 percent more energy than it does now. If oil prices average $60 a barrel through 2006 - a figure that we are currently well above - we will spend about $320 billion on oil imports this year. This is roughly the same amount that the United States has spent on the war and reconstruction effort in Iraq during the first three years of conflict.
These conditions might be negotiable in the short and medium terms if oil resided with responsible, secure producers who maximize production during periods of elevated demand. But just the opposite is true. According to PFC Energy, about 79 percent of the world's oil supply is controlled by state-run oil companies. These governments profoundly affect prices through politicized investment and production decisions. The vast majority of these oil assets are afflicted by at least one of three problems: lack of investment, political manipulation, or the threat of instability and terrorism.
As recently as four years ago, spare production capacity exceeded world oil consumption by about 10 percent. As world demand for oil has rapidly increased in the last few years, spare capacity has declined to less than 2 percent. Thus, even minor disruptions of oil can drive up prices. Earlier this month, a routine inspection found corrosion in a section of BP's Prudhoe Bay oil pipeline that shut down 8 percent of U.S. oil output, causing a $2 spike in oil prices. That the oil market is this vulnerable to something as mundane as corrosion in a pipeline is evidence of the precarious conditions in which we live.
Our current dependence on imported oil has put the United States in a position that no great power should tolerate. Our economic health is subject to forces far beyond our control, including the decisions of hostile countries. We maintain a massive military presence overseas, partly to preserve our oil lifeline. One conservative estimate puts U.S. oil-dedicated military expenditures in the Middle East at $50 billion per year. But there is no guarantee that even our unrivaled military forces can prevent an energy disaster. We have lost leverage on the international stage and are daily exacerbating the problem by participating in an enormous wealth transfer to authoritarian nations that happen to possess the commodity that our economy can least do without.
THE NEW ENERGY REALISM
Rising energy prices, news reports of hostile oil producers, and the energy shocks experienced after the Katrina and Rita hurricanes, have awakened Americans to our energy vulnerability.
Almost six months ago, I delivered an address at the Brookings Institution in which I described "a shifting balance of realism" from those who believe in the immutability of oil domination of our economy and a laissez faire approach to energy policy to those who recognize that our nation has no choice but to seek a major reorientation in the way we get our energy. With oil at $72 a barrel and multiple crises flaring in the Middle East, fewer pro-oil commentators still assert that dependence on oil is simply a choice of the marketplace and government can and should do little to change it.
I believe that there is a growing consensus behind the new energy realism. There are clear signs that policy makers and a majority of the public recognize that our oil dependence is dangerously unsustainable.
The media is filled with examples of enterprising individuals who are making ethanol or biodiesel, erecting windmills, installing solar panels, or otherwise establishing personal control over their energy resources. A review of the nation's five largest newspapers revealed that twice as many energy-related stories appeared in July 2006 as appeared in July 2003.
Gasoline prices are beginning to have some effect on the automobile choices of American consumers. Sales of SUVs were down 15 percent in the first half of 2006 compared with the same period in 2005. Sales of compact cars, by comparison, rose 8 percent. These statistics were reinforced by a May 2006 Consumer Reports survey, which found that 37 percent of Americans were considering trading in their current cars for more fuel efficient cars. Almost half of these consumers were considering the purchase of a hybrid car or another alternative to traditional gasoline powered cars.
Progress is also appearing in the investment world. The entrepreneurial vanguard that brought us the internet and transformed telecommunications is turning its attention to alternative energy. According to data compiled by VentureOne, venture capital targeted at alternative energy projects more than tripled to $315 million in the first half of 2006 compared to the first half of 2005. Alternative energy investment is no longer just a niche area for environmental idealists and companies trying to improve their public image.
As a political issue, energy has been elevated to a status that is roughly equivalent to health care or education. A check of all one hundred Senators' websites in early August found that at least 85 of them had either issued a press release on energy this summer or had an energy section prominently displayed on their homepage. No politician on the national scene can afford to ignore energy.
EMBRACING REALISM, BUT AVOIDING ACTION
Unfortunately, although many Americans are embracing the idea of changing our energy destiny, they have not committed themselves to the action steps required to achieve an alternative future. This is an important distinction, because although national acceptance that there is a problem is a necessary condition for solving the problem, it does not guarantee that the problem will be solved.
In fact, advancements in American energy security have been painfully slow during 2006, and political leadership has been defensive, rather than pro-active. One can point with appreciation to a few positive trends, as I have just done, but these are small steps forward in the context of our larger vulnerability. If our economy is crippled by an oil embargo, if terrorists succeed in disrupting our oil lifeline, or if we slide into a war because oil wealth has emboldened anti- American regimes, it will not matter that before disaster struck, the American public and its leaders gained a new sense of realism about our vulnerability. It will not matter that we were producing marginally more ethanol than before or that consumers are more willing to consider hybrids and other alternative vehicles.
Not all indices and measures of energy progress are even moving in the right direction. The American people are angered by $3.00 gasoline, but they are still buying it in record quantities. In a recent Business Week article, writer Peter Coy points out that gasoline consumption during the 2006 July 4 holiday was up 2 percent from a year earlier and consumers bought 10 percent more gasoline in the first half of 2006 than they did in the first half of 2000, even though the price of gasoline was 75 percent higher.
Neither American oil companies, nor American car companies have shown an inclination to dramatically transform their businesses in ways that will achieve the degree of change we need to address a national security emergency. In fact, a number of the major oil companies have written to me to explain why they are not enthusiastic about installing pumps that can accommodate E85 - a blend of gasoline and up to 85 percent ethanol. Some are distinctly hostile to any such idea.
General Motors launched a new "Live Green, Go Yellow" ad campaign to promote the purchase of flexible fuel vehicles. But its strategy for overall corporate recovery appears to depend on the sale of pickup trucks. Earlier this month, General Motors CEO Richard Wagoner called a new redesigned line of pickup trucks "the most important part of our North American turnaround plan." According to the New York Times, to counter GM's new line, Ford Motors plans to cut the price of its 2007 F-Series pickups, add two more body styles, and increase towing capacity. Moreover, earlier in the summer, GM attempted to tap into consumer worries about gasoline costs by offering to subsidize gasoline for purchasers of certain gas guzzlers in Florida and California. Under the deal, GM would cap the price of gasoline at $1.99 per gallon for one year for buyers of Hummers, Yukons, Tahoes, and other large vehicles.
Within state governments, dropping speed limits or raising gas taxes are non-starters almost everywhere. In fact, speed limits are rising in some states. Recently, Texas raised speed limits on some sections of rural interstate highways to 80 miles per hour, effectively ensuring that many motorists will be traveling closer to 90 miles per hour on those stretches and using more gasoline per mile.
Most importantly, the federal government is not treating energy vulnerability as a crisis, despite an increase in energy related proposals. Consider that the only major energy legislation taken up by Congress so far this year was legislation to encourage offshore oil and gas production in the Gulf of Mexico. I supported passage of the bill, but it was offered in a format that did not allow for amendments, and no bill has emerged from a House-Senate conference. If the bill passes, we would be addressing only a small corner of the energy picture. Issues such as energy efficiency, renewable fuels, and alternative energy technology had no chance to be discussed.
Even when the Congress and the President establish programs that would produce meaningful results, bureaucratic inertia and turf- consciousness within the federal agencies have added delays. Groundbreaking for the first commercial-scale cellulosic ethanol plant has been on hold for a year while investors wait for the Federal government to establish the regulations and application procedure for a loan guarantee program that was passed last summer. The program was meant to jump start the commercialization of cellulosic ethanol - a key goal of President Bush and Congress. But despite the urgency of this mission, the Energy Department's glacial implementation of the program has frustrated potential investors and those of us who are urging the transition to gasoline alternatives. In fairness, Secretary Bodman announced in early August that the Energy Department will accept proposals this fall for cellulosic plant pilot projects, even before regulations are complete. The Department estimates that construction of the first plants could begin early next year.
We could all take our time if this were merely a matter of accomplishing an industrial conversion to more cost effective technologies. Unfortunately, in the absence of far-reaching changes in energy policy, we are risking multiple disasters for our country.
DEMOSCLEROSIS IN THE ENERGY DEBATE
The energy debate is afflicted with what writer Jonathan Rauch has called "Demosclerosis" - the phenomenon of competing interest groups protecting their perceived interests so effectively that policy can achieve only least common denominator outcomes that do not solve the problem threatening the whole nation. Rauch used the concept of demosclerosis to describe the gridlock afflicting efforts to cut the federal budget and restructure entitlement programs. But it is also applicable to the energy debate. The competing interests of oil companies, car companies, environmentalists, truckers, farmers, consumers, and governmental agencies cancel out initiatives or compromises that serve the broader public interest.
Even in California, where voters tend to be environmentally sensitive and where pollution provides a strong extra impetus to cut gasoline use, entrenched business interests have succeeded in discouraging alternative fuels and transportation technologies. Since 1979, California lawmakers have tried a variety of approaches, only to be frustrated by the oil and auto industries that resisted change. A proposal there to cut oil use 15 percent by 2020 is supported by Governor Schwarzenegger, but opposed by the major oil companies, and has not made it through the legislature. California consumes more gasoline than any other state. Yet the number of E85 stations open to the public, after all the conflicting cross-currents, is exactly one.
Overlaying these elements of gridlock are memories of President Jimmy Carter's unpopular energy program from the 1970s. His dour calls for sacrifice remain a cautionary example for many office holders, editorial writers, and political strategists. Conventional political wisdom holds that the American public will punish anyone who forces significant energy sacrifices on them. This is a major oversimplification, but it is true that Americans are not eager to pay higher prices for energy, wait in gas lines, or see their driving or horsepower curtailed. A recent Bloomberg/Los Angeles Times poll asked about 1,500 people which of five options were "the best way to reduce U.S. reliance on foreign oil." Two percent chose increasing the gas tax. Building new nuclear plants or enforcing stricter mileage standards fared little better at 6 and 8 percent respectively. Respondents gravitated toward general trends that were unlikely to affect them personally, with 52 percent endorsing increased government investments in alternative energy sources and 20 percent choosing to relax environmental standards for oil and gas drilling.
Breaking through a political logjam often requires a crisis that focuses the nation in a way that achieves a consensus. But consider that the combination of September 11, 2001, the war in Iraq, the conflict on the Israeli-Lebanese border, the nuclear standoffs with Iran and North Korea, the Katrina and Rita hurricanes, sustained $3 per gallon gasoline, and several other severe problems have not created a consensus on energy policy. This leads one to the sobering conclusion that a disaster capable of sufficiently energizing public opinion and our political structures will have to be something worse than the collective maladies I just mentioned - perhaps extreme enough to push the price of oil to triple digits and set in motion a worldwide economic downturn. None of us want to experience this or any of the nightmare scenarios that await us. It is time to summon the political will to overcome the energy stalemate.
ESTABLISHING MEANINGFUL GOALS
In most areas of national policy we are concerned far more with trends than with a discernable national goal. For example, we watch the effects of President Bush's "No Child Left Behind Act" and debate whether more American school children are reading at grade level than before. Despite the name of that bill, we realize that not every school or every child will succeed. We measure success or failure in trends and those trends have meaning because they can be translated into progress for real individuals. The same is true for most aspects of health care policy, environmental protection, job creation, highway construction, and numerous other policy areas. Even when goals aren't met completely, we are rarely disappointed if we achieve measurable improvements.
Our energy dilemma is different. Although every gallon of ethanol, every E-85 pump, every flex fuel vehicle that comes on line moves us closer to safety, they do not necessarily make us safer right now. Marginally reducing our reliance on imported oil over the course of the next few decades will be welcome, but we will still be vulnerable to disaster at any time, and our national security and economic policy options will be constrained accordingly.
Our energy vulnerability is analogous to rowing a boat to shore in rough seas. Each stroke moves us closer to safety, but until we reach the shore, we can be capsized. We have to measure progress not against where we have been, but against the distance to our goals. Achieving a positive trend line is almost inevitable as long as energy costs remain high, because these costs will lead to some improvements in investment and conservation. We need to have the discipline to understand that a modestly positive trend line is not enough. With the storm bearing down on them, the occupants of a threatened boat do not put up their oars and relax because the current has caused them to drift a little closer to shore.
To bolster public motivation and to connect our efforts to rational outcomes, we must work much harder to establish meaningful goals. Americans need to know exactly what the plan is and how we will achieve it. We not only must understand how to bring alternatives to the market, we must establish what degree of change would improve our national security situation, then tailor national policy to achieve that goal.
A PROGRAM FOR AMERICA
Although the energy debate is multifaceted, the heart of our geostrategic problem is reliance on imported oil in a market that is dominated by volatile and hostile governments. This is where we must devote our national effort, because it is our most intense short term vulnerability. It also could bring the most collateral benefits, including reinvigorating the American automobile and agricultural industries and helping to reduce carbon emissions. This is not to minimize the challenges facing our electricity grid or other energy problems, but as we marshal our political capital for a difficult task, this should be our first focus.
To this end, the United States should adopt a national program that would make virtually every new car sold in America a flexible fuel vehicle. We should ensure that at least one quarter of filling stations in America have E85 pumps. We should expand ethanol production to 100 billion gallons a year by 2025, a figure that could be achieved by doubling output every five years. We should also create an approximate $45 per barrel price floor on oil through a variable ethanol tax credit to ensure that investments keep flowing to alternatives. And we should enact stricter vehicle mileage standards to point automobile innovation toward conservation. The plan I am proposing today would achieve the replacement of 6.5 million barrels of oil per day by volume - the rough equivalent of one-third of the oil used in America and one half of our current oil imports.
I am aware that these are ambitious goals, and that achieving them will take political breakthroughs and intensive government oversight. But if we have the political will, America can end its oil addiction through technology, the new economics of energy, and targeted government incentives and regulations to focus market forces on the problem.
As former Federal Reserve Chairman Alan Greenspan told the Senate Foreign Relations Committee earlier this year, almost one out of every seven barrels of oil produced in the world is consumed on American highways. To break oil's monopoly on American roads, some experts favor a giant leap in technology to hydrogen. But that will require new engines, new distribution systems, new production technologies, and is decades away from commercialization. Instead, we can start to break petroleum's grip right now. The key is making ethanol as important as gasoline in our transportation fuel mix.
To start with, every new car can be easily fitted with proven technology that enables it to burn E85. Millions of these cars are on the road today, and the factory cost of making each vehicle capable of burning E85 is probably less than $150. Because these flex-fuel cars can run on either gasoline or E85, or any combination, the driver can fill up with E85 when it is available, and with regular gasoline when it is not. So the first step should be to require that all new cars sold in America be flex-fuel vehicles.
We applaud the efforts of American automakers to increase their flexible fuel offerings. On June 28, Daimler-Chrysler, Ford, and General Motors issued a statement announcing that they will double their production of flexible fuel vehicles by 2010. This pledge is significant within the context of the auto company's business objectives, but it is inadequate in the context of pursuing the national security benefits of replacing a large share of gasoline with ethanol. The federal government should work with both foreign and domestic car companies on a plan to rapidly achieve the goal of equipping all new vehicles sold in America with flex-fuel technology. The federal government should be willing to offer incentives to help make a voluntary plan work. But if car manufacturers do not respond with a sufficient plan in a short time period, Congress should mandate that all new autos sold in the United States have flex-fuel capability.
I do not suggest this lightly. But my observations of the post- Katrina response by car companies, oil companies, and consumers is that in the short run, the evolution of market forces won't be capable of producing the progress that we need to achieve our national security goals, particularly since the car fleet turns over slowly.
Next, we need to make E85 more widely available. Major oil companies have resisted installing E85 pumps. Indeed, most of the 897 E85 fuel stations in the country are independently-owned. As the profits of oil companies have increased with the price of oil, members of Congress have discussed increasing taxes on oil companies or requiring that a certain percentage of profits be devoted to research, exploration, or alternative energy sources. Some of these ideas may have merit. I would suggest, however, that our first requirement of oil companies should be to use some of their recent profits to install E85 pumps in at least 25 percent of the nation's fuel stations within ten years. Unfortunately, this may also require an outright mandate. The majors have, thus far, shown little willingness to take this step.
The oil companies have argued that installing these pumps is too expensive and should wait until sufficient supplies of ethanol and flex-fuel vehicles are available. It does cost money to turn a gas pump into an E85 pump, primarily to replace the underground storage tank. But the cost is generally far less than the oil companies have portrayed. A recent Wall Street Journal article cited Chevron as estimating that installing an E85 pump costs $200,000. In fact, last year I helped inaugurate an E85 outlet in Terre Haute, and the owner said it cost her less than $5,000 to retrofit her station. Moreover, according to oil industry sources, installing a new E85 pump costs only about $5,000 more than installing a new gasoline pump. This suggests that stations on the drawing board would be low-cost candidates for E85 pumps. Conversion of some pumps will be much more expensive, and there are numerous price variables to consider. But by making use of retrofits and by devoting one pump to E85 at newly constructed fuel stations, the average conversion cost nationwide would be a fraction of what oil companies have implied.
In addition, gasoline companies can take advantage of an existing tax credit for the installation of renewable fuel pumps. I would support increasing this tax credit if a mandate were enacted. Gasoline companies also would be able to hold costs down by selecting the least expensive locations for adding E85 pumps, as long as they met geographic distribution requirements.
If the six largest gasoline companies installed E85 pumps in half of their stations, we would get to the 25 percent fuel station goal. For the sake of argument, if we estimated that the average marginal cost of opening an E85 pump after tax credits was $15,000, then establishing the pumps at one quarter of the nation's 170,000 fuel stations would cost approximately $637 million over 10 years. That is just 1 percent of the combined $64 billion profit made during 2005 alone by the three largest American oil companies - Exxon-Mobil, Chevron, and Conoco-Phillips. Even if the average cost is somewhat more than $15,000, these figures illustrate that the cost of a nationwide E85 pump conversion for the major oil companies would be far from prohibitive.
My intent here is not to punish the oil companies. As a Senator who has favored new drilling and other initiatives designed to help the oil companies produce more domestic oil, I am suggesting that they need to alter their thinking. In the best circumstances, they would embrace ethanol and work hard to diversify their investments and operations - partly for the good will they would receive from Congress and the public - but also to prepare for the coming decades of greater American prosperity and security.
If the mandate can be effectively linked to the increasing availability of ethanol, so much the better. But to achieve our larger goal, we must be prepared to tolerate a certain level of disconnect between cars, pumps, and ethanol in the early stages of this effort. Some pumps may be underutilized at first, but this cannot be an excuse not to move forward.
Incidentally, virtually every gas-powered vehicle in America today can run on gasoline blended with 10 percent ethanol, or E10. By requiring that all gasoline be E10 as ethanol supplies become available, we could accommodate significantly more ethanol production even before most flex-fuel vehicles and E85 pumps are in place. Our neighbors in Illinois have passed such legislation, and I have urged my friends in Indianapolis to follow suit.
Now how do we produce enough ethanol to supply these stations and fuel these cars? The good news is we can let the market do a lot of the work. When oil is above $70 a barrel, making ethanol from corn or sugar, even before subsidies, is less costly than producing gasoline. That is true even if oil drops substantially from today's level.
But the long term advancement of ethanol as a national transportation fuel requires a focused effort to perfect and commercialize cellulosic technology, which will enable us to make ethanol from switch grass, agricultural waste and other inexpensive biomass. The addition of cellulosic ethanol has the potential to substantially reduce the overall production cost of ethanol, while greatly expanding the volume produced. Although scientists and technicians are confident of the possibilities for cellulosic ethanol, efforts at commercialization have lagged behind basic research. The time is long past due for the Federal government to step in and prime the pump for commercial production through an aggressive loan program. The experience gained by the first production plants will provide the knowledge we need to rapidly expand the cellulosic industry.
Studies have shown that we will have enough land for energy crops, given the expected increases in yields and improvements in processing efficiency. If we could reach a target of 100 billion gallons of ethanol a year - a 13-fold increase over current capacity in operation or under construction - that would be equivalent to 71 percent of current gasoline consumption by volume. The two are not directly comparable because ethanol has lower energy content than gasoline, but over time, I expect automakers will improve the efficiency of their engines for E85 fuel.
Although many investors are currently lining up to jump into the ethanol business, many are still hesitating to take the plunge. They fear that foreign oil producers might, as they have before, manipulate the oil market to temporarily cut the price and drive ethanol producers out of business. Therefore, another step we should take is to ensure market certainty for investors by setting a price floor for crude oil at about $45 a barrel through a variable ethanol tax credit that would rise as the price of oil dropped. I am developing legislation to achieve this goal and have benefited from the contributions of Dr. Wallace Tyner of Purdue University, who will appear in the afternoon panel.
Finally, it will be far easier to alter the mix of fuel supplies if we can slow or stop the growth in overall fuel demand. It has been more than twenty years since there was a change in the Corporate Average Fuel Efficiency standards for cars. Over that time, American gas mileage has largely stagnated. In 1987, the average light duty vehicle got 22.1 miles per gallon, according to the EPA. Nineteen years later, in 2006, the figure has fallen to 21 miles per gallon. Yet during that time, automobile technology has greatly advanced, only in other directions. For instance, today a family car like the Toyota Camry has faster acceleration than a muscle car of the 1970s.
We need to channel the technical prowess of America's auto industry in the direction of greater fuel efficiency so that we can grow our economy without growing our fuel consumption. Therefore, Congress should enact modern mileage standards that set a target of steadily improving fuel economy every year. It should also continue to encourage research, development, and deployment of hybrids, plug-in technology, ultra-light auto materials, biodiesel, and coal-based transportation fuels, among other promising technologies.
This package of proposals would dramatically improve America's security posture. It would not dismantle the automobile culture that Americans cherish, nor would it create a vast bureaucracy with a bottomless appetite for taxpayer dollars. In fact, if it is accompanied by strong leadership and thoughtful explanation, I am confident that Americans will recognize that this is the way that we will preserve our cars and our economy over the long run. It would provide more jobs for Americans instead of sending a deluge of money to hostile countries, support our farmers instead of foreign terrorists, and promote green fuels over fossil fuels.
It should not surprise you to learn that I have proposed or co- sponsored legislation on these ideas. But this is just a start. None of these bills has passed, or even been put to a vote in the Senate. For instance, the Fuel Economy Reform Act, which I co-sponsored with my friend Sen. Barack Obama and other Democrats and Republicans, seeks a 4 percent annual increase in fuel economy. Last month, Sen. Obama tried to amend the offshore oil drilling bill with our legislation, but Senate procedures prevented him from doing so. While we are asking for greater statesmanship from our automobile and oil companies, we must demand the same from our federal legislators and administrators.
CONCLUSION
Far in the future, historians may point to the energy policy of the last several decades as the major national security failing of the American government in this era. In the absence of decisive policy changes, historians will rightly ask how the wealthiest and most powerful nation on earth with abundant land, a magnificent industrial infrastructure, and the world's best universities and research institutions simply would not reorient itself over the course of decades despite repeated warning signs. Our failure to act will be all the more unconscionable given that success would bring not only relief from the geopolitical threats of energy-rich regimes, but also restorative economic benefits to our farmers, rural areas, automobile manufacturers, high technology industries, and many others.
We must be very clear that this is a political problem. We now have the financial resources, the industrial might, and the technological prowess to shift our economy away from oil dependence. What we are lacking is coordination and political will. We have made choices, as a society, which have given oil a near monopoly on American transportation. Now we must make a different choice in the interest of American national security and our economic future. As the vanguard of concerned and informed experts in this field, I call upon each of you to apply your talents and energies to solving this fundamental problem threatening the well-being of our nation. I look forward to working with you as we achieve this goal.
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CONTACT: Andy Fisher, Sen. Lugar's press secretary, 202-224-2079, andy_fisher@lugar.senate.gov
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