Schlesinger predicts investments in 2006 will cause oil glut and denial of peak oil in future

Energy Security and Oil Dependence. Two Senate hearings from 2006.

In these two 2006 hearings (excerpts below), there is a constant refrain of our dependence on oil,  yet now, many congressional hearings are about our energy independence.  Apparently congress has forgotten this testimony of James Schlesinger, former Secretary of Defense:

“By about 2010, we should see a significant increase in oil production as a result of investment activity now under way. There is a danger that any easing of the price of crude oil will, once again, dispel the recognition that there is a finite limit to conventional oil.  In the longer run, unless we take serious steps to prepare for the day that we can no longer increase production of conventional oil, we are faced with the possibility of a major economic shock—and the political unrest that would ensue.In the longer run, unless we take serious steps to prepare for the day that we can no longer increase production of conventional oil, we are faced with the possibility of a major economic shock—and the political unrest that would ensue.”

More importantly, we face a fundamental, longer term problem. In the decades ahead, we do not know precisely when, we shall reach a point, a plateau or peak, beyond which we shall be unable further to increase production of conventional oil worldwide. We need to understand that problem now and to begin to prepare for that transition.

The underlying problem is that for more than three decades, our production has outrun new discoveries. Most of our giant fields were found 40 years ago and more. Even today, the bulk of our production comes from these old—and aging—giant fields. More recent discoveries tend to be small with high decline rates—and are soon exhausted. Since the issue is crucial—and is not widely understood—I have prepared a chart which lays bare the problem.

The upshot is, quite simply, that, as the years roll by, the entire world will face a prospectively growing problem of energy supply. Moreover, we shall inevitably see a growing dependency on the volatile Middle East.The United States is today the preponderant military power in the world. Still, our military establishment is heavily dependent upon oil. At a minimum, the rising oil price poses a budgetary problem for the Department of Defense at a time that our national budget is increasingly strained. Moreover, in the longer run, as we face the prospect of a plateau in which we are no longer able, worldwide, to increase the production of oil against presumably still-rising demand, the question is whether the Department of Defense will still be able to obtain the supply of oil products necessary for maintaining our military preponderance. In that prospective world, the Department of Defense will face all sorts of pressures at home and abroad to curtail its use of petroleum products, thereby endangering its overall military effectiveness.”

Former CIA director Woolsey predicts that the Saudi’s can lower prices to stop our development of shale oil or tar sands:

“Even if other production comes on line, e.g., from unconventional sources such as tar sands in Alberta or shale in the American West, their relatively high cost of production could permit low-cost producers, particularly Saudi Arabia, to increase production, drop prices for a time, and undermine the economic viability of the higher cost competitors, as occurred in the mid-1980s. For the foreseeable future, as long as vehicular transportation is dominated by oil as it is today, the Greater Middle East, and especially Saudi Arabia, will remain in the driver’s seat.”

Woolsey also nails the main problem of future oil shortages:

“The current transportation infrastructure is committed to oil and oil-compatible products. This fact substantially increases the difficulty of responding to oil price increases or disruptions in supply by substituting other fuels. There is a range of fuels that can be used to produce electricity and heat and that can be used for other industrial uses, but petroleum and its products dominate the fuel market for vehicular transportation…  To have an impact on our vulnerabilities within the next decade or two, any competitor of oil-derived fuels will need to be compatible with the existing energy infrastructure and require only modest additions or amendments to it.”

Our transportation system doesn’t have any oil substitute for the trucks, locomotives, and ships that do the actual work of civilization, which mainly have diesel engines that can only burn diesel — not gasoline, ethanol, diesohol, or other products. These diesel engines are so powerful and so efficient that Vaclav Smil argues diesel engines are as important as the diesel fuel they burn for the level of civilization we have now. I discuss the “liquid fuels transportation crisis” at great length in my book “When Trucks Stop Running“, which is mainly about what other fuels could substitute for oil, and whether heavy-duty transportation (i.e. locomotives and trucks) can be electrified.

Copulos points out that the hidden costs of oil were $780 billion in 2005, and that the military is becoming ever more dependent on oil, so shortages in the future could hamstring them. Presumably the hamstringing refers to future oil wars as the Great Game grows more desperate.

Jason Grumet at the National Commission on Energy Policy states that “Energy independence is simply unrealistic and has been ever since President Nixon first proposed to enshrine it as a national goal in the 1970s.”  He explains this is because the U.S. consumes a quarter of world oil but has “less than 3% of the world’s proved oil reserves, while 61% of world reserves are in the Middle East”.  He points out we will also be more dependent on foreign natural gas “given declining domestic production of natural gas—another fuel that plays an extremely important role in the U.S. economy. It appears inevitable that we will increasingly need to rely on overseas sources .”  He’s not wrong about that, despite the glut of fracked natural gas we have now. Like oil, natural gas is not going to last forever (see Peak Natural Gas).

Vinod Khosla makes grand promises about ethanol below.  His fortunes have fallen greatly since then.  60 minutes did a devastating piece on him in 2014 titled: The Cleantech crash: despite billions invested by the U.S. government in so-called “cleantech energy”, Washington and Silicon Valley have little to show for it”. And he is being sued for$75 million by the state of Mississippi for misleading investors about the quantities and yields of biofuels the KiOR cellulosic ethanol plant could produce, which is now bankrupt.  On top of that, Khosla is detested in California for closing off beach access to his property and demanding $30 million to allow access.

In 2016, cellulosic ethanol is still not commercialAnd not likely to ever be commercialAnd since diesel engines can’t burn ethanol or diesohol, irrelevant.

Former Senator Biden of Delaware, now Vice President, says “There can no longer be any doubt that our dependence on oil is a critical problem, one that must be addressed. The sheer size of this problem is such that there will be no quick fix“.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation, 2015, Springer]

1. Senate 109-860. May 16, 2006. Energy security and oil dependence. U.S. Senate hearing. 61 pages.

2. Senate 109-64. June 2006. Energy diplomacy and security. a compilation of statements by witnesses before the Committee on Foreign Relations. U.S. Senate. 98 pages

Excerpts from these two documents follow.

JAMES SCHLESINGER, former Secretary of Defense

By about 2010, we should see a significant increase in oil production as a result of investment activity now under way. There is a danger that any easing of the price of crude oil will, once again, dispel the recognition that there is a finite limit to conventional oil.

In the longer run, unless we take serious steps to prepare for the day that we can no longer increase production of conventional oil, we are faced with the possibility of a major economic shock—and the political unrest that would ensue.

More importantly, we face a fundamental, longer term problem. In the decades ahead, we do not know precisely when, we shall reach a point, a plateau or peak, beyond which we shall be unable further to increase production of conventional oil worldwide. We need to understand that problem now and to begin to prepare for that transition.

The underlying problem is that for more than three decades, our production has outrun new discoveries. Most of our giant fields were found 40 years ago and more. Even today, the bulk of our production comes from these old—and aging—giant fields. More recent discoveries tend to be small with high decline rates—and are soon exhausted. Since the issue is crucial—and is not widely understood—I have prepared a chart which lays bare the problem.

The upshot is, quite simply, that, as the years roll by, the entire world will face a prospectively growing problem of energy supply. Moreover, we shall inevitably see a growing dependency on the volatile Middle East. We shall have to learn to live with degrees of insecurity—rather than the elusive security we have long sought.

The United States is today the preponderant military power in the world. Still, our military establishment is heavily dependent upon oil. At a minimum, the rising oil price poses a budgetary problem for the Department of Defense at a time that our national budget is increasingly strained. Moreover, in the longer run, as we face the prospect of a plateau in which we are no longer able, worldwide, to increase the production of oil against presumably still-rising demand, the question is whether the Department of Defense will still be able to obtain the supply of oil products necessary for maintaining our military preponderance. In that prospective world, the Department of Defense will face all sorts of pressures at home and abroad to curtail its use of petroleum products, thereby endangering its overall military effectiveness.

The problem of energy security is of relatively recent origin. When mankind depended upon windmills, oxen, horses, etc., energy security was not a strategic problem. Instead, as a strategic problem it is a development of modem times—and reflects most crucially the turn to fossil fuels as increasingly the source of energy. The Industrial Revolution in the 19th century, strongly reinforced by the rapid growth of oil-dependent transportation in the 20th, unavoidably posed the question of security of supply. Imperial Germany took over Lorraine with its coal fields after the Franco-Prussian War—to insure its energy security. When Britain, pushed by Churchill, converted its Navy to oil early in the 20th century, it sought a secure supply of oil under its own control in the Persian Gulf—which incidentally increased its concern for the security of the Suez Canal. For the United States, where the production of oil had started and for long was primarily located, the question of security of supply did not arise until the 1960s and 1970s. Since then, we have regularly talked about—and sought by various measures—to achieve greater energy security. Such measures, limited as they were, have generally proved unsatisfactory. The nation’s dependence on imported hydrocarbons has continued to surge.

Until such time as new technologies, barely on the horizon, can wean us from our dependence on oil and gas, we shall continue to be plagued by energy insecurity. We shall not end dependence on imported oil nor, what is the hope of some, end dependence on the volatile Middle East—with all the political and economic consequences that flow from that reality.  Instead of energy security, we shall have to acknowledge and to live with various degrees of insecurity.

In addition to the long-term problem of the prospective limit on conventional oil production, we have a number of short-term or cyclical problems that have contributed to the current stringency and current high prices. Spare production capacity has essentially disappeared. This reflects the volatility of oil prices, which has led to a low rate of investment in new capacity, as well as an unexpected surge of demand, particularly from China and the United States. For many years, we have had excess capacity in refining. That, too, has largely disappeared, and we lack capacity to refine the heavy, sour crudes that remain available. Here in the United States, the problem has been amplified by the battering of gulf infrastructure by Hurricanes Katrina and Rita. We also have an added, self-inflicted problem of some 17 boutique blends of gasoline, mandated by state authorities.

The insurgency in Iraq has prevented the increase in production, even to the prewar level, that many expected. Long-term sanctions against Iraq, Iran, and Libya, both United States and international, have reduced their contribution to world supply.

In no way do the prospective investment decisions solve the long- term, fundamental problem of oil supply.

The effect of higher oil prices has been significantly higher incomes for producers. A much higher level of income has meant that a range of nations, including Russia, Iran, Venezuela, as well as gulf Arab nations have had their economic problems substantially eased. As a result, they have become less amenable to American policy initiatives. Perhaps more importantly, the flow of funds into the Middle East inevitably has added to the moneys that can be transferred to terrorists. As long as the motivation is there and controls remain inadequate, that means that the terrorists will continue to be adequately or amply funded. To the extent that we begin to run into supply limitations and to the extent that we all grow more dependent on the Middle East, this problem of spillover funding benefits for terrorists is not going to go away.

Of the well over $700 billion of that deficit, some $300 billion comes from oil and gas. It is recognized that the U.S. balance-of-payments deficit represents the locomotive that drives much of the world’s economies. In performing this service—for which we get little thanks—the United States is steadily adding to its financial obligations to others. How long this process can continue is uncertain, but high oil prices add to the dilemma.

JAMES WOOLSEY, Former CIA Director   

There are at least seven major reasons why dependence on petroleum and its products for the lion’s share of the world’s transportation fuel creates special dangers in our time. These dangers are all driven by rigidities and potential vulnerabilities that have become serious problems because of the geopolitical realities of the early 21st century. Those who reason about these issues solely on the basis of abstract economic models that are designed to ignore such geopolitical realities will find much to disagree with in what follows. Although such models have utility in assessing the importance of more or less purely economic factors in the long run, as Lord Keynes famously remarked: ‘‘In the long run, we are all dead.’’

PETROLEUM DEPENDENCE: THE DANGERS

  1. The current transportation infrastructure is committed to oil and oil-compatible products.

This fact substantially increases the difficulty of responding to oil price increases or disruptions in supply by substituting other fuels. There is a range of fuels that can be used to produce electricity and heat and that can be used for other industrial uses, but petroleum and its products dominate the fuel market for vehicular transportation.

Moreover, in the 1970s about 20% of our electricity was made from oil—so shifting electricity generation toward, say, renewables or nuclear power could save oil. But since today only about 3% of our electricity is oil-generated, a shift in the way we produce electricity would have almost no effect on the transportation or oil market.

There are imaginative proposals for transitioning to other fuels for transportation, such as hydrogen to power automotive fuel cells, but this would require major infrastructure investment and restructuring. If privately owned fuel cell vehicles were to be capable of being readily refueled, this would require reformers (equipment capable of reforming, say, natural gas into hydrogen) to be located at filling stations, and would also require natural gas to be available there as a hydrogen feed-stock. So not only would fuel cell development and technology for storing hydrogen on vehicles need to be further developed, but the automobile industry’s development and production of fuel cells also would need to be coordinated with the energy industry’s deployment of reformers and the fuel for them. Moving toward automotive fuel cells thus requires us to face a huge question of pace and coordination of large-scale changes by both the automotive and energy industries. This poses a sort of industrial Alphonse and Gaston dilemma: Who goes through the door first? (If, instead, it were decided that existing fuels such as gasoline were to be reformed into hydrogen on board vehicles instead of at filling stations, this would require onboard reformers to be developed and added to the fuel cell vehicles themselves—a very substantial undertaking.)

It is because of such complications that the National Commission on Energy Policy concluded in its December 2004, report ‘‘Ending the Energy Stalemate’’ that ‘‘hydrogen offers little to no potential to improve oil security and reduce climate change risks in the next 20 years.’’

To have an impact on our vulnerabilities within the next decade or two, any competitor of oil-derived fuels will need to be compatible with the existing energy infrastructure and require only modest additions or amendments to it.

  1. The Greater Middle East will continue to be the low-cost and dominant petroleum producer for the foreseeable future

Home of around two-thirds of the world’s proven reserves of conventional oil—45% of it in just Saudi Arabia, Iraq, and Iran—the Greater Middle East will inevitably have to meet a growing percentage of world oil demand. This demand is expected to increase by more than 50% in the next two decades, from 78 million barrels per day (bbl/d) in 2002 to 118 bbl/d in 2025, according to the Federal Energy Information Administration. Much of this will come from expected demand growth in China and India. One need not argue that world oil production has peaked to see that this puts substantial strain on the global oil system. It will mean higher prices and potential supply disruptions and will put considerable leverage in the hands of governments in the Greater Middle East as well as in those of other oil-exporting states which have not been marked recently by stability and certainty: Russia, Venezuela, and Nigeria, for example. Deep-water drilling and other opportunities for increases in supply of conventional oil may provide important increases in supply but are unlikely to change this basic picture.

Even if other production comes on line, e.g., from unconventional sources such as tar sands in Alberta or shale in the American West, their relatively high cost of production could permit low-cost producers, particularly Saudi Arabia, to increase production, drop prices for a time, and undermine the economic viability of the higher cost competitors, as occurred in the mid-1980s. For the foreseeable future, as long as vehicular transportation is dominated by oil as it is today, the Greater Middle East, and especially Saudi Arabia, will remain in the driver’s seat.

  1. The petroleum infrastructure is highly vulnerable to terrorist and other attacks

The radical Islamist movement, including but not exclusively al Qaeda, has on a number of occasions explicitly called for worldwide attacks on the petroleum infrastructure and has carried some out in the Greater Middle East. A more well-planned attack than what has occurred to date—such as that set out in the opening pages of Robert Baer’s recent book, ‘‘Sleeping With the Devil’’ (terrorists flying an aircraft into the unique sulfur-cleaning towers in northeastern Saudi Arabia), could take some 6 million barrels per day off the market for a year or more, sending petroleum prices sharply upward to well over $100/barrel and severely damaging much of the world’s economy. Domestic infrastructure in the West is not immune from such disruption. U.S. refineries, for example, are concentrated in a few places, principally the gulf coast. The recent accident in the Texas City refinery—producing multiple fatalities— points out potential infrastructure vulnerabilities, as of course does this fall’s hurricane damage in the gulf. The Trans-Alaska Pipeline has been subject to several amateurish attacks that have taken it briefly out of commission; a seriously planned attack on it could be far more devastating.

In view of these overall infrastructure vulnerabilities policy should not focus exclusively on petroleum imports, although such infrastructure vulnerabilities are likely to be the most severe in the Greater Middle East. It is there that terrorists have the easiest access, and the largest proportion of proven oil reserves and low-cost production are also located there. Nor is anything particularly useful accomplished by changing trade patterns. To a first approximation there is one worldwide oil market and it is not generally useful for the United States, for example, to import less from the Greater Middle East and for others then to import more from there. In effect, all of us oil-importing countries are in this together.

  1. The possibility exists, particularly under regimes that could come to power in the Greater Middle East, of embargoes or other disruptions of supply

It is often said that whoever governs the oil-rich nations of the Greater Middle East will need to sell their oil. This is not true, however, if the rulers choose to try to live, for most purposes, in the seventh century. Bin Laden has advocated, for example, major reductions in oil production and oil prices of $200/barrel or more. In 1979 there was a serious attempted coup in Saudi Arabia. Much of what the outside world saw was the seizure by Islamist fanatics of the Great Mosque in Mecca, but the effort was more widespread. Even if one is optimistic that democracy and the rule of law will spread in the Greater Middle East and that this will lead after a time to more peaceful and stable societies there, it is undeniable that there is substantial risk that for some time the region will be characterized by chaotic change and unpredictable governmental behavior. Reform, particularly if it is hesitant, has in a number of cases been trumped by radical takeovers (Jacobins, Bolsheviks). There is no reason to believe that the Greater Middle East is immune from these sorts of historic risks.

  1. Wealth transfers from oil have been used, and continue to be used, to fund terrorism and its ideological support

Estimates of the amount spent by the Saudis in the last 30 years spreading Wahhabi beliefs throughout the world vary from $70 billion to $100 billion. Furthermore, some oil-rich families of the Greater Middle East fund terrorist groups directly. The spread of Wahhabi doctrine—fanatically hostile to Shiite and Suffi Muslims, Jews, Christians, women, modernity, and much else—plays a major role with respect to Islamist terrorist groups: A role similar to that played by angry German nationalism with respect to Nazism in the decades after World War I. Not all angry German nationalists became Nazis and not all those schooled in Wahhabi beliefs become terrorists, but in each case the broader doctrine of hatred has provided the soil in which the particular totalitarian movement has grown. Whether in lectures in the madrassas of Pakistan, in textbooks printed by Wahhabis for Indonesian schoolchildren, or on bookshelves of mosques in the United States, the hatred spread by Wahhabis and funded by oil is evident and influential.

On all points except allegiance to the Saudi State, Wahhabi and al-Qaeda beliefs are essentially the same. In this there is another rough parallel to the 1930s—between Wahhabis’ attitudes toward al-Qaeda and like-minded Salafist jihadi groups today and Stalinists’ attitude toward Trotskyites some 60 years ago. The only difference between Stalinists and Trotskyites was on the question whether allegiance to a single state was required or whether freelance killing of enemies was permitted. But Stalinist hatred of Trotskyites and their free-lancing didn’t signify disagreement about underlying objectives, only tactics, and Wahhabi/Saudi cooperation with us in the fight against al-Qaeda doesn’t indicate fundamental disagreement between Wahhabis and al-Qaeda on, e.g., their common genocidal fanaticism about Shi’a, Jews, and homosexuals. So Wahhabi teaching basically supports al-Qaeda ideology.

It is sometimes contended that we should not seek substitutes for oil because disruption of the flow of funds to the Greater Middle East could further radicalize the population of some states there. The solution, however, surely lies in helping these states diversify their economies over time, not in perpetually acquiescing to the economic rent they collect from oil exports and to the uses to which these revenues are put.

  1. The current account deficits for a number of countries create risks ranging from major world economic disruption to deepening poverty, and could be substantial reduced by reducing oil imports

The United States in essence borrows about $2 billion a day, every day, principally now from major Asian states, to finance its consumption. The single largest category of imports is the approximately $1 billion per working day borrowed to import oil. The accumulating debt increases the risk of a flight from the dollar or major increases in interest rates. Any such development could have major negative economic consequences for both the United States and its trading partners. For developing nations, the service of debt is a major factor in their continued poverty. For many, debt is heavily driven by the need to import oil that at today’s oil prices cannot be paid for by sales of agricultural products, textiles, and other typical developing nation exports.

  1. Global-warming gas emissions from man-made sources create at least the risk of climate change

Although the point is not universally accepted, the weight of scientific opinion suggests that global warming gases produced by human activity form one important component of potential climate change. Oil products used in transportation provide a major share of U.S. man-made global warming gas emissions.

 

MILTON R. COPULOS, President, National Defense Council Foundation, Alexandria, VA

America is rushing headlong into disaster. What is worse, however, is that it is a disaster of our own design. More than three decades have passed since the 1973 Arab Oil Embargo first alerted the nation to its growing oil import vulnerability. Yet, despite this warning, we are now importing more than twice as much oil in absolute terms than we did in 1973, and the proportion of our oil supplies accounted for by imports is nearly double what is was then.

What makes this dependence even more dangerous than it was three decades ago is the fact that the global market has become a far more competitive place with the emerging economies of China, India, and Eastern Europe creating burgeoning demand for increasingly scarce resources.

Indeed, over the past decade the Chinese economy has grown at a frenetic pace, officially estimated at 9.2% in 2005. India’s growth rate for that year was 7.1%. In Eastern Europe, Belarus grew at 7.8%, the Czech Republic at 4.6%, and the Ukraine at 4.4%. This compares with 3.5% for the United States, 2.1% for Japan, and 1.7% for the European Union. As a result of this explosive growth, oil consumption in the developing countries is expected to increase at a rate of 3% annually over the next two decades. But even this figure may severely understate the problem. Indeed, China alone has accounted for 40% of the total increase in world oil consumption over the past several years. Moreover China plans to add 120 million vehicles to its automobile fleet over the next decade, ultimately requiring 11.7 million barrels per day of new crude oil supplies. India, too, is expected to continue to require increasingly large amounts of oil with a projected increase of 28% over just the next 5 years. Even conservative estimates suggest that nearly 30 million barrels per day of new oil supplies will be required by the year 2025 just to service the developing world’s requirements. When Europe and the Americas are included the requirement is closer to 40 million barrels per day. It is doubtful that new supplies sufficient to meet this skyrocketing demand will be found from conventional sources.

Nor is it just the potential physical shortfall of resources that is a source of concern. An even greater concern lies in the instability of U.S. sources of oil imports. The top six sources of U.S. oil imports, Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, and Iraq account for 65.1% of all foreign crude reaching our shores and 38.9% of total domestic consumption. Of these, four, Saudi Arabia, Venezuela, Nigeria, and Iraq provide 38.2% of oil imports and 22.6% of total consumption. For a variety of reasons, none of the four I just mentioned can be considered a reliable source of supply. Venezuela’s President Hugo Chavez is a vocal opponent of the United States who has twice threatened to cut off oil shipments to the United States. Nigeria’s production has been repeatedly disrupted by civil unrest, and some 135,000 barrels of oil per day are lost to theft. Last month, a terrorist attack on the massive Saudi oil processing facility at Abqaiq was barely thwarted, but not before two of the terrorist’s explosive-laden cars were detonated. Moreover, this was not the only instance of an attempt to disrupt the flow of Saudi oil. In the summer of 2002, Saudi Interior Ministry forces blocked an al-Qaeda plot to attack and cripple the loading dock at Ras Tanura which handles 10% of the world’s oil supplies.

Attacks on oil facilities in Iraq are a frequent occurrence. Nor are the attacks on U.S. oil supplies a coincidence. In December of 2004, al-Qaeda issued a fatwa that said in part: We call on the mujahideen in the Arabian Peninsula to unify their ranks and target the oil supplies that do not serve the Islamic nation but the enemies of this nation. The fatwa went onto declare: Be active and prevent them from getting hold of our oil and concentrate on it particularly in Iraq and the Gulf.

Clearly, given the instability that characterizes four of our top six sources of oil, the question is not whether we will experience a supply disruption, but rather when. The disruption could occur as a consequence of a terrorist act, or could result from a politically motivated embargo. In the end, it doesn’t really matter why a disruption occurs, because the consequences would be identical, and severe.

The supply disruptions of the 1970s cost the U.S. economy between $2.3 trillion and $2.5 trillion. Today, such an event could carry a price tag as high as $8 trillion—a figure equal to 62.5% of our annual GDP or nearly $27,000 for every man, woman, and child living in America. But there is more cause for concern over such an event than just the economic toll.

A supply disruption of significant magnitude, such as would occur should Saudi supplies be interdicted, would also dramatically undermine the nation’s ability to defend itself.

Oil has long been a vital military commodity, but today has taken on even more critical importance. Several examples illustrate this point:

  • A contemporary U.S. Army Heavy Division uses more than twice as much oil on a daily basis as an entire World War II field army.
  • The roughly 582,000 troops dispatched to the Persian Gulf used more than twice as much oil on a daily basis as the entire 2-million man Allied Expeditionary Force that liberated Europe in World War II.
  • In Operation Iraqi Freedom, the oil requirement for our Armed Forces was 20% higher than in the first gulf war, Operation Desert Storm, and now amount to one barrel of refined petroleum products per day for each deployed service member.

Moreover, the military’s oil requirements will be even higher in the future. Therefore, a shortage of global oil supplies not only holds the potential to devastate our economy, but could hamstring our armed forces as well.

While it is broadly acknowledged that our undue dependence on imported oil would pose a threat to the nation’s economic and military security in the event of a supply disruption, less well understood is the enormous economic toll that dependence takes on a daily basis.

In October 2003, my organization, The National Defense Council Foundation, issued ‘‘America’s Achilles Heel: The Hidden Costs of Imported Oil,’’ a comprehensive analysis of the external costs of imported oil. The study entailed the review of literally hundreds of thousands of pages of documents, including the entire order of battle of America’s Armed Forces and more than a year of effort. Its conclusions into divided the externalities into three basic categories: Direct and Indirect economic costs, Oil Supply Disruption Impacts, and Military Expenditures. Taken together, these costs totaled $304.9 billion annually, the equivalent of adding $3.68 to the price of a gallon of gasoline imported from the Persian Gulf.

As high as these costs were, however, they were based on a crude oil refiner acquisition cost of $26.92. Today, crude oil prices are hovering around $60 per barrel and could easily increase significantly. Indeed, whereas in 2003 we spent around $99 billion to purchase foreign crude oil and refined petroleum products, in 2005 we spent more than $251 billion, and this year we will spend at least $320 billion.

But skyrocketing crude oil prices were not the only factor affecting oil-related externalities. Defense expenditures also changed. In 2003, our Armed Forces allocated $49.1 billion annually to maintaining the capability to assure the flow of oil from the Persian Gulf.

I should note that expenditures for this purpose are not new. Indeed, last year marked the 60th anniversary of the historic meeting between Saudi monarch King Abdul Aziz and U.S. President Franklin Roosevelt where he first committed our nation to assuring the flow of Persian Gulf oil—a promise that has been reaffirmed by every succeeding President, without regard to party.

In 1983 the implicit promise to protect Persian Gulf oil supplies became an explicit element of U.S. military doctrine with the creation of the United States Central Command, CENTCOM.

CENTCOM’s official history makes this clear stating in part: Today’s command evolved as a practical solution to the problem of projecting U.S. military power to the gulf region from halfway around the world. I am stressing the longstanding nature of our commitment to the gulf to underscore the fact that our estimates of military expenditures there are not intended as a criticism. Quite the opposite, in fact. Without oil our economy could not function, and therefore protecting our sources of oil is a legitimate defense mission, and the current military operation in Iraq is part of that mission.

To date, supplemental appropriations for the Iraq War come to more than $251 billion, or an average of $83.7 billion per year. As a result, when other costs are included, the total military expenditures related to oil now total $132.7 billion annually.

So, where does that leave us? In 2003, as noted, we estimated that the ‘‘hidden cost’’ of imported oil totaled $304.9 billion. When we revisited the external costs, taking into account the higher prices for crude oil and increased defense expenditures we found that the ‘‘hidden cost’’ had skyrocketed to $779.5 billion in 2005. That would be equivalent to adding $4.10 to the price of a gallon of gasoline if amortized over the total volume of imports. For Persian Gulf imports, because of the enormous military costs associated with the region, the ‘‘hidden cost’’ was equal to adding $7.41 cents to the price of a gallon of gasoline. When the nominal cost is combined with this figure it yields a ‘‘true’’ cost of $9.53 per gallon, but that is just the start.

Because the price of crude oil is expected to remain the $60 range this year, expenditures for imports are expected to be at least $320 billion this year. That amounts to an increase of $70 billion in spending for foreign oil in just one year. That increase would raise the total import premium or ‘‘hidden cost’’ to $825.1 billion, or almost twice the President’s $419.3 billion defense budget request for fiscal year 2006. If all costs are amortized over the total volume of imports, that would be equivalent to adding $5.04 to the price of a gallon of gasoline. For Persian Gulf imports, the premium would be $8.35. This would bring the ‘‘real’’ price of a gallon of gasoline refined from Persian Gulf oil to $10.86. At these prices the ‘‘real’’ cost of filling up a family sedan is $217.20, and filling up a large SUV $325.80.

We face a two-fold problem. The first part entails assuring adequate fuel supplies for the 220 million privately owned vehicles on the road today. These vehicles have an average lifespan of 16.8 years and the average age of our vehicle fleet is 8.5 years. Therefore, we will require conventional fuels or their analogs for at least a decade, even if every new vehicle produced from this day forth runs on some alternative.

The second part is how to affect a transition to alternatives to conventional petroleum. This transition will take much longer than a decade—perhaps a generation or more—but the longer we delay beginning to make the change, the longer it will take to accomplish.

In the near term, say the next 5 to 10 years, we essentially have two options. First, to make the greatest possible use of our readily accessible conventional domestic resources, particularly the oil and natural gas that lay off our shores. We should also consider using some of our 1,430 trillion cubic feet of domestic gas reserves as a feedstock for motor fuels produced through the Fischer-Tropsch process. Indeed, we currently have 104 trillion cubic feet of so-called ‘‘stranded’’ natural gas in Alaska and a pipeline with some 1.1 million barrels per day of excess capacity. Stranded gas could be converted into clean burning motor fuel and transported in the existing pipeline to the lower 48 states.

 

RICHARD G. LUGAR, INDIANA.  The committee meets today to consider strategies for reducing dependence on oil. This dependence brings intolerable costs to American national security and economic well-being. If oil averages just $60 a barrel this year, the import costs to the United States economy will be approximately $320 billion. This revenue stream emboldens difficult oil-rich regimes and enables them to entrench corruption and authoritarianism, fund anti-Western demagogic appeals, and support terrorism.

As global oil demand increases and the world becomes more reliant on reserves concentrated in unstable regions, the likelihood of conflict over energy supplies will dramatically increase, and energy-rich countries will have more opportunity to use their energy exports as weapons against energy-poor nations.

High prices over the past 10 months have demonstrated the vulnerability of supply. A global oil market tightened by underinvestment in production and surging global demand has been aggravated by hurricanes, unrest in Nigeria, speculation about developments in Iran, weakened capacity in Venezuela, and terrorist activity in Iraq and elsewhere. In this environment, the price shock from a major supply disruption could cause a recession.

Today we will concentrate on how our Government can speed up the transition to alternative, sustainable energy sources. We are cognizant that despite past campaigns for energy independence and constant improvement in energy intensity per GDP, we are more dependent on oil imports today than we were when President Nixon authorized Project Independence in 1973.

The American public and elected officials are becoming more aware of the severe problems associated with energy dependence and are more willing to take aggressive action.

The new realism of energy geopolitics requires us to abandon the notion that simply finding more oil will solve oil-driven threats to our national security. More than three-quarters of the world’s oil reserves are controlled by foreign governments. With global oil demand projected to rise from 83 million barrels a day to 120 million barrels per day by 2030, the security threats related to oil dependence will continue to intensify unless we make dramatic changes in policy. Efforts to reduce oil consumption must focus on developing sustainable fuels and increasing efficiency. I am pleased that the first commercial-scale cellulosic ethanol plant in the United States is ready for construction and that Americans are beginning to demand more fuel-efficient vehicles.   I have introduced Senate bill 2435, the Energy Diplomacy and Security Act, to reorient our diplomatic activities to give greater priority to energy matters.

VINOD KHOSLA, PARTNER, KHOSLA VENTURES, MENLO PARK, CA.   Since the President’s State of the Union and rising prices at the pumps, there has been a lot of talk about our oil addiction. I come here to talk not about what must be done but rather how to get it done simply, and pragmatically, in a manner aligned with the major political interests that carry clout in this country. We can not only do the right thing, but also the politically correct thing, I come to you today with ambitious goals, but goals that are grounded in sound science, technology, and business. I am convinced that we can replace the majority of our petroleum used for cars and light trucks with ethanol within 25 years. This is not an alternative fuel—it can be a mainstream fuel. More importantly, with a few simple policy changes, we can be irreversibly traveling down this path in less than 7 years.

Ethanol is substantially cheaper to produce today than gasoline before all subsidies and taxes. For example, the cost to produce ethanol in Brazil is less than $0.75 per gallon, while a U.S.-based corn to ethanol plant’s production costs are roughly $1.00 per gallon. That equates, even with U.S. costs, to about $1.25 per ‘‘gasoline equivalent’’ gallon of ethanol. Gasoline on the other hand costs $1.60–$2.20 or more per gallon to produce, depending upon the cost of a barrel of oil. Why shouldn’t it sell for much less than gasoline at the pump, except for the oil interests distorting the price to ensure they don’t lose their lucrative profit opportunity or temporary supply/demand dynamics? As new technologies ramp up, ethanol can be cheaper than gasoline even if oil drops to $35–$40 per barrel—a level it is not expected to reach according to the EIA. In addition to lower cost, E85 reduces volatile organic compounds by 15%, carbon monoxide by 40%, NOX by 10%, and sulfate emissions by 80% when compared to gasoline according to an estimate from one environmental organization. With ethanol, we get a fuel that is cheaper for consumers and automakers, cleaner and greener, and it takes Mideast terrorism fueling dollars and moves them to rural America.

We capitalize on American technology to create more jobs and cheaper transportation costs for the American public.

My friends from the Midwest tell me ethanol is the talk of coffee shops and maybe the most important thing in rural America in 30 years. It may also be the most important thing for global peace and welfare, the climate crisis, and for consumers. Fortunately, this time around the environmentalists, the automakers, the agricultural interests, the security and energy independence proponents, and even the evangelicals are all aligned. Finally, a cause all interests can rally behind.

The oil interests keep propagating myths like insufficient land, poor energy balance, and high production costs to curb enthusiasm for ethanol. This is reminiscent of the tobacco companies funding studies to prove that smoking does not cause cancer. The NRDC, more concerned about land use than the oil interest, estimate a modest 114m acres of land needs, Argonne National Labs and UC Berkley, among many others, have discounted the energy balance claims. In my opinion, these are bogus if not ill-intentioned claims and I will address these falsehoods one by one. Crop Land: Yields of corn are increasing

Based on my forecasts, I can see my way to yields increasing more than 10X to between 3,000 to 5,000 gallons per acre compared to 400 gallons per acre today, demolishing all land use and energy balance arguments.

Based on my forecasts, including the considerable upside afforded by technology innovations, biomass-based ethanol can replace most of our gasoline needs in 20 years, using less than 60m acres of land.

Energy Balance: The only study that claims corn ethanol has an unfavorable energy balance is an outdated study performed by Professor Pimentel. Both USDA and DOE-affiliated researchers claim that Pimentel’s 2005 study overstates energy requirements. Professor Kammen at UC Berkley further states that corn ethanol results in more than a 90-percent reduction in petroleum use and a moderate 10– 30-percent reduction in greenhouse gases. The NRDC agrees, stating that (1) corn ethanol is providing important fossil fuel savings and greenhouse gas reductions; (2) cellulosic ethanol simply delivers, profoundly, more renewable energy than corn ethanol; and (3) very little petroleum is used in the production of ethanol . . . a shift from gasoline to ethanol will reduce our oil dependence. Remember tobacco claiming and funding studies, forever, to prove that smoking does not cause cancer?

I came to you today with ambitious goals. I hope that you, too, are convinced that we can replace the majority of our petroleum used for cars and light trucks with ethanol within 25 years.

 

JASON S. GRUMET, Executive director, National Commission on Energy Policy, Washington, DC.

I have the privilege to speak to you today on behalf of the National Commission on Energy Policy (NCEP), a diverse and bipartisan group of energy experts that first came together in 2002 with support from the Hewlett Foundation and several other leading philanthropies. In December 2004, the Commission released a report entitled ‘‘Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges.’’ The first chapter of that report was about oil security because our Commission believed then, and still does, that oil security is one of our Nation’s foremost economic, national security, and energy challenges.

This isn’t news to anyone, of course—least of all this committee. In fact, as national policy obsessions go, America’s oil dependence has been one of our most enduring. For more than 50 years, Congress and multiple administrations of either party have decried our reliance on imported oil and vowed to do something about it. Today, with oil prices topping $70 per barrel and gasoline prices at $3 per gallon, we are again enmeshed in an active debate over energy policy. The lack of real options to address near-term energy prices is a source of great frustration here in Congress and throughout the country.

Until, and unless, private markets reflect the full economic, security, and environmental costs of oil dependence—and until, and unless, consumers possess adequate information to make efficient choices—policies that rely solely on private market decisions will continue to fail.

Improving our energy security is a long-term challenge. This time, the problem of high prices and tight supplies will almost certainly get worse as growth in petroleum demand continues to outstrip the rate at which vehicle fuel economy improves and new sources of oil come on line. While biofuels hold great potential, near term gains will also be incremental when compared against our annual petroleum consumption. If history is a guide, public interest and support for long-term policies will wax and wane as the price of gasoline rises and falls.

RETHINKING ‘‘ENERGY INDEPENDENCE’’

Before delving into solutions, I would like to take on the somewhat heretical task of challenging the aspiration of ‘‘energy independence’’ with its attendant focus on reducing our Nation’s use of ‘‘foreign oil.’’ While emotionally compelling, these concepts are vestiges of a world that no longer exists. By failing to recognize the fundamentally global nature of the oil market, and the increasingly global nature of markets for natural gas, the call for energy independence has become an obstacle to effective policy design. There is one world market for oil. It is a fungible global commodity that has a single benchmark price. Wide disparities in the price of gasoline around the world are the product of national subsidies and taxes, but have nothing to do with how much oil different nation’s import or produce. Our economic vulnerability to oil price shocks is entirely a function of how much oil we use—the continent from which the oil was extracted has no bearing, whatsoever, on this equation.

As members of this committee know better than anyone else, some of the most profound consequences of America’s dependence on oil go well beyond the economic. It’s virtually impossible to put a dollar figure on all the costs of that dependence, but there is no question that our thirst for oil constrains our foreign policy, imposes burdens on our military, accounts for, approximately, one-third of the U.S. current account deficit which soared to $805 billion in 2005, swells the coffers of undemocratic and even actively hostile governments, and directly, or indirectly, provides some of the funding for terrorist organizations that mean us harm. These risks and vulnerabilities too, like those we face strictly in terms of our own economic well-being, will surely continue to grow if we don’t take action. Put simply, if current trends don’t change we face a global scramble for energy resources within this century that is sure to be economically and geopolitically damaging to all concerned.

Energy independence is simply unrealistic and has been ever since President Nixon first proposed to enshrine it as a national goal in the 1970s.

U.S. oil imports have been rising inexorably ever since. The United States, alone, currently accounts for fully one-quarter of world oil demand.

Our Nation holds less than 3% of the world’s proved oil reserves, while 61% of world reserves, by contrast, are located in the Middle East.

The United States will not have a serious policy to increase oil security until we achieve a significant increase in the fuel economy of our vehicles. A fundamental premise underlying the Commission’s oil security recommendations is the belief that we can neither drill nor conserve our way to energy security. We simply must address both the supply and demand sides of the equation if we are to have any hope of lasting success. As Congress and ordinary Americans search for solutions to the current costs of gasoline, it is painfully clear that there are no good near term options. We must accept this unfortunate reality and direct our attention to minimizing the harmful effects of the oil shocks that are likely to occur with increasing regularity and severity over the next 20 years.

Current projections indicate that oil production by the United States and other industrialized countries will decline by 6% over the next two decades, even as oil production in the former Soviet Union increases by nearly 50% and OPEC output increases 33%. This means that U.S. oil imports will continue to grow in the future, as they have for the last several decades, and that we like everyone else will increasingly need to rely on oil supplies that originate in what are now unstable and undemocratic regions of the world. Nor will our dependence on foreign sources of energy be limited to oil: Given declining domestic production of natural gas—another fuel that plays an extremely important role in the U.S. economy—it appears inevitable that we will increasingly need to rely on overseas sources for natural gas as well. The key, then, to greater energy security for the United States lies in recognizing—and better managing—our fundamental energy interdependence. Nearly all experts agree about the fundamental drivers behind today’s high oil prices and extreme market volatility. For some time now, rising global demand for petroleum—driven not only by growing U.S. demand, but in part by the very rapid modernization of countries like China and India—has been outpacing the discovery and development of new sources of supply. The result is that we now live in a world that requires approximately 85 million barrels of oil daily, but has only very little spare production capacity (as little as 2%, according to various estimates) and barely sufficient refining capacity. In this environment even small disruptions along the supply chain can cause serious repercussions.

The world is suffering from what can best be described as a ‘‘demand shock’’ as China, India, and much of the developing world modernize their economies and dramatically increase their use of motor vehicles.

In partnership with the organization, Securing America’s Energy Future (SAFE), NCEP has been exploring the potential consequences of today’s tight supply margins by examining the impacts of any number of possible disruptions in global oil supply. With help from industry and military experts, as well as from the Wall Street analysis firm, Sanford C. Bernstein and Co. LLC, we concluded that any number of truly unexceptional circumstances could cause global oil prices to literally skyrocket. As part of an oil crisis simulation called Oil ShockWave, we found that a mere 4% shortfall in daily world oil supplies could lead to a 177% increase in world prices. It wouldn’t take much, in other words, to send oil prices even higher— perhaps significantly higher—than they already are. With the U.S. transportation system over 97% reliant upon petroleum, the impacts of such an increase could be devastating.

As then-Chairman of the Federal Reserve, Alan Greenspan, observed in 2002, ‘‘All economic downturns in the United States since 1973 have been preceded by sharp increases in the price of oil.’’

Fuel economy requirements for passenger vehicles have been essentially unchanged since 1980. As a result, average fleet efficiency actually began to decline in recent years as large trucks and SUVs captured ever larger shares of the U.S. auto market.

On the demand side, the Commission recommends: 1. Significantly strengthening fuel economy standards for new passenger vehicles, while simultaneously reforming the existing CAFE program to reduce compliance costs and provide cost-certainty for manufacturers and consumers; 2. Creating incentives to accelerate the market penetration of highly efficient hybrid vehicles while also helping the domestic auto industry retool to meet growing demand for these vehicles; and 3. Exploiting opportunities to boost the efficiency of heavy duty vehicles and to improve the fuel-economy performance of the existing light duty vehicle fleet. Finally, to develop long-term alternatives to petroleum, the Commission recommends a sustained and vigorous effort to spur public and private sector investment in the development and early deployment of domestically produced transportation fuels derived from biomass and organic wastes. Of all available alternatives to petroleum fuels, the Commission believes that cellulosic ethanol holds the most potential for displacing a significant fraction of transportation oil demand within the next 20–30 years and should, therefore, be a focus of near term RD&D activities

Currently, the United States produces about 8.5 million barrels per day of oil (crude and products) and consumes about 21 million barrels per day of finished oil products.

The United States is thought to have about 25 billion barrels of proved, conventional oil reserves, the great majority in Alaska and off our Pacific coast with a smaller fraction off the Atlantic coast and the eastern Gulf of Mexico.

OIL DEMAND MEASURES.   While the Commission firmly believes that both supply and demand measures must be pursued as part of an effective strategy to enhance the Nation’s energy security, it is important to emphasize that when it comes to protecting the economy from oil price shocks, a barrel produced and a barrel conserved are not the same thing. The benefits of every added barrel of supply—whether produced domestically or abroad—accrue to oil consumers the world over, in the form of a marginal reduction in the market price. By contrast, the benefits that can be achieved through demand side measures and alternative fuel production—besides being much larger in absolute magnitude—are largely captured by those who implement them. The Commission, therefore, devoted significant attention to the potential for reducing our Nation’s oil demand, particularly in the transportation sector, which because it accounts for nearly 70% of current domestic consumption and is nearly solely dependent on petroleum fuels—is key to oil use in the broader U.S. economy.

Improving passenger vehicle fuel economy is by far the most significant and reliable oil demand reduction measure available to U.S. policymakers. As noted previously, CAFE standards played an important role in substantially reducing the oil intensity of the U.S. economy between the late 1970s and early 1990s. However, a longstanding political stalemate has blocked significant progress in fuel economy for over two decades. (See Fig. 5)

People often confuse our failure to increase domestic fuel economy with the view that technology options for improving vehicle efficiency have not advanced over the past two decades. Nothing could be farther from the truth. The efficiency of our automobiles increases annually. Estimates of this annual increase vary substantially from a low estimate of roughly 1.5% per year to a high estimate of over 5% per year.

However, with no requirement to direct these substantial efficiency gains toward achieving the public good of reduced oil dependence, vehicle manufacturers instead devoted recent technological advancements to simply maintaining fuel economy while dramatically increasing vehicle size and power. While vehicle fuel economy is now no higher than it was in 1981, vehicle weight has increased by 24% and horsepower has increased by over 100% over this same time period.

For the existing light duty vehicle fleet, simply ensuring that replacement tires have the same low-rolling resistance as original equipment tires can improve vehicle fuel economy by as much as 4.5% at very low cost to the vehicle owner.

Efficiency improvements are important not only because they produce demand reductions that will allow us to ‘‘buy time’’ to develop new alternatives to oil (a serious effort to diversify our fuel supply will likely take decades), but because they are essential to making many of those alternatives technologically and economically viable on a commercial scale. Biofuels and most other alternative fuels suffer from feedstock constraints, a lower energy density than gasoline, or both. Unless the vehicle fleet becomes more fuel efficient, efforts to promote a greater reliance on alternative fuels will likely falter due to inadequate supply or inadequate driving range.

DEVELOPING ALTERNATIVES TO OIL.  The United States burns nearly 140 billion gallons of gasoline each year and relies on petroleum-based fuels to supply nearly all of its transportation energy needs. To meaningfully improve our Nation’s energy security, alternative transportation fuels must be capable of being economically and reliably produced on a truly massive scale. The Commission identified four criteria that characterize a promising alternative fuel: (1) It can be produced from ample domestic feedstocks; (2) it has low net, full fuel-cycle carbon emissions; (3) it can work in existing vehicles and with existing infrastructure; and (4) it has the potential to become cost-competitive with petroleum fuels given sufficient time and resources dedicated to technology development. Among the variety of alternative fuel options potentially available for the light duty vehicle fleet, the Commission believes that ethanol produced from cellulosic biomass (i.e. fibrous or woody plant materials) should be the focus of near term federal research, development, and commercial deployment efforts. Let me briefly discuss the attributes of traditional corn-based ethanol and then turn to cellulosic ethanol.

For years, detractors of corn-based ethanol have asserted that the energy content of a gallon of ethanol is matched or even exceeded by the energy required to produce it. The Commission’s analysis disputes this conclusion, finding that corn-based ethanol provides nearly 20% more energy than it takes to produce.

The fundamental liability of corn-based ethanol is that there is simply not enough corn to begin to keep pace with expected growth in transportation energy demand, let alone to reduce current U.S. gasoline consumption in absolute terms. Put simply, it takes roughly 4% of our Nation’s corn supply to displace 1% of our gasoline supply. Even organizations devoted to ethanol advocacy agree that it will be difficult to produce more than 10–12 billion gallons of ethanol a year without imposing unacceptable demands on corn supply and significant upward pressure on livestock feed prices.

For cellulosic ethanol to succeed on a commercial scale important concerns about land requirements must be overcome and production costs must be reduced. The central challenge is producing enough feedstocks without disrupting current production of food and forest products. Some cellulosic ethanol can be produced from currently available waste products such as corn stalks, sugarcane bagasse, and wheat straw. Production volumes on the order of 50 billion gallons per year, however, will require improved high-yield energy crops like switchgrass, the integration of cellulosic ethanol production into existing farming activities, and efficiency improvements in the processes used to convert cellulosic materials into ethanol.

A Commission-sponsored analysis of the land required to produce enough cellulosic ethanol to fuel half of the current U.S. passenger vehicle fleet reveals the importance of the advancements noted above. Using status quo assumptions for crop yields, conversion efficiency, and vehicle fuel economy, Oak Ridge National Laboratory has estimated that it would take 180 million acres or roughly 40% of the land already in cultivation in the United States to fuel half the current vehicle fleet with cellulosic ethanol.

The Energy Policy Act of 2005 contains at least 10 major programs to promote ethanol derived from cellulosic feedstocks. These programs include explicit authorizations for more than $4.2 billion over the next decade to support critical R&D as well as ‘‘first mover’’ commercial facilities through a combination of grants, loan guarantees, and production incentives.

Research appears to indicate that when a small quantity of ethanol is blended into gasoline, the resulting mixture escapes more readily through the hoses and seals in the vehicle’s fuel system leading to more smog-forming emissions.

The Commission recognizes that Congress alone is responsible for appropriations, but can’t help but note that the high level of noncompetitive earmarks is undermining the strategic goals of our Nation’s bioenergy programs. For example, in 2004, of the $94 million in appropriations for DOE’s bioenergy programs, nearly $41 million was directed to earmarked projects. In 2005, earmarks accounted for nearly 50% of the program’s budget. Paradoxically, this high level of earmarks reflects the enthusiasm of many Members of Congress for promoting domestic alternatives to petroleum. However, an effective national effort that coordinates the efforts of Federal, State, and private institutions cannot be mounted under these circumstances.

CONCLUSION.  Sadly, there are no good options for delivering immediate relief from high prices at the gas pump. And while it’s understandable at times like this that people want to focus on price gouging, windfall profits, or restrictive environmental laws—as if our plight was somehow the result of a few greedy people or poorly written statutes—we must direct the vast majority of our attention to confronting the fundamental roots of our oil security predicament.

Prices may, of course, fall again in the months ahead. But there is almost no scenario in which the underlying causes of the current crisis simply resolve themselves without a concerted effort by the United States and other major oil-consuming nations to change course. The real tragedy would be if this ‘‘moment’’ simply passes as others have with no real progress toward a lasting solution. In short, there is no question that we will someday use less oil than we do now. The question is, rather, whether we arrive at that point on our own terms or on someone else’s. The Commission believes that the sacrifices we choose are infinitely preferable to those imposed on us by forces we cannot control.

JOSEPH R. BIDEN, JR., DELAWARE.  With gasoline at $3 a gallon, and with our most pressing foreign policy challenges centered in the oil-producing countries of the world, today’s hearing before the Foreign Relations Committee could not be more timely or more important. We heard a few weeks ago in this committee about the hidden costs of our dependence on foreign oil. The United States has just one third of the world’s oil reserves, and less than 5% of its population, but we consume fully one-third of the global oil output. Over 60% of the world’s oil reserves are held in the Middle East, and as one of our witnesses points out today, only 9% of world reserves are held in countries we would call ‘‘free.’’ We are dependent on oil, and that makes us dependent on countries with whom we will continue to have, at best, many differences and, at worst, open hostility. What Michael Mandelbaum has called ‘‘the axis of oil’’—an axis that stretches from Russia to Iran to Venezuela to Saudi Arabia—will have as great an impact on our national security as the so-called ‘‘axis of evil.’’

That dependence means we pay a huge price militarily for access to a resource that we cannot do without. One estimate suggests we pay as much as $825 billion a year in security expenditures to project our influence and secure access to oil.

Some part of every dollar we pay for imported oil finds its way into the hands of our sworn enemies. As some observers have put it, the war on terror is the first war in which we are paying for both sides in the conflict. Disruption to our economy from interruptions in supply can be huge, and will grow as our dependence grows. As Alan Greenspan has warned us, all economic downturns since the 1970s have been preceded by spikes in the price of oil. We pay a price environmentally for our dependence on oil, most profoundly in dealing with the repercussions of climate change, driven by our use of fossil fuels. There can no longer be any doubt that our dependence on oil is a critical problem, one that must be addressed. The sheer size of this problem is such that there will be no quick fix. Oil represents about 40% of our energy consumption and we import about 60% of the oil we use.   That statistic will not be transformed overnight. But there are other statistics that will not change, as well. China has accounted for fully 40% of the recent increase in global oil demand. It will put another 120 million vehicles on the road over the next 5 years. Along with India, and a reindustrializing Eastern Europe, that growth in global demand is not going to be reversed. The fit between global supply and demand today is extremely tight. Billions of dollars of new investment may keep pace with demand, but will do little to ease the price at the pump. And new supply, from conventional or unconventional sources of oil, will only hasten the process of climate change, and will simply delay our transition to the alternatives than can address our addiction to oil.

What are our alternatives to oil? In the short term, ethanol from corn could be a first step away from our oil addiction, by providing a liquid fuel that is compatible with existing internal combustion engines that power our cars, trucks, and buses. We will hear today about the costs and benefits of taking such a step, and the steps that must follow toward sugar or cellulosic ethanol. Ethanol will be just part of a broader energy policy that will reduce our dependence on oil, and will reduce the leverage that the oil-producing nations have over our foreign policy and our national security. If it was not clear before, it is now. Domestic energy policy is at the center of our foreign policy.

Mr. Khosla, you mentioned some intriguing possibilities with regard to the acreage issue. As you pointed out, sometimes critics of alternative plans point out that we are limited in this country by the number of acres we could devote. Usually the argument is made, first of all, with regard to corn ethanol, but then as you observe, maybe more generally with regard to switchgrass or biofuels materials that might come in the cellulosic ethanol in addition. In the figures that you gave—and sort of retrace this for us, if you will—you talked about 400 to 500 gallons of ethanol per acre coming from, as I understand, current practices. Is that in the corn field or the cellulosic field? What are the 400 or 500 gallons at this point?

Mr. KHOSLA. Sir, roughly 140-some bushels per acre times 2.7 or 2.8 gallons of ethanol per bushel would result in about 400 gallons per acre, roughly.

The CHAIRMAN. So that is the corn yield, the 140 bushels.

Mr. KHOSLA. Yes.

The CHAIRMAN. Now, how do we get from there to some multiple? And, ultimately, in the years beyond, you were even talking about 3,000 to 5,000, which is quite a jump.

Mr. KHOSLA. I expect that we can get to yields of corn, according to the National Corn Growers Association, approaching 2,000 bushels per acre.

The CHAIRMAN. 2,000 bushels per acre.

Mr. KHOSLA. By 2015.  I believe cellulosic technologies have the most impact when it comes to achieving yields of 3,000 gallons per acre.

The CHAIRMAN. Now, let me just run back through this because 2,000 bushels per acre in a timeframe of 2015——

Mr. KHOSLA. I’m sorry; 200 bushels per acre.

The CHAIRMAN. From my father’s experience on the same farm, 60 years ago, we were getting 40 or 50 and we are now getting 140 or 150 in our generation.  Even if we get to 200 bushels to the acre times 2.7, that gets you to 540 or so, which is not 3,000. So when you get to the 3,000 mark, there has got to be something else, and this is more in the cellulosic variety, I gather.

Mr. KHOSLA. A basic assumption I make is we can now get about 6 tons per acre of biomass yields. The best plant biologists in the country I have talked to completely support the notion that in 25 years, that yield can go up to 27.5 tons per acre. If we can do 27.5 tons per acre and 118 gallons per ton of biomass, then the numbers are what we get in this chart on page 58, roughly about 3,000 gallons per acre.

The CHAIRMAN. The skeptics would say, after all, there is not enough land left in America to do all these sorts of things. At best, this is still a niche idea in which you do a little bit of it, get maybe, single digits or 20% of our needs, but that is about where it ends. So, therefore, all this talk about independence—in my opening statement, I am talking about some grim facts, and that is, even if there is a lot of oil left on earth and if, in fact, there are a lot of reserves that are still not exploited, 77% plus are held by other governments. And these are not benign people. Somebody that shuts off the tap to Ukraine, for example, accomplishes something that you do not have to send aircraft over or tanks or what have you to do. You can obliterate a country this way. It is not advisable people do this very often. And that is one reason that we are talking about this because we have said as these things begin to close in, the knives get sharper and the elbows, likewise. People in a strategic position decide to use this aggressively against others and maybe against us. People who do not understand the existential problem here, not just for Ukraine, but, ultimately, for the United States, really need to wise up.

Both of you have mentioned, in one form or another, oil sands, Canada, Alberta. Now, the Energy Minister was in last week, and he said the problem there is that we cannot get people to do the work. Literally this is very tough work. It is very cold. It is very messy. It is very dirty. They cannot get enough Canadians, Americans, Mexicans, anybody in the hemisphere. The Mexican Energy Minister was there. They cannot furnish enough people from Mexico to make that work. So, theoretically, you have oil sands up there. We have, unfortunately, some human problems. How do you get people to work the oil sands? Now, eventually, we may get through that.

We still have people in denial that climate change or global warming is a real problem. This is almost a theological debate even with major newspapers and publications in this country. So although you are in a group of people that believe this is for real and we have to deal with it, as politicians we find a lot of people who do not believe in this, who think essentially it is sort of an elite group of people who meet with the Foreign Relations Committee from time to time and talk about things that are vaguely subversive to normal American practice.

Senator BIDEN. To the oil industry. They think it is subversive.

The CHAIRMAN. Now, finally, while I am spouting off about all of my prejudices, which you have listened to, on the CAFE standards, we have got a situation here. We debate this issue all the time. In the House committee last week, by a vote of 28 to 26, they, at least, had a nominal CAFE standard. Democrats on the committee, who voted en bloc against that—and they were the 26— said, well, this does not amount to anything. What you really need is a 33-miles-per-gallon standard. That was offered by one gentleman and that lost 37 to 16, as I recall. I do not know where they all stand now.

Senator BIDEN.  Mr. Grumet, you said that the National Highway Transportation Safety Administration, although it is well intended—the discussion of CAFE standards may not produce the effect we desire. What should we be doing here in Congress?

Mr. GRUMET. I think this really does come down to a question of institutional capacity. The people at NHTSA are well-intended, hard-working people, and when they imagine how to make the optimum changes in CAFE, what they try to do is figure out what is the total social value of saving a gallon of gasoline and what is the cost of new technologies to achieve that, and they try like any good economists to make the lines cross. So what NHTSA just did was they reformed the structure of CAFE in ways that I think bring greater economic efficiency to the program. It gets you out of the idea that all cars have to meet the same standards. So it is kind of a continuum of weight-based results. And all of that is perfectly fine and good. But the key input was the number they put into the model to say what is the total social value of saving a gallon of gasoline over the next 10 years, and that was $1.70. They used, by law, the EIA projections of the cost of a gallon of gasoline, which are presumed to flatten out by around $2, and they take the taxes off that. So we get $1.60 of real value of a gallon of gasoline. And then when they looked through 50 different ways that gasoline and oil also affect our economy, the sum total of the benefits of reducing a gallon, they come up with is about 6 cents. And they looked hard within the abilities of a guy with green eyeshades and a computer. They looked actually at the value of spending less time standing at a gasoline station squeezing fuel into your tank. They looked at what they perceived to be the value of reducing air pollution. They looked at what they perceived to be the value of reducing the vulnerability to price shocks. They looked at the value of military, and I will read to you the quote from the regulatory impact statement. ‘‘The U.S. military presence in world regions that represent vital sources of oil imports also serves a range of security and foreign policy objectives that is considerably broader than simply protecting oil supplies. As a consequence, no savings in Government outlays for maintaining the Strategic Petroleum Reserve or a U.S. military presence are included among the benefits of the light duty truck CAFE standards.’’

Someone has to help NHTSA think about tensions with China, foreign policy prerogative, military costs, and things that are simply beyond their tools and competence.

Mr. KHOSLA. we are very, very close to a tipping point of permanently getting away from petroleum. I believe we have the capacity in this country to meet all of our needs within a relatively short period of time.

If you can imagine going beyond America, because it is transformative of rural America, it will repeat that phenomena all over the world. If one was to address the question of poverty, another question I am personally very interested in—and microfinance is my other area of endeavors—and you draw a poverty belt, it is all around the equator. The poverty belt runs 20 degrees north and 20 degrees south of the equator. That is the part of the world that will be rejuvenated completely by a switch to biomass fuels. We will address the poverty question much more effectively with this transformation and have global impact. Also, if one might imagine a map of the world, one can see America meeting its needs and Canada’s needs, sort of North America meeting its needs; South America supplying South America and Europe; Australia with lots of land supplying China; India being relatively self-sufficient; and Africa sort of being a big buffer zone for biomass. So one can almost paint a global picture of supply and demand and the regional and local balances that I am happy to elaborate in more detail, if you would like. That to me is the most exciting part of this transformation beyond just meeting our energy independence goals. It changes the planet beyond changing the face of rural America, and that is exciting. That is very exciting. And it is very doable. It is not esoteric.

RUSSELL D. FEINGOLD, WISCONSIN.  I appreciate the Chair’s unfailing commitment to the issue of energy security. He has been a constant voice, using this committee’s area of jurisdiction, warning us about the implications of our energy choices and today’s hearing continues these efforts. As we all know, our current over-dependence on oil poses grave risks for our country—for our national security, for our economy, and for our environment. While I remain saddened that we didn’t use last year’s energy bill to really push the envelope, I am optimistic that we will soon get it right and provide an energy vision to bring us into the 21st century.

NORM COLEMAN, MINNESOTA. I think this is one of the most important issues facing this country today. There’s no question about it. It is a national security issue. It is an economic security issue. It is about our present. It is about our future. So I am glad that we are thinking outside the barrel, and I think this is an opportunity

 

RICHARD G. LUGAR, INDIANA.   The Foreign Relations Committee meets today to consider the externality costs of U.S. dependence on fossil fuels. The gasoline price spikes following the Katrina and Rita hurricanes underscored for Americans the tenuousness of short-term energy supplies. Since these events, there is a broader understanding that gasoline and home heating prices are volatile and can rapidly spike to economically damaging levels due to natural disasters, terrorist attacks, or other world events. But, as yet, there is not a full appreciation of the hidden costs of oil dependence to our economy, our national security, our environment, and our broader international goals. Today, with the help of experts who have thought a great deal about these issues, we will attempt to more clearly define some of these costs. We are cognizant that this is a difficult and imprecise exercise. We are also aware that most, if not all, energy alternatives have some externality costs. But we are starting from the presumption that if we blithely ignore our dependence on foreign oil, we are inviting an economic and national security disaster. With less than 5% of the world’s population, the United States consumes 25% of its oil. If oil prices remain around $60 a barrel through 2006, we will spend approximately $320 billion on oil imports this year. Most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism. More than three-quarters of the world’s oil reserves are controlled by national oil companies. And within 25 years, the world will need 50% more energy than it does now. These basic facts demand a major reorientation in U.S. policy aimed at reducing U.S. dependence on fossil fuels. Our goals must be to mitigate the short-term costs of our dependence on oil, while pursuing energy alternatives that would reduce the international leverage of petro-superpowers, improve environmental quality, cushion potential oil price shocks, stimulate new high-tech energy industries, and ground the American economy on energy sources that will neither run out nor be cut off by a foreign supplier.

There are at least six basic threats associated with our dependence on fossil fuels. First, oil supplies are vulnerable to natural disasters, wars, and terrorist attacks that can produce price shocks and threats to national economies. This threat results in price instability and forces us to spend billions of dollars defending critical fossil fuel infrastructure and choke points. Second, over time, finite fossil fuel reserves will be stressed by the rising demand caused by explosive economic growth in China, India, and many other nations. This is creating unprecedented competition for oil and natural gas supplies that drives up prices and widens our trade deficit. Maintaining fossil fuel supplies will require trillions in new investment—much of it in unpredictable countries that are not governed by democracy and market forces. Third, energy rich nations are using oil and natural gas supplies as a weapon against energy poor nations. This threatens the international economy and increases the risk of regional instability and military conflict. Fourth, even when energy is not used overtly as a weapon, energy imbalances are allowing oil-rich regimes to avoid democratic reforms and insulate themselves from international pressure and the aspirations of their own people. In many oil rich nations, oil wealth has done little for the people, while ensuring less reform, less democracy, fewer free market activities, and more enrichment of elites. It also means that the United States and other nations are transferring billions of dollars each year to some of the least accountable regimes in the world. Some of these governments are using this money to invest abroad in terrorism, instability, or demagogic appeals to anti-Western populism. Fifth, reliance on fossil fuels contributes to environmental problems, including climate change. In the long run, this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability. Sixth, our efforts to facilitate international development are often undercut by the high costs of energy. Developing countries are more dependent on imported oil, their industries are more energy intensive, and they use energy less efficiently. Without a diversification of energy supplies that emphasizes environmentally friendly options that are abundant in most developing countries, the national incomes of energy poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism.

Each of these threats comes with short- and long-term costs. As a result, the price of oil dependence for the United States is far greater than the price consumers pay at the pump. Some costs, particularly those affecting the environment and public health, are attributable to oil no matter its source. Others, such as the costs of military resources dedicated to preserving oil supplies, stem from our dependence on oil imports. But each dollar we spend on securing oil fields, borrowing money to pay for oil imports, or cleaning up an oil spill is an opportunity missed to invest in a sustainable energy future. Certain types of costs are extremely difficult to quantify. We understand that many national security risks are heightened by our oil dependence. But how, for example, would we assign a dollar figure to Iran’s use of its energy exports to weaken international resolve to stop its nuclear weapons program?

HILLARD HUNTINGTON EXECUTIVE DIRECTOR, ENERGY MODELING FORUM, STANFORD UNIVERSITY, STANFORD, CA

A number of knowledgeable experts, however, are concerned about the very real possibility of much more damaging shocks in the future. A group assembled by Stanford’s EMF thought that the odds of, at least, one very damaging shock over the next 10 years were higher than those of an oil market with some volatility but without such a shock. Although another major oil disruption is not a certainty, its likelihood is significantly high enough to be worrisome. Your odds of drawing a club, diamond, or heart from a shuffled deck of playing cards are three out of four. In the EMF study, the participants found that the odds of a foreign oil disruption happening over the next 10 years are slightly higher at 80%. Disruption events included surprise geopolitical, military, or terrorist turmoil that would remove at least 2 million barrels per day—an amount representing about 2.1% of expected global oil production. Foreign disruptions of this magnitude would have more serious effects on oil prices and the economy than we have seen with the Katrina and Rita hurricanes. Oil prices, however, would rise more and for longer than a few months or a heating season.

The approach identified four major supply regions where disruptions are most likely. These regions account for approximately similar shares of total world oil production. Collectively, they account for about 60% of total world oil production. The study lumped Algeria, Angola, Libya, Mexico, Nigeria, and Venezuela as the first region, called ‘‘West of Suez.’’ Saudi Arabia was the second region, and other Persian Gulf states—Iran, Iraq, Kuwait, Qatar, UAE, and Oman— were the third. Russia and the Caspian states comprised the fourth region.

The riskiest areas were the Persian Gulf countries outside of Saudi Arabia and several countries along the Atlantic Basin, such as Nigeria and Venezuela. The least risky area was Russia and the Caspian states. Although the participants found the possibility of disruptions was lower in Saudi Arabia than in several other vulnerable regions, disruptions there would tend to have larger effects.

In the second study on the economic consequences of a major disruption, we sought to understand how easily the economy could absorb such a shock. Figure 1 shows that oil price shocks preceded 9 of the last 10 recessions in the United States.

This finding was first advanced by Professor James Hamilton at University of California at San Diego and has been confirmed by numerous other researchers.

Some people think that oil shocks may not be a problem because the Federal Reserve Board could intervene and lessen the impact. I have a great deal of faith in the Federal Reserve Board. They have done a marvelous job in controlling inflation, which places the U.S. economy in a better position for offsetting oil disruptions than in previous decades. I am not yet convinced that they can compensate the economy for a large devastating disruption. They would have to make some important decisions very quickly at a time when fears were running rampant. They may also find it difficult to stimulate the economy because nominal interest rates are already very low, not only here but also abroad. For this reason, I think that the United States should seriously consider other types of insurance policies that would allow the Federal Reserve Board more leeway and flexibility in controlling our inflation rates.

As a general rule, strategies that reduce our dependence on oil consumption are more effective than policies that reduce our imports. One should view the world oil market as one giant pool rather than as a series of disconnected puddles. When events happen anywhere in the market, they will raise prices not only there but also everywhere that connect to that large pool. Since reducing our imports with our own production does not sever our link to that giant pool, disruptions will cause prices to rise for all production, including that originating in the United States. More domestic supplies do not protect us from these price shocks.

As a result of the 1970 oil price shocks, we shifted away from oil in many sectors in the early 1980s, but that trend has slowed considerably since then. Moreover, transportation remains strongly tied to oil use. The dependence on oil in transportation not only affects households directly through higher gasoline costs but it also raises the costs of transporting goods around the country.

In summary, the nation is vulnerable to another major disruption not because the economy imports oil but primarily because it uses a lot of oil, primarily for gasoline and jet fuel.

Oil-importing governments have committed significant political and military resources to the Middle East over a number of decades in order to provide regional stability that is critical to world oil supplies. Excessive exposure to oil vulnerability risks in this country increases these costs or reduces the capacity to pursue foreign policy objectives that are for mitigating nuclear proliferation, terrorism, and other risks that reduce global security.

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