Transcript: “Economics of America’s Oil Dependence”
WILLIAM SQUADRON, President, OurEnergyPolicy.org
REPRESENTATIVE PETER WELCH (D VT), Co Chair,
Congressional Peak Oil Caucus
REPRESENTATIVE ROSCOE BARTLETT (R MD), Co Chair
Congressional Peak Oil Caucus
THE HONORABLE J. BENNETT JOHNSTON,
Retired U.S. Senator from Louisiana; Chairman,
Johnston & Associates
ROGER BEZDEK, President,
Management Information Services, Inc.; Co Author,
The Impending World Energy Mess
EYAL ARONOFF, Co Founder, Quest Software;
Member, Set America Free Coalition
YOSSIE HOLLANDER, Founder and Chairman,
12 noon to 1:30 p.m.
Thursday, July 14, 2011
2325 Rayburn House Office Building
MR. SQUADRON: Welcome, everybody. As you take your seats and stand along the wall, thanks for coming today.
I’m Bill Squadron. I’m the President of OurEnergyPolicy.org, and we’re very pleased to be hosting this event with the Peak Oil Caucus. In particular, our appreciation goes to Congressmen Roscoe Bartlett and Peter Welch, who will be saying a few words in just a minute or two, for helping us organize this event and hosting it with us.
This is the most recent in a series of events that our organization has organized here on the Hill, and for many of you who are new to our organization, which is two years old now, we facilitate dialogue mostly online on energy policy issues. We’re a nonpartisan organization dedicated to the promotion of sound energy policy by opening up a broad based, serious, substantive discussion of energy policy issues and then making that dialogue available as a resource to many of you, people on the Hill, in the administration, to the media who are working on these issues on a daily basis, so we are delighted to be able to host this event.
The transcript of today’s event will be posted online in a special chapter of OurEnergyPolicy.org at which point we will then open it up to ensuing comment by our coterie of experts, and anyone here today, if you are not already registered as an expert participant in our discussion, we would urge you to do so and join that discussion, which has been growing very rapidly particularly this year.
So thank you again for coming. First, what we are going to do is have some opening remarks by the caucus co chairs and then turn it over to Yossie Hollander, the Founder and Chairman of OurEnergyPolicy.org, who will moderate the panel.
So, first, from the State of Vermont, Congressman Peter Welch.
REPRESENTATIVE WELCH: Thank you, Bill.
You know, it’s great to be here with my co chair, Roscoe Bartlett, who with Tom Udall in the 110th Congress began the Peak Oil Congress, and the Senate’s gain, Tom Udall, turned out to be my gain. And Roscoe approached me to see if I would try to fill in for Tom, and it’s been a pleasure to work with Roscoe who has been a leader on this.
I noticed that the mission here is to have, on OurEnergyPolicy.org, a substantive and responsible public dialogue. There’s not much of that. I’m a Member of Congress, and substance is often absence in our conversations. And I’ll tell you, one of the problems is that with energy policy, there are always trade offs, so you do have to have people engaged in what the trade offs are, so that we talk about energy policy with the perspective of trying to make a policy that’s going to be good and sustainable and do as much as we possibly can for the environment.
So I appreciate the work of the panelists, the interest of all of you who are here, and it is absolutely important that that substantive conversation inject itself into this political decision making process that gets so convoluted around here.
So I’m delighted to be here with my co chair, and I’d like to introduce Roscoe Bartlett, one of our senior and most respected Members of Congress who is passionate about this issue, oftentimes organizes Floor Special Order presentations where in fact he’s a breath of fresh air of substantive public discussion about a very serious issue.
Mr. Bartlett. Thank you.
REPRESENTATIVE BARTLETT: Thank you, Peter, very much. Many thanks to my colleague who has joined us.
I tell audiences that the innocence and ignorance on energy matters across our country is astounding, and with few exceptions, we have truly representative government.
REPRESENTATIVE BARTLETT: I’ve been to the Floor, as Peter mentioned, 52 times now over about nearly a decade talking about peak oil. I was out there when this really wasn’t a popular subject at all, and I kept telling audiences every time, “I hope I’m wrong.” Every night when I go to bed, every morning when I get up, I pray that I’m wrong, because if I’m right, we have a very rocky, challenging future ahead.
I just have three little slides I’d like to show in kicking this off, if we can have the first one.
Okay. This is a report of the IEA (International Energy Association), a creature of the OECD, and it came out in ’08, and I want you to look at some significant things there. The dark blue at the bottom is the oil we’re getting from our present fields that we’ve been pumping for 150 years now, and they believe that these have reached the peak, and they’re going to have some dramatic fall off after that. The big wedge on top is the liquid fuels that come from natural gas. That won’t be in your gas tank. That’s propane and butane and things like that. Unconventional oil, the little green one under it, that one is the tar sands of Alberta, Canada, and heavy sour for Venezuela and things like that, the little dark red one there.
And they did this over two year, two years from this in ’10. I’ll show you that one next. That one disappears and shows up as a part of where it should be of some of the conventional oil, because it’s just getting a little bit more out of conventional oil. Then they put two wedges in there, so they can continue to have an increase in the growth of other production of oil, and the light blue edge there is exploiting fields we found, like under 7,000 feet of water, 30,000 feet of stone, rock in the Gulf of Mexico, and the bright red wedge there is fields yet to be discovered. Notice that the total amount of liquid fuels that we’re going to have by 2030 is 106 million barrels a day, up from the toughly 84 million barrels a day that we’ve been stuck at for about five years now.
The next slide shows when they’ve redone this and looked at it again in 2035. Now they go out to 2035, and they looked at this two years later in ’10. They switched the colors, the colors and the two things on top, but they are the same. They just have put the unconventional oil on top and natural gas liquids under that. Notice a dramatic fall off in the production from our current fields that we’ve been pumping now for 150 years, and they now have included the enhanced oil recovery in that. They show two very generous wedges there that means by 2035 that we’ll be getting way more than half of all the oil that we’re producing from fields from which we’re getting nothing now. Those two edges in my judgment will not happen. We will get something from those. It will be nothing like that.
And the next chart shows you why I am so confident that that is not going to happen. The next chart shows – I hope there’s a next chart. Ah, this is the next chart. This shows what happened in the United States. In 1956, you can see where we were on the curve in ’56.
M. King Hubbert predicted that we would peak in 1970, and from after that, the oil production would go down. He did not include Alaska. He did not include the Gulf of Mexico. You know, we have tried like the devil to make M. King Hubbert out a liar. We found a lot of oil in Alaska. We found a lot of oil in the Gulf of Mexico, and the Alaska, huge Alaska find, was just a blip in the down, down, down curve.
Today, we produce about half the oil that we produced in 1970, in spite of the fact we found a lot in Alaska, we found a lot in the Gulf of Mexico, and we have drilled more oil wells than all the rest of the world put together.
So I really feel kind of bad that I’ve been vindicated because I had hoped that what I saw as the probability was not going to be, but here we are. And your government has paid for four reports, the Hearst report, Corps of Engineers report, the GAO report, and the National Petroleum Council report, two of them issued in ’05, two of them in ’07, all saying the same thing. The peaking of oil is either present or imminent with potentially devastating consequences.
Your government didn’t want to hear that, so they didn’t pay any attention to it. They put them on their shelf where they’re collecting dust. They need to peel them off and look at them again because I think we’re here. I think this is the biggest problem facing the world in the future. I think that energy is going to be the overarching problem dwarfing every other challenge that we have.
The Chinese are buying reserves of oil all over the world. We have only 2 percent of the world’s oil. We use 25 percent of the world’s oil. We’re not buying oil reserves anywhere in the world. I hope you have a better explanation as to why they’re doing that than I have, because they’re simultaneously building, aggressively building a blue water navy. I think the time will come when they’re going to say, “Gee, guys, I’m sorry, but it’s our oil, and we can’t share it because we have a billion three hundred million people, and we have 900 million people in rural areas, that through the miracle of communications understand the benefits in an industrialized society, they’re saying, hey, guys, what about us, and we got to meet their needs, so we’re not going to share that oil. And we have a military big enough, that we’re going to use that oil for ourselves, and you can’t share it with us.” Those would be tough times, wouldn’t they?
Thank you very much for coming here today. Thank all of you for your concern about this matter. Thank you.
MR. SQUADRON: Thank you very much, Congressmen.
We’re going to now move to our panel. We are very privileged today to have a tremendously distinguished but also diverse panel, so we’ll hear some really different perspectives on this critical issue, which is really in large measure what OurEnergyPolicy.org is all about, bringing together diverse perspectives and allowing that kind of debate to take place in the sunshine.
What we will do is turn it over in a minute to each of them to make short presentations, and then Yossie Hollander will moderate the discussion. And there will be question and answer from those of you in the audience, and so when we do pass around the microphone for Q & A, please be sure to identify yourself because, as I mentioned earlier, there will be a transcript of this made available through OurEnergyPolicy.org.
I’m going to give very brief introductions. The bios of our panelists are tremendously long, and we don’t want to take up all the time with introductions, but to my far left, Eyal Aronoff who is a successful, I should say very successful, software entrepreneur and engineer, including being the Co Founder of Quest Software, who most recently over the past few years has devoted his energies to the area of oil dependence and working particularly through the organization Set America Free, has been a major contributor of strategy, innovative thinking, writing, and funding on the issue of the world’s dependence on oil.
To his right is Roger Bezdek who is the Founder and President of Management Information Services, Inc., a major energy and economic research firm headquartered here in Washington. He has spent 30 years as an executive, advisor, government official in the energy, environmental, and utilities area. He’s written extensively — six books, more than 300 articles, including most recently published last year The Impending World Energy Mess. So he is just to Eyal’s right.
And then to his right, the Honorable Senator Bennett Johnston from the State of Louisiana who served here in the Senate from 1973 to 1996, as the Chairman or Ranking Member of the Senate Committee on Energy and Natural Resources as well as the Chairman or Ranking Member of the Subcommittee on Energy and Water of the Senate Appropriations Committee. Since his retirement from the Senate, he formed Johnston & Associates, which is a government relations and consulting firm here in Washington, but serves on numerous committees, councils, boards in this field, including chair of the Advisory Committee to the MIT study on the Future of the Electric Grid. He’s on the Oil and National Security Council.
And we’re delighted to have all three of you here today. Thank you.
I’m now going to turn it over to Yossie Hollander. It was his vision that formed OurEnergyPolicy.org, and he will be the moderator here today. Yossie?
MR. HOLLANDER: Thank you.
This is first of all about conversation, so you will have plenty of time to ask questions, and that’s the idea. The idea is not to hear like one answer from everybody. We have very different people talking here, and each one will probably present a very different angle on the whole problem.
But every one of them have many years of experience in the oil area, but I don’t think that anybody has been around the oil business more than Senator Johnston, so I think that buys you the starting point.
SENATOR JOHNSTON: Thank you very much, Yossie, and I have been around a long time.
Ever since President Nixon in 1973 declared Operation Independence where he said by 1985, we were going to be independent of foreign crude oil imports – of course, we’ve gone up every year since then – it has really been a pipe dream that we were going to really have energy independence. It is not today a pipe dream because of one thing, and that is methanol.
Let’s see if I can get this to work.
Methanol can be made from natural gas, of which the recent studies show we have 150 years of natural gas because of shale at today’s rate of consumption. We’re the Saudi Arabia of coal, and methanol can be made from coal.
Now, in a recent study by MIT on natural gas just released this month – full disclosure, I was a member of the advisory board on this study – it shows what the cost of methanol on an energy equivalent basis is compared to gasoline. At $4 a million BTU, that’s the same thing as an MCF roughly. You say the cost reduction is about a dollar a gallon less than gasoline. You can see as the price of natural gas goes up, even at $8 million a BTU, you save 30 cents a gallon. This is on an energy equivalent basis.
Methanol can be used in a tri flex, light duty fuel. You know, we have now some 500,000 cars which are bi flex, can use alcohol or gasoline, and for $100 to $200 more – this is a quote from the study – you can have a tri flex fuel, very reasonable cost to be able to use methanol. It can also be used for long haul trucks, as that states. If the present oil to natural gas spread is sustained, there will be materially increased opportunities for use of natural gas based transportation fuels. That’s the conclusion of this study.
Now, in effect, you can massively reduce the dependence of the United States on crude oil by utilizing methanol. So, if that is so, why aren’t we doing it? What’s the catch? Well, the catch is that four things need to occur simultaneously in order to go to methanol. First, you must have a supply of methanol, and methanol is manufactured throughout the United States, but you have to have it available for use as a fuel. Secondly, you must have the tri flex fuel cars, which you have seen for, according to MIT, $100 to $200 additional over bi flex. You get the cars. Third, you must have the pumps available, and fourth, you must have public acceptance of methanol.
And in order to get that done, you need a demonstration project done by DOE. As a matter of fact, we had a demonstration project underway in the early ’90s, some 15,000 cars, and then the price of crude collapsed to below $20 a barrel in which event it seems rather pointless to move to something that’s cheaper today but was not cheaper at that time.
But the Chinese, wouldn’t you know, are undertaking a big demonstration project on methanol. From the May 2011 Conference in Kuchen, China, on methanol fuel, here are some of the points. First of all, “Ministry of Industry and Information is the main governmental driving force fully supporting and promoting the applications of methanol fuel.” That’s a quote from the conference. Consumption of methanol in 2010 was 22.7 million tons, targeted to increase to 190 million tons by 2020; in other words, it’s going up about, I think that’s about nine times. Presently, there are 35,400 modified cars in China.
Now, these figures will show how important it is to have a demonstration. There are various fuel mixtures which they’re testing, M15, which is of course 15 percent methanol, 30, 40, 50, 85, and 100; however, it is necessary to have additives in order to enhance the efficiency of the fuel to get the greatest power and also to resist the corrosion and also for purposes of clean air. In other words, you need to experiment with these various fuels to determine which is the best. They need to be certified and standardized, so that companies who would manufacture them will have confidence that they will operate well in the cars.
There are presently some 400 possible additives, so you can see the necessity for standardization and for testing, but that’s what they’re doing in China. One particular experiment in Shanghai with diesel engines is using 40 percent methanol and 60 percent diesel. Exhaust pollutants are decreased. Uphill and acceleration power increase. This is from the study. Significant economic benefit, 50 percent cheaper than regular petroleum. So, in other words, this is a real deal. This is not pie in the sky. The Chinese are doing it. We did it. We’ve got a lot of experience with methanol.
Indy 500 cars for two decades use methanol. We know it works, and it’s cheaper. Of course, not everybody is for it. The corn ethanol people are not enthusiastic about it. I mean, the competitors would not be enthusiastic about it. It does not solve all the problems of clean air, although it is marginally cleaner than gasoline, but there are two things about methanol for the United States which differs from all other so called energy independence proposals, two ways it differs. First, it can actually work, and secondly, it would not require a permanent subsidy. There’s virtually no other solution that does not require a permanent subsidy, and most of them massive subsidies. Look at corn ethanol, for example. We’re a dollar cheaper than corn ethanol per gallon.
So my message is that methanol can really work if we will begin as a nation to do the necessary testing, certifying, and then it can really reduce our dependence on foreign crude.
MR. HOLLANDER: Our next guest is Roger Bezdek. He will give you a different angle on another aspect of the oil market and where it is going, and you can buy his book.
MR. BEZDEK: I’d like just to pick up on some of the things that Congressman Bartlett and Senator Johnston have already mentioned.
Next slide, please. There’s a couple of messages I’ll get through here in the seven or eight minutes. I’ve only got a couple of slides.
Currently, the world oil production, total world oil production is on a plateau. It hasn’t increased in about five or six years. It’s not going to increase, and it will likely be decreasing beginning within the next few years. There is a correlation between oil production and GDP, so when oil production declines, world GDP will also be declining. There will be no quit fixes, and societal proprieties, energy, environmental, institutional, political, will have to change dramatically and quickly.
Next slide, please.
As I mentioned, this is not a forecast or hypothesis. These are actual data from EIA and IEA. World liquid fuels production has not increased. It’s been on a fairly narrow plateau since 2004, 2005, over a period where we had huge economic growth and the worst recession in 70 years. Oil prices have varied between $30 a barrel and $150 a barrel, and you can see liquid fuel production simply hasn’t changed all that much. Within two to five years, we believe on the basis of massive amounts of empirical data that world oil production will probably begin to decline.
Next slide, please.
As I mentioned, there is a strong correlation between world GDP growth and oil production. The correlation does not imply causality; however, you can argue this for months or years if you want on which causes which. Economists have been arguing for many decades over how oil shortage, oil shocks cause recessions and depressions, but the situation does not look good. We lose oil in the world markets; economies tank.
Next slide, please.
If that is the case, and it has been the case certainly since the late 1960s, and world oil production continues to be on this plateau and then begins to decline at a rate that may be in the range of 3 or 4 or 5 percent a year, then world GDP will most likely begin to decline as well because, as has been often said, oil is the life blood of the world economy.
To echo Congressman Bartlett, I hope it never happens, but it’s liable to happen in the next three or four or five years.
Next slide, please.
What happens when world oil production begins to decline at a rate of 2 or 3 or 4 percent a year? Again, it’s the decline rates that are critical of existing oil wells. All existing oil wells decline at the rate of about 3 or 4 of 5 percent a year. If you can’t bring additional production on, which requires several million barrels a day of new oil, just to be discovered, just to stay in place, what happens? Liquid fuel shortages, large increases in liquid fuel prices. Commuting becomes difficult if you have a job still to go to. Inflation increases, growing unemployment and deepening recession until you can somehow begin to mitigate these liquid fuel shortages, working on both the supply and the demand sides of the equation.
Next slide, please.
These two charts on the bottom here, Congressman Bartlett has already talked about these. World oil discoveries peaked in the late 1960s, and for the past four decades at least the world has been consuming every year more oil than it has been finding. That can go on for a while but not forever, for common sense reasons. We’re now consuming – the world presently is consuming about 26 , 27 , 28 billion barrels a year, finding 5 or 6 or 7 billion. Again, this can go on for a while, given inventories and past discoveries, but it ain’t rocket science. You don’t have to be a genius to figure out eventually reality bites.
Next slide, please.
What are the mitigation options? What can we do in 2012 or 2014 or 2015 when we realize that we have a serious liquid fuels crisis on our hands? Well, immediately all we have to work with are administrative options, price controls, allocations, rationing, telecommuting, and forced car pooling, et cetera. That’s the only immediate thing you can do in immediate weeks or days or weeks or months following the crisis.
Physically, over the longer run, you can work on the supply side and the demand side. The demand side is basically more fuel efficient vehicles, which takes decades to implement. You have heavy oil and oil sands. You have coal to liquids. You have gas to liquids. You have enhanced oil recovery, all ways of producing substitute liquid fuels.
The key thing to keep in mind here is the real constraint is time. All of these mitigation options require many years, if not decades, to produce or save significant amounts of oil, and by significant, I’m talking about millions of barrels a day.
Next slide, please.
This is what I’m talking about. The graph on the lower left here simply shows you how many years these mitigation options, all of them in the supply side or the demand side, take to implement. It takes at least four or five years to begin.
Why? If you’re going to build, for example, a gas to liquids or a coal to liquid plant, the construction, development, siting, everything takes a minimum of four years. Then you start to ramp up production, and let’s say you’re building a 50,000 barrel a day coal to liquids plant, perhaps producing methanol, perhaps clean diesel fuel, whatever, 50,000 barrels of day, how many of these you need to build? At least a hundred to make a significant difference. How long is it going to take you to do that, if you can do it? A decade or more and so forth.
Vehicle fuel efficiency. We’re currently working on enhanced – my company is under contract looking at enhanced vehicle fuel efficiency standards. They’re talking about introducing them in 2017 and for new cars becoming effective in 2025, which means they will really begin to save serious amounts of liquid fuel in 2030.
Next slide, please.
Again, the problem here is the decline rate of existing oil wells, something in the range of 3 or 4 percent a year. All this shows you is that you’re going to lose an awful lot of oil from existing wells before your mitigation options. Either supply side or demand side can kick in. That’s why today as we sit here, as we discuss this, we’re already 10 years behind the curve, and every year, we’re getting another year behind.
Next slide, please.
Finally, if world GDP is affected by and correlated with oil production and world oil production is declining and can’t be reversed for at least 10 years, then world GDP will decline, maybe not on a 1:1 basis, maybe on a 1:1 basis, something in that range. If it’s on a 1:1 basis, a simple estimate is that within a decade, world GDP could be decreasing on an annual basis by 15 percent. Even if we’re wrong by a factor of 3, it’s a catastrophe for the world. Even a 5 percent annual decrease in GDP is worse than the recession that we’ve just been through, the worst recession in 70 years.
The world has never faced a problem like the decline in world oil production. Congressman Bartlett has been speaking out for many years now, so also have we. He hopes he’s wrong, and I hope we’re wrong, but I think we’re right, and we’ve got a very serious problem ahead of us in the not too distant future.
MR. HOLLANDER: Next will be Eyal Aronoff.
MR. ARONOFF: Thank you, Yossie.
You know, you said one thing about OurEnergyPolicy.org, that it stimulates discussion, but today we have lots of agreement, because I’m going to repeat a lot of the things we talked about.
I was asked to talk about the economic impact of high oil prices. So, first of all, I wanted to give a little context, if you can play it up.
Okay. So this is our energy budget in the United States. What you can see here is that the top part, which is our oil consumption in 2010 was about $500 billion, and you can see the rest of the fuels we’re using, biofuels about another 5 billion, natural gas about another 150 billion, coal about 30 billion, nuclear and renewable another 30 billion. So right off the bat, what you can see is petroleum and petroleum products is the vast majority of our budget for energy source in the United States.
You also see that the sector that uses these products are by far transportation. Okay. Electricity, the entire electric bill for the United States – this is just fuel, $100 billion. The entire electric bill for the United States was $127 billion, still far away from the amount of money we paid for transportation fuels.
Now, let’s see what happens since 2010. Our energy bill in the United States, the cost of fuel went up, but the cost of fuel of the largest component of fuel went up by a lot, and so now we are looking with the last 12 months, it’s around $600 billion for petroleum, petroleum products.
So why is it happening? How many of you have been to China? The rest of you have to go.
MR. ARONOFF: It’s incomprehensible what’s happening over there. Think about New York size metropolitan area popping up every year. They have a plan to bring 50 million people from the rural areas into the cities every year. So what happens is that that creates incredible rise in demand for oil , and we’re talking about 2.4 to 2.6 million barrels a day in the last 12 months. Well, new production, as we heard, went up by an estimated 800,000 barrels of oil, and a lot of it is liquid, natural gas liquids, which is a byproduct of our natural gas industry and not of our oil industry.
So what happens is as long as this trend continues, we should expect a long period of rising oil prices. Okay. So what is the economic impact of those high oil prices? So we looked at simple correlations. What is high oil prices correlated to? Well, the two glaring correlations is food prices and unemployment, and the two negatively glaring correlations is discretionary income, which goes down when oil price goes up, but the most surprising one is house prices. House prices are negatively correlated to oil prices, and the reason is as we spread our urban population out to the suburbs, commuting becomes a very important part of our life, but the cost of houses out in the suburbs and in the far burbs are dependent on your budget for commuting. So, as that budget becomes more expensive or a larger portion of your budget goes to commuting, the amount of money you can spend paying your mortgage goes down. So the value of the house goes down, and the fear is that as this process continues, then we can get into a situation where the banking system can destabilize again.
So this is the issue with the banking systems. On the short term, the banking systems love – the financial institutions, they love what’s going on right now because they have a great mechanism making lots of money, and we saw that in 2010, Goldman Sachs made 7 percent of their profit from the commodity, for specifically the oil trading. This is an unbelievable – I think it’s a tragedy, personally, because these guys are making few hundreds of millions, the economy is losing few hundreds of billions, and it doesn’t really have great value add to trade commodities.
Longer term, of course, the situation changes because, as the price of houses decline, mortgage default increases, and as mortgage default increases, the stability of the banking system decreases. And once again, we can get into the territory of systemic risk, which we were in 2008.
So what can be done? We have two proposals going on right now. One is “drill, baby, drill.” The other one is fuel efficiencies, standard improvements.
Okay. So, hey, today there’s a record amount of drilling in the United States. We have more drilling going on right now than we’ve had since the beginning of the ’80s when the United States was still an exporting country. Yet the prices are almost a hundred dollars. So drilling by itself, just drilling is not reducing the price, because improving production by few hundreds of thousands of barrels of oil is not going to reduce the price when the demand is rising by 2 point something million barrels of oil a day.
How about fuel efficiency standards? Well the developing world is using less oil now than we used in 2005, but the growth is not happening here anymore. It’s not about us. It’s about emerging markets, and urbanization is an out of control train. Urbanization is dependent on transportation. Their emergence from poverty is dependent on urbanization, so they will become more and more dependent on transportation, and it’s regardless of what we do.
Okay. The only market solution out there that knows how to deal with high prices is competition. We cannot do rationing. All of that stuff has been tried. The only thing that really works is competition, and competition means that somebody needs to be able to make a choice. So, if the government makes a choice for you, so for example the renewable fuel standard, the government is saying, “Oh, we are going to use certain percentage of fuel be renewable fuel,” because the end, the consumer is not making any decision, this is not competition. So the goal is to give the consumer the ability to make a choice, and they will choose the thing that is best for them.
So what are the choices? Right now we are really talking about four scalable fuels out there that can address the issues of millions of barrels of oil, and there, natural gas by itself can be a great fuel or as we heard can be converted to methanol. By the way, methanol can be created from algae, from trash, from biomass, and so on, electricity and ethanol, which today in the United States we generate it mostly from corn but can also be generated from any other biomaterial.
All these fuels are produced domestically. All these fuels generate American jobs, and they’re all positive to greenhouse gas emissions, every single one of them. And here is the kicker. Every single one of these fuels is less expensive than gasoline today. We heard about methanol. Okay. The price of methanol today is without scalability, as the market for methanol is only like the chemical industry and some technical institutes, so the price can go even further lower.
So how come we have lower cost fuels and we have great demand in the market, yet the price signal is not reaching the market? We are not driving on all those alternative fuel costs. So what we found is that there are three interconnected monopolies that prevent competition in the market. We use the word “monopolies” loosely here, but the car can only run on petroleum, so the car platform is a monopoly for fuel. The gas stations are franchise organizations of the oil companies, although the ownership is complex, but they really want to sell you gasoline. They don’t want to sell you ethanol or methanol, or they don’t want you to make choices where it comes to fuel. Just like in Burger King, you are not going to get a taco.
And then the emission regulations were put together, were put in, in order to improve our air, but the result is that over the years, these emission regulations become barrier for competition in the market.
So what needs to be done? We need to open the fuel car to competition. So we have the Open Fuel Standard as one of the proposals. We have to open the fuel supply to competition, and we have to simplify emission regulations such that one of the missions of the regulators should be to enable competition. So we want more competition with cleaner air.
And that’s it. Thank you very much.
MR. HOLLANDER: Well, we’ve heard some forecasts. Can you be more specific? I know it is dangerous to be forecasting, especially about the future, but what do you think the timeline is? What time do you think prices – I mean, what happens when the demand rises very quickly and supply goes down and the price goes up? When do you think we’ll see $200 oil? Do you think we’ll see it? Do you think it’s coming around? Who wants to take a shot at that?
MR. BEZDEK: When are we going to see it? See what? I mean, the forecasts for 2012 are already – you know, these are the Goldman Sachs or the major forecasting houses, financial houses, $125 a barrel oil, $150 a barrel oil. This is next year. This is 2012. Could it go that high? Maybe. Maybe it won’t. I mean, there are many factors involved in oil markets.
Will we see $200 a barrel oil? It’s not all unlikely within a couple of years, I fear. Just a couple of years ago, oil was in the range of $20 to $30 a barrel, and if you said it would be $50, they’d think you’re crazy. Well, as you know, a couple of years ago, it peaked at almost $150 a barrel, and during the recessionary time, like the present, they’re talking about the Oklahoma price or the Brent price, $100 to $110 a barrel. When the world economy turns around, the U.S. economy gets back on track, Europe, Japan, China, the developing countries, I wouldn’t be at all surprised to see $150 a barrel oil. This may tank some of the economies. Oil will be going back down to $100 a barrel, but there’s an unfortunate synergistic relationship as the price of oil spikes, it will derail many of the economies of the world, primarily the economies of the developing world. They cannot cope with it.
MR. HOLLANDER: Anybody want to add something?
SENATOR JOHNSTON: Let me just say it depends. I mean, do we do methanol, or do we have peace in Iraq? Does Iran get online? Does Libya get online? All of these things. So it’s unknowable, except we know the direction of the price is up.
MR. ARONOFF: Well, if we just look at the existing supply spare capacity and we look at the rate at which demand is growing for emerging markets, particularly in China because in China we also get subsidies of the state that subsidize oil, we probably have three to four years until this demand meets supply. And at that point, really it’s very hard to know what the price would be.
If the price is $200 for long in the United States, it can’t be, because the economic infrastructure of this country fails. So it can spike to $200, but at $200, we are talking about $8 a gallon. We are talking about 40 percent of the population cannot afford to drive to work.
MR. HOLLANDER: Can I ask you – we’ve been talking a little bit about economy, and you’ve been around for a very long time, but most discussion about oil has been how much did I pay on the pump really but not analyzing the other effects, like you showed the connection between GDP and the price of oil. Most of the discussion has been about energy security and sometimes about environment, but there’s hardly any real discussion that you hear around about what’s the connection between oil and the economy. Why is it?
SENATOR JOHNSTON: Well, I think it’s the most important issue. I mean, look, there’s going to be plenty of oil if you’re willing to pay the price. I mean, supply and demand in one sense are always in balance. It’s just that when the supply is way down, the price is way up, and when the price goes way up, the effect on the economy is terrible.
So, I mean, there’s no doubt about it. The recession right now is, to some large extent, caused by the high price of gasoline.
MR. JORDAN: My name is Jim Jordan. I’ve been in this business since 1970 as an energy expert for the Navy’s R & D program and in the Senate for 10 years with Senator Johnston. I’ve stayed with it pretty closely looking at it, and let me give you some standards, okay?
The price of oil is going to keep going up and the price of any substitute oil is going to keep going up, as long as we use internal combustion engines, that kind of thing, and our economy is dependent on this kind of mobility. And it’s fundamental to us.
So, when the price goes up, people lose their jobs. The income is dropped. The amount of money you have available to spend on anything goes down, because fundamental to the basics of life, food, which we’ve already seen the chart, the oil drives the food prices up. It drives the cost of getting to work, this kind of thing, up. So what we do is stay in sort of a permanent slow recession, sort of like we’re in now, you know, with no growth at all, by a couple of percentage points a year at the most ever, and so we can’t keep up with the job demand. So people really sort of like slow down. Our standard of living drops off markedly, and we’ve become what’s called an elegant but formerly rich nation along with the other countries in the world. I call it “pleasant living in the English countryside” is what we’re going to do, fishing every day to get out food. So that’s what I’m saying is going to happen, oh, in the next 20, 30 years. It’s impossible, it’s inevitable, we’re going to all come down in our standard of living, because we’re sharing a lot of these world resources, and even if we had plenty of oil, there will be some other resource shortage to take care of these newly affluent groups of people in the billions. In the billions. Just think about India and China. That’s 2.4 billion people that are competing with this tiny bunch of 310 million in this country.
So it’s inevitable that our standard of living drops down, and the idea
MR. HOLLANDER: Do you think, guys, that this is inevitable?
MR. BEZDEK: No.
MR. JORDAN: I do. I am pretty certain it is.
MR. HOLLANDER: So why not?
MR. BEZDEK: Well, as an economist, countries of the world have been competing for scarce resources for several centuries now. In general, the growth of the Indian and Chinese economies are good for the U.S. They’re good for Europe. They’re good for Japan. They’re great additional markets.
We have a liquid fuels program that we have not, as Congressman Bartlett said – have not addressed for 30 years. It doesn’t mean it’s insoluble. As Senator Johnston mentioned, we have abundant resources of natural gas and coal in this country that we could convert to liquid fuels, and if we had started five or six years ago, we wouldn’t be facing this chasm that we face in the next several years.
We have the technology. We have the inventiveness. There are just too many institutional, environmental, administrative constraints from allowing us to exploit that. As mentioned, the environmental regulations are one of them. The fact that we can’t build anything in this country, any kind of infrastructure, gas to liquid plants, coal to liquid plants, bridges, tunnels, anything in this country is a travesty, and why is it that the greatest engineering country in the history of the world can’t build anything anymore? Enough said.
No, it’s not inevitable, but it may happen.
MR. HOLLANDER: Anyone, anywhere, comment?
SENATOR JOHNSTON: Well, it is very hard to predict what’s going to happen. I’ve been around in energy, I think, longer than anybody in this room, and I can tell you that all the surprises in energy have been huge unexpected surprises, including the first oil shock in 1973, including the so called “Iranian oil shock” in 1979, the gas bubble, the decline in oil prices, et cetera, et cetera. None of it has been predicted. Shale gas was not predicted.
So I won’t say it’s so much inevitable. We know what the direction is, and we don’t know what policy makers are going to do. I said up there that you needed a demonstration project in order to get to where you’re supposed to be going. Will we get it? You know, I don’t know. A lot of you are staffers. Do you think the Congress would do that? You know, there’s a lot of political opposition to that sort of thing. If you’re in the corn ethanol business, you want corn ethanol to be the exclusive fuel. If you’re in the electric car business, you know, you don’t need methanol, et cetera. There’s so many unknown things in terms of policy and in terms of breakthroughs in science.
The direction is bad, but the inevitability depends so much on us. I mean, for example, can you tell me whether the debt limit is going to be extended? If it’s not, that’s going to affect the fuel balance, I can tell you, and everything else in this country.
MR. HOLLANDER: Eyal?
MR. ARONOFF: Well, first of all, I want to say that I am an entrepreneur, and I believe in the innovative spirit of the American people. And if the government would step aside and let us innovate, we’ll find solutions.
So we delegated to the government a lot of the responsibility that otherwise are people’s responsibility here in this particular case, and we talk to entrepreneurs all the time, innovators. We have people here that research existing solutions and find new solutions emerging. There’s an unbelievable field out there of people trying to find solutions. Their biggest problem is they can’t compete in the market.
If you create today cellulosic ethanol plant from trash, you will not get funding because nobody would want to buy your product. If we let this fuel compete, all of a sudden new solutions will emerge.
An example is methanol. Today, there is no standard for methanol fuel in your car. Maybe your car today can run on methanol, but it’s illegal. If we make this happen, people will come up with ideas of how to make it happen.
MR. HOLLANDER: Okay. At this point, I would like to get some questions from the audience. If you want to speak, raise your hand, and you will get a microphone for the recording.
MS. HUNT: Hi. Suzanne Hunt with the Carbon War Room.
Actually, Eyal, I think that’s a great jump off point. I am one of the folks in the room that does work on these alternatives to fossil fuels. Especially, my focus is renewables, and I thought it was interesting that Eyal was the only one who mentioned renewables. So I would suggest to OurEnergyPolicy.org, and I would volunteer to help, with maybe a follow on where we bring in some of the entrepreneurs that are working on these renewable fuels beyond ethanol, beyond methanol, and all kinds of interesting renewable hydrocarbons, because there’s an enormous amount of innovation going on, an enormous amount of money being poured into this.
And I would just offer to help with that, and I think there are a lot of – because there are so many young people in the room, it’s important to go from this daunting picture to Eyal’s point about the innovation and the entrepreneurism, and so many things that make our – so many things that are under development that make our standard of living better that are exciting from all of the gardens going in locally where you don’t have to transport food as far to all kinds of interesting things that make our lives better. So I just want to make sure we have a bit of a hopeful picture added on.
And then I would just add, you know, when we used horse and buggies and there was a hay shortage, it was this huge crisis. When we ran all the ships on coal, a shortage of coal in one location, that was a huge crisis. So I would just say the picture is bigger, and I think Eyal’s point, I just want to reiterate his point about letting these alternatives compete in the marketplace.
MR. ROSENSTOCK: Hello. My name is Steve Rosenstock. I’m with the Edison Electric Institute. After this presentation, I’m really glad I drive a plug in hybrid vehicle.
But my question is you were talking about the world economy. In many of these oil exporting countries, they subsidize the price of gasoline and diesel to well under a dollar a gallon. I believe in Venezuela, the price of gasoline is about 20 cents a gallon basically, and their demand is growing like 7 to 10 percent per year, so that’s also, I’m sure, somewhere in your equation to where what is the impact of some of those policies in terms of the actual oil for export in terms of some of your analysis.
MR. HOLLANDER: Anybody?
MR. ARONOFF: There has been a lot written about the fact that although in some cases oil production is increased, for example, in Saudi Arabia, the available oil for export is decreasing and decreasing significantly because local demand is increasing. We’ve seen that in Mexico. Mexico is no longer expected to be an oil exporting country within the next five to six years, and they are our second largest source of oil.
So the world oil equation is changing, and the thing is this, that we have to be proactive. We can’t just wait for it to happen, because it’s going to happen. We have to be proactive.
SENATOR JOHNSTON: Let me say one thing. We’ve talked about the need to let these other fuels compete. I’m very much a free market man; however, there is an essential role for government. Government must fund, in the case of methanol, demonstration projects. In the case of nuclear, if you want the nuclear option, you’re going to have to have some subsidy of the new plants to come online. If you’re going to say just go ahead and compete, okay, forget nuclear.
The same thing would be true of cellulosic ethanol. I mean, it’s not that you want cellulosic ethanol to be able to compete in the market. It can’t. There’s not a single cellulosic ethanol plant, commercial, in the United States today, not one. However, the hope is that through innovation and entrepreneurship that we can bring those along. There’s the role for government and getting these new technologies started. I don’t think they should be permanent subsidies. That’s the problem. You get started with corn ethanol, and it gets to be a permanent subsidy where it is picked out in preference to other things, but you must have that proper balance of the role for government, which is not permanent but is essential to get entrepreneurs started and to bring these fuels along, so that they can be competitive.
MR. HOLLANDER: Roger?
MR. BEZDEK: I would agree with what both fellow panelists have said.
There is an essential role for government. It’s research, development, demonstration, pilot plants, things along these lines, and maybe some time limited subsidies, but the idea of continuing heavy subsidies with these various alternatives going on forever, in some cases decades, is ludicrous, whether it’s Venezuela or whether it’s the U.S. That is not the way to approach energy rationally, and the more free market entrepreneurial solutions we can get, the better.
MR. HOLLANDER: I want to interject a little bit here and maybe contradict some, a little bit in some ways what’s been said.
The reason we don’t have a cellulosic ethanol industry right now is the same reason we’re exporting ethanol to United Arab Emirates and Brazil. I don’t know if you know, but last year the United States exported a lot of ethanol at $2.08 a gallon, okay? That’s the number. That’s the average price. No subsidies involved, okay? That’s the real market price. They paid for it with no subsidies.
Why we are exporting ethanol to them and buying oil at a more expensive price from them, that beats me, but it doesn’t beat me. We know exactly why, because the blenders, the people, the distributors of the oil will not buy the ethanol from them. That’s all. So they have to export it.
So, in the same way you cannot finance a cellulosic ethanol plant, because nobody will give you a 10 year contract to buy your ethanol, even if it’s under the oil price today, even if you can produce it under oil price, because the distributors are not interested in getting anything, not just ethanol. Methanol, natural gas, whatever, they don’t want anything in the mix. They want to sell you oil. They own the refinery. The refinery goes down by 10 percent production, they go under. That’s it.
But next, please. We’ll get you.
MR. MUELLER: Jan Mueller with the Association for the Study of Peak Oil.
First, I’d just like to echo Ms. Hunt’s comment that obviously this is a huge challenge. It’s very sobering, but this is going to be uncharted territory, and the power of American ingenuity and the opportunities that this might provide, I’d just like to give a little plug that we will be having a conference here in November right off Capitol Hill where this is going to be the big focus of that conference.
But my question is about economics and how the United States may fare relative to other countries. I was an above average economics major at one time, and I have a way of thinking about this, but I’d love to hear you guys talk about it. My dad is from Germany, and I was just over there shortly. Being in this job, I’m looking around, I’m thinking like Germany will do better than we will. Not only are they sort of set up differently, great train system when everywhere I needed to go on one ticket, but they also have very high fuel prices. And they’re in export – they’re the strongest economy in Europe, arguably, but they hold onto those revenues from those taxes and use them in some other way.
So I guess I’m wondering, comment about this. They live with high prices for a long time, and they do – so how are we going to compare in that experience?
MR. HOLLANDER: So the issue, I’ll put the issue in a different way. Should we have tax on oil and encourage it? It’s another way of asking it, okay? Should we have a tax on oil? Pluses, minuses, what’s your thinking?
SENATOR JOHNSTON: Well, a carbon tax, according to virtually any economist, is far superior to cap and trade. It’s direct. It’s transparent. You can’t game the system. It is politically impossible today, but I think at some point, it will be possible. But if you’re going to have a system on putting a price on carbon, it ought to be directly, in my judgment, through a carbon tax.
MR. BEZDEK: Well, I certainly agree, given the objective, a carbon tax is much more efficient and preferable to cap and trade, and an oil tax or liquid fuel tax or gasoline tax is far superior to CAFE. That does not necessarily mean that you definitely want a carbon tax or an oil tax. Taxes hurt people. They hurt the economy.
If you want to try to reduce oil dependence, if you wish, or people’s use of gasoline or liquid fuels, slap a very heavy tax on it. That will certainly do the trick. It will raise a lot of revenues for the government. It will drive millions of people out of business, truckers for one. People who have to commute for long distances may not be able to afford it. The 50 percent of the U.S. population who live on an income below $50,000 a year spend 15, 20, 30 percent of their after tax income on energy. You want to make them spend an extra 5 percent of that income? These are all questions that have to be addressed.
For people sitting in this audience, an extra 20 or 30 cents a gallon gasoline would be a distraction but not much more than that. For millions of poor people, it would be disastrous, and we have to think about that before we start talking about carbon taxes, oil taxes, and billions of dollars of revenues. Those revenues come from certain people, and energy taxes are extremely v regressive.
MR. ARONOFF: Specifically to your question how does the United States fare in a high priced oil world, so we have the distinction of being the most dependent on petroleum out of all the world, you know, so we consume 20 percent of the world oil or something like it. We get penalized extra heavy.
And in addition to that, our poor are the most penalized, because we don’t have public transportation. So our poor, this is where the regressive tax comes in. Our poor are most dependent on transportation than any portion of our population. So we get penalized twice, so that’s to your question.
But on the other hand, Europe is just as dependent on petroleum, although they use less per capita. The power of petroleum come from – there is something called “price optionality.” Price optionality is the cost of replacement. So, if there is comparable price optionality, you get competition. For oil, there is no comparable price optionality. The result is today we have record inventory in the United States. If you fly, for example, from New York down here to Washington, D.C., you see tankers. It is oil storage. It’s oil storage. So we don’t have current shortage, yet the price is at 100. So the reason is because there is no price optionality in oil, and the Europeans are affected by that just as we are.
MR. HOLLANDER: One last question.
ATTENDEE: Thank you. Sean Schriefer [ph], policy student at American University.
I wanted to return briefly to the point that you were making a few moments ago about what I presume are, well, some sort of barriers or impediments of some sort to blenders, fuel distributors using American production of … I think you cited the example of methanol or–
MR. ARONOFF: Cellulosic.
ATTENDEE: Yeah, cellulosic. I’m wondering if that’s an example of a good government problem that wherein antiquated laws, antitrust issues perhaps, things like that, that could be addressed by policy tools not strictly limited to the energy world might help deal with the problem.
MR. HOLLANDER: Anybody wants to talk about opening the government regulation a little bit more?
SENATOR JOHNSTON: Well, if I understand the question, it is should you open up the fuels for competition? Was that your–
ATTENDEE: Well, I was referring to the example that your neighbor here was mentioning about five minutes ago.
MR. HOLLANDER: So I’ve explained the blenders, they don’t have to date currently have to mix or mixing up to 10 percent of ethanol in your fuel. That’s your regular fuel, but they don’t have to buy anything more than that, and if you gave the methanol, even if it was legal and started, they still don’t have to buy it, or if you have natural gas rich in there, they don’t have to put it.
It’s the same thing that was with AT&T. Okay. They didn’t have to allow long distance to access the local loop until the government forced them. So the question is should we force them, should we find other means. What do you think? What do you think? Let’s say if you have methanol standardized, the market will be methanol is cheaper, and your car can run on methanol, but the government doesn’t force the distributor to get the methanol and sell it to anybody.
SENATOR JOHNSTON: Well, like I say, four things have got to take place. You got to have the pumps. You’ve got to have the manufacturing of the methanol. You have to have standards.
There’s a big controversy now as to whether you ought to go to E15 as opposed to E10, ethanol 10 percent up to 15 percent, because the oil companies and the auto companies resist. They say it will hurt the engines, and the corn ethanol people say, “No, it will not.” That needs to be demonstrated.
By the same token, if you’re going to sell methanol, it needs to be demonstrated and certified. Otherwise, people will not buy it. That’s why I say you need a demonstration with the government involved, just as it is in China. In China, they will get these things standardized. They will determine what additives need to come in, how it will protect your engine, and then that would protect the automobile manufacturers and the purveyors of the fuel. You don’t want to get into the business of selling a fuel and find out that it has ruined a million engines out there. That’s a quick way to go into bankruptcy. You need a demonstration by the government with certification and standards and testing. That is the essential step.
MR. HOLLANDER: Like the one that we already demonstrated in 1980, that it worked? We can do it again. We did it in 1980, okay? Five, 10 years – actually, the police cars in California were all methanol. The policemen love it, loved it because it had a stronger kick, and they were very sorry to get rid of it.
SENATOR JOHNSTON: Yeah. Well, as I say, they stopped it at that time because the price of crude collapsed. You need a bigger demonstration. I think they used probably M15 at that time, and of course, you can go – the Chinese are going, are testing everything up to
MR. HOLLANDER: No, no. M100, right?
MR. ARONOFF: It was M100.
MR. HOLLANDER: M100.
MR. ARONOFF: 20,000 cars at M100.
MR. HOLLANDER: M100.
SENATOR JOHNSTON: Well, I mean, if that can be standardized and manufacturers can be assured that they are not going to be liable for engine damage, but the experience of the Chinese, I’ve got this report here from the Chinese. They say that there are problems if you don’t do the additives correctly, that you can have engine corrosion, that you can have in the cold, the engine may not start. I mean, there are problems that need to be dealt with, which are entirely dealable, but it takes the government to standardize and test and certify.
ATTENDEE: Senator Johnson, one of these, I recall correctly, the Navy testing, is that it reduces the range; that is, you don’t get as much distance.
SENATOR JOHNSTON: The energy density of methanol is about 50 percent, which you can make up for with either a bigger tank or mixing with gasoline, and that is a lot easier than having to have filling stations for compressed natural gas or electricity.
ATTENDEE: What I’m talking about is when you ship.
MR. HOLLANDER: Eyal?
MR. ARONOFF: Well, okay. So, basically, here is how I see it. Okay. We can educate the consumer, saying, “Look, here is a fuel. It costs half as much as gasoline, because it can – if you bring up the volume in methanol, you can produce it for half as much,” and it drives a few miles less for you per gallon, and maybe the life of your car will go down from 15 years to 12 years, but cost half as much. What would you choose? I think it’s pretty straightforward. People will choose the less expensive fuel, okay?
MR. HOLLANDER: Roger?
MR. BEZDEK: Yeah. I’d like to leave the audience with one thought. While we’re debating and discussing and all the rest, just remember that existing oil wells are currently, as we speak, depleting at the rate of about 4 percent a year. We’re going to lose 3 million barrels a day from existing wells. We have to produce 3 million barrels a day more just to stay – just to stay constant. This year, we’ll use probably three or four times as much oil as will be discovered. This is happening every day, every week, every month, and it’s inexorable, and we’re facing a very serious problem. We can debate and discuss all we want. Those are the empirical facts.
SENATOR JOHNSTON: One final point, if I may, Yossie. One bonus from coal to methanol is that you capture the carbon, and that’s about 60 percent of the cost of carbon. And you can use the carbon, the CO2 for enhanced oil recovery, which can increase the life of these depleted fields by about 40 percent. So that’s an extra bonus for going to methanol.
MR. BEZDEK: That’s a very good point.
MR. HOLLANDER: I want to pass it to Bill, because we don’t even have time to thank you.
MR. SQUADRON: We promised that we’d get all of you back to work by 1:30, but I want to thank Eyal Aronoff, Roger Bezdek, Senator Johnston for their comments, also Lisa Wright from Congressman Bartlett’s office, and Mary Sprayregen from Congressman Welch’s office.
Thank all of you for taking the time to come today, and we look forward to working with you in the future.