[Senate Hearing 109-860]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-860
 
                   ENERGY SECURITY AND OIL DEPENDENCE

=======================================================================

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             SECOND SESSION



                               __________

                              MAY 16, 2006

                               __________



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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening 
  statement......................................................    34
    Prepared statement...........................................    35
Coleman, Hon. Norm, U.S. Senator from Minnesota..................     3
Grumet, Jason S., Executive Director, National Commission on 
  Energy Policy, Washington, DC..................................    12
    Prepared statement...........................................    21
Khosla, Vinod, partner, Khosla Ventures, Menlo Park, Ca..........     3
    Prepared statement...........................................     8
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1

         Additional Prepared Statement Submitted for the Record

Feingold, Hon. Russell D., U.S. Senator from Wisconsin...........    57

                                 (iii)

  


                   ENERGY SECURITY AND OIL DEPENDENCE

                              ----------                              


                         TUESDAY, MAY 16, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met at 9:34 a.m., in room SD-419, Dirksen 
Senate Office Building, Hon. Richard G. Lugar (chairman of the 
committee) presiding.
    Present: Senators Lugar, Chafee, Coleman, Martinez, and 
Biden.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    The committee meets today to consider strategies for 
reducing dependence on oil. This dependence brings intolerable 
costs to American national security and economic well-being. If 
oil averages just $60 a barrel this year, the import costs to 
the United States economy will be approximately $320 billion. 
This revenue stream emboldens difficult oil-rich regimes and 
enables them to entrench corruption and authoritarianism, fund 
anti-Western demagogic appeals, and support terrorism. As 
global oil demand increases and the world becomes more reliant 
on reserves concentrated in unstable regions, the likelihood of 
conflict over energy supplies will dramatically increase, and 
energy-rich countries will have more opportunity to use their 
energy exports as weapons against energy-poor nations.
    High prices over the past 10 months have demonstrated the 
vulnerability of supply. A global oil market tightened by 
underinvestment in production and surging global demand has 
been aggravated by hurricanes, unrest in Nigeria, speculation 
about developments in Iran, weakened capacity in Venezuela, and 
terrorist activity in Iraq and elsewhere. In this environment, 
the price shock from a major supply disruption could cause a 
recession.
    Today we will concentrate on how our Government can speed 
up the transition to alternative, sustainable energy sources. 
We are cognizant that despite past campaigns for energy 
independence and constant improvement in energy intensity per 
GDP, we are more dependent on oil imports today than we were 
when President Nixon authorized Project Independence in 1973. 
Yet, I believe we are turning a corner. The American public and 
elected officials are becoming more aware of the severe 
problems associated with energy dependence and are more willing 
to take aggressive action.
    The new realism of energy geopolitics requires us to 
abandon the notion that simply finding more oil will solve oil-
driven threats to our national security. More than three-
quarters of the world's oil reserves are controlled by foreign 
governments. With global oil demand projected to rise from 83 
million barrels a day to 120 million barrels per day by 2030, 
the security threats related to oil dependence will continue to 
intensify unless we make dramatic changes in policy. Efforts to 
reduce oil consumption must focus on developing sustainable 
fuels and increasing efficiency. I am pleased that the first 
commercial-scale cellulosic ethanol plant in the United States 
is ready for construction and that Americans are beginning to 
demand more fuel-efficient vehicles.
    We must continue investing in advanced energy research, but 
threats to our national security require us to efficiently 
deploy the oil-saving technology that is available now. The 
benefits of reducing oil use at home will multiply when other 
countries also switch to alternative fuels and decrease the 
energy intensity of their economies.
    I have introduced Senate bill 2435, the Energy Diplomacy 
and Security Act, to reorient our diplomatic activities to give 
greater priority to energy matters. We need bold international 
partnerships to blunt the ability of producer states to use 
energy as a weapon, to increase our security of supply, and to 
reduce the vulnerability of our economy to high oil prices.
    Today, we will benefit from the views of two distinguished 
experts. We will ask them to identify the best options for 
reducing oil use through alternatives and efficiency gains. We 
will also seek their counsel on what the government can do to 
accelerate the transition away from oil and how we can most 
effectively encourage helpful actions by the private sector and 
consumers.
    First, we will hear from Mr. Vinod Khosla, the founding 
partner of Khosla Ventures, a leading venture capital firm that 
has invested in many cutting-edge energy technologies. A 
cofounder of Sun Microsystems, Mr. Khosla is an influential 
voice on the viability of alternative energy sources.
    Next, we will hear from Mr. Jason Grumet, Executive 
Director of the National Commission on Energy Policy. In 
December 2004, the bipartisan Commission released its 
recommendations for a long-term energy strategy. The report 
comprehensively examined numerous technologies and methods for 
increasing energy supplies as well as for moderating energy 
demand. Prior to joining the Commission, Mr. Grumet served as 
executive director of Northeast States for Coordinated Air Use 
Management.
    We welcome our witnesses. We look forward to your insights. 
Your full statements will be made a part of the record, but we 
will ask you to proceed as comprehensively as you wish. The 
purpose of the hearing is to hear you and then for members to 
question you and for you to enhance our experience with these 
issues and, hopefully, with the public that is viewing this 
hearing.
    I mention in advance, so that this will not be 
disconcerting to you as witnesses or to those participating in 
the hearing, that we are scheduled to have a rollcall vote on 
the Senate floor at approximately 10 minutes after 10. These 
things have a way sometimes of being extended onward, but at 
some point I will call a recess of the committee so that all of 
us will be present to hear what you are saying. You will have a 
full audience of Senators in that case, and then after a short 
recess to have votes cast by Senators who are here, we will be 
back into action again.
    We thank you for coming. I note the presence of my 
colleague, Senator Coleman. Senator, do you have an opening 
comment or thought this morning before our witnesses begin 
their testimony?

  STATEMENT OF HON. NORM COLEMAN, U.S. SENATOR FROM MINNESOTA

    Senator Coleman. I am looking forward to hearing the 
testimony, Mr. Chairman, and I want to thank you for having 
this hearing. I think this is one of the most important issues 
facing this country today. There's no question about it. It is 
a national security issue. It is an economic security issue. It 
is about our present. It is about our future. So I am glad that 
we are thinking outside the barrel, and I think this is an 
opportunity. I am just thrilled to be here. So with that, I 
want to hear from the witnesses.
    The Chairman. Thank you very much, Senator.
    We will proceed with you, Mr. Khosla, if you would give 
your testimony.

  STATEMENT OF VINOD KHOSLA, PARTNER, KHOSLA VENTURES, MENLO 
                            PARK, CA

    Mr. Khosla. Thank you, Mr. Chairman, for this opportunity 
to speak to you and the rest of the committee and other guests 
about this important issue of America's energy independence.
    Since the President's State of the Union and rising prices 
at the pumps, there has been a lot of talk about oil addiction. 
But I come here not so much to talk about what must be done 
because there has been a lot of talk about that, but rather, 
how to get it done simply and without a lot of ruffled 
feathers, aligned with the major political interests, and in a 
fashion that is not only politically correct, but also the 
correct thing to do. For once, those things coincide.
    If it was not for rapid growth of our domestic ethanol 
industry, Americans would be seeing prices approaching $4 a 
gallon or more. For comparison, the Department of Energy has 
estimated that ANWR drilling would save 1 cent per gallon at 
the pump by 2025, according to a quote in the most recent 
Fortune magazine. Because of this unusual opportunity, we have 
the ability to be the architects of a new global development 
plan, not just an American plan, a sort of a Marshall Plan for 
our times that could support technological advancements and 
sustainable development of a global alternative to petroleum. 
And what is most attractive to me is it takes almost no money 
to do it.
    I come here with very ambitious goals, but goals that are 
grounded in science, technology, and a practical knowledge of 
business. Having gone through similar industry transitions in 
computing, in the Internet, and in telecommunications, I can 
tell you that ethanol and biofuels, in general, do not have to 
be an alternative fuel. In fact, they can be our mainstream 
fuel. More importantly, with a few policy changes, we can 
achieve this transition not by 2040 or 2050, but be 
irreversibly down a new path of energy independence in less 
than 7 years, in my view.
    But before I go there, let me talk about some assertions 
that, at first, seem implausible. I do not believe we need any 
oil for cars and light trucks, and we definitely do not need to 
wait for hydrogen. We do not need new cars, new engine designs, 
or new distribution systems, and this rapid changeover within 7 
years that I talked about, in fact, is economically feasible, 
possible, and relatively little cost. All this at little cost 
to consumers, the Government, and automakers.
    That might seem implausible, but I hope I can convince you 
that it is at least plausible. Brazil went from 4 percent of 
their new cars sold being flex fuel cars to 80 percent in less 
than 3 years, all driven by consumer demand. They reduced 
petroleum usage by 40 percent. All the scenarios I have seen in 
this country talk about doing that in 30, 50 years, or longer. 
It happened because ethanol costs 75 cents a gallon to produce 
in Brazil versus petroleum production costs that are between 
$1.60 a gallon to $2.20. In fact, in the 10th-largest car 
market in the world, which is Brazil, rumor has it that VW is 
planning on phasing out all gasoline-only cars. When a major 
automaker starts to not make gasoline cars in a major market, 
we should be paying attention. All this has come with a 60- to 
80-percent reduction in greenhouse gas emissions and $50 
billion in import savings for a small economy like Brazil. 
Hopefully, that convinces us that it is at least plausible.
    So the next question I ask is how we go from the plausible 
to the possible. Many of us have heard that there are between 5 
million to 6 million cars capable of ethanol, FFVs, and a 4-
billion-gallon-a-year supply of ethanol in this country 
already. But to make it more visceral, I submit that at least 
in the State of California, there are almost as many flex fuel 
cars on the roads as diesel vehicles. That should prove to us 
that this is, in fact, possible. U.S. production costs for corn 
ethanol are about $1 a gallon, far below the cost of petroleum. 
And a rapid increase in capacity, 20 percent or more per year, 
is already in process.
    So I then ask if, in fact, it is possible, what makes it 
probable. There are a few issues that come to mind, but I want 
to give you a sense of what I hear about this new revolution 
that has quietly been taking place for many, many years in 
rural America. My friends from the Midwest tell me that ethanol 
is the talk of every coffee shop in the Midwest. It is the most 
important topic in rural America in decades. But it also may be 
the most important thing for global peace and welfare, for the 
climate crisis, and for consumers.
    Fortunately, this time around, environmentalists, the 
automakers, the agricultural interests, the security and energy 
independence proponents, and even the evangelicals are all 
aligned. Finally, a cause all interests can rally behind.
    Consumer polls support the same idea. Tom Friedman, 
reciting a New York Times poll, suggested that 89 percent of 
U.S. adults favor a mandate for more efficient cars. When asked 
if they want higher taxes on gasoline, 87 percent say no, but 
when asked if they favor gasoline taxes to reduce our 
dependence on foreign oil, that 87 percent drops to 37 percent. 
When asked if they favor gasoline taxes to reduce global 
warming, that 87 percent drops to 34 percent. The American 
people want that.
    The oil interests and the American Petroleum Institute keep 
propagating myths like insufficient land, poor energy balance, 
and high production costs to curb enthusiasm for ethanol. This 
to me is reminiscent of the tobacco companies funding studies 
to prove that smoking does not cause cancer. The NRDC, somebody 
I trust a lot more than the American Petroleum Institute, has 
estimated that it takes only 114 million acres of land to 
replace our gasoline. Argonne National Labs, a U.S. Government 
lab, and UC Berkeley, among others, have discounted the energy 
balance studies. In my opinion, these are either bogus or ill-
informed claims, and I hope we can address these falsehoods one 
by one.
    First, on crop lands. Brazil has had a 4X increase since 
1975 in the yield of ethanol per acre. Knowledgeable scientists 
there see a path to another 4X. In the United States, I believe 
gallons per acre can be extended by about 8-10 times what they 
are today, about 400 to 500 gallons per acre, even without the 
innovations that are commonplace in Silicon Valley. Based on my 
personal forecasts, I can see yields increasing all the way to 
3,000 gallons per acre, conservatively, and 5,000 gallons per 
acre, optimistically, in the next 25 years, compared to about 
400 gallons per acre today. This could demolish all energy and 
land use arguments. Based on my forecasts, including the 
considerable upside afforded by technology innovations, 
biomass-based ethanol can replace almost all of our gasoline 
needs in 25 years, using less than 60 million acres of land.
    In the United States, the ethanol industry sold about 1.6 
gallons of ethanol at $1.20 a gallon in 2000. In 2005, at $1.50 
a gallon, they sold 4 billion gallons. My personal estimates 
say that at prices for ethanol between $1.35-$1.40 a gallon, 
approximately, you can build plants and pay off all cash flow 
and debt requirements. Those numbers are far below the numbers 
we are seeing today in the marketplace. Today, with prices 
where they are, one can pay off a new plant in less than a 
year, far less than the 7 years that could be standard for 
investors.
    While it is disturbing to me to see some factions calling 
for permanent extensions of the credits, instead of supporting 
variable credits or other structures that would provide them 
insurance if oil prices were ever manipulated that I believe is 
possible, I do think, in general, this is a very viable 
industry with or without supports. We have sufficient land and 
energy balance and economics are favorable for ethanol as a 
transportation fuel. Consumers will demand it once it is 
available at the prices it can be made available as a 
commodity. All we need to do is kick-start this process.
    The time has come for us to ask ourselves the following 
questions. Do we want to feed our farmers or Mideast 
terrorists? Do we want ANWR oil rigs or prairie grasses? Do we 
want fossil fuels or green fuels? Create farm jobs or Mideast 
tycoons? Gasoline cars or cars that offer consumers the choice 
of gasoline or biofuels? Expensive gasoline or cheaper fuels? 
This appears to me to be nothing less than a simple Darwinian 
IQ test for us.
    Most importantly, I believe this does not take any capital 
from Government. Risk capital for investors is probably the 
only solution to the oil stranglehold we are in. Three simple 
things that need to change. So let me talk about what these 
three things are.
    If our goal is to convince investors to pour in billions of 
dollars, we need to assure them both a large market and a 
stable market exist.
    First, I suggest we mandate that at least 70 percent of all 
new cars sold in America be flex fuel cars by 2014, 10 percent 
annual increases starting with 20 percent by 2009. We are 
already approaching that 2009 number. All such cars, new and 
old, be provided with a yellow gas cap. I might add that flex 
fuel cars are 100 times more effective at saving petroleum than 
hybrids per consumer dollar spent in purchasing the car. I am 
happy to answer questions on that claim later. Of course, flex 
fuel hybrids are the best combination of all. So I suggest that 
this mandate makes gasoline savings very cost effective.
    My second recommendation would be that we mandate that 10 
percent of all gas stations owned or branded by the major gas 
station owners offer at least one ethanol pump. Sweden, by the 
way, has mandated 50 percent of its pumps by 2009 to offer E85. 
Alternatively, mandating a separate RFS for E85 and cellulosic 
ethanol would serve a similar purpose. I suggest that for the 
first 20,000 stations that convert at least one pump, we offer 
an incentive of $30,000 per station in the first year, $25,000 
per station in the second year, and $20,000 per year in the 
third year, a slight modification to current law that offers 
$30,000, up to 30 percent. I suggest that the proceeds be 
appropriated from the leaking underground storage tank fund, 
the LUST fund, that already has over $2 billion. The maximum 
cost to this program would be no more than $600 million, 
probably a lot less.
    The last and most important recommendation is based on the 
following somewhat appalling story. In January, I gave a brief 
talk on this at Davos. A senior executive from a major oil 
company walked up to me and said, you know, we can drop the 
price of gasoline to drive the ethanol producers out of 
business. It galled me that he had the courage to come up to me 
and say that.
    So I suggest that we take the VEETC credit and make it a 
variable credit. I have already stated that the level of the 
credit, 51 cents per gallon, is not required for cash flow for 
ethanol plants today. It was required when ethanol was selling 
for $1.20 a gallon. I would recommend that we make it a 
variable credit that changes from 20 cents a gallon to 80 cents 
a gallon based on the price of petroleum as it varies from $70 
a barrel to $30 a barrel. This will ensure that OPEC or the 
national oil companies cannot manipulate prices as easily, 
hence driving ethanol producers out of business. I do believe 
such credits should expire once ethanol capacity exceeds 15 
billion gallons in this country because I do not believe they 
will be needed.
    These three policies will ensure investors a permanent 
market for the ethanol and will cause billions of dollars to 
flow in.
    In addition, certain other policies can accelerate the 
process, even though I consider them what I call page 2 
recommendations and not essential. I do believe if we do make 
the VEETC credit variable, down to 20 cents, it would benefit 
the American farmer and the ethanol producer if we shift the 
credit to an ethanol producers credit instead of making it a 
blenders credit. Today it is estimated they get about 25 cents, 
the oil companies collecting the rest of the benefit.
    One variant of that would be to make the credit applicable 
only to building new plant capacity in America. That has 
multiple benefits. It will increase plant capacity, increase 
supply, and drive down prices for consumers for biofuels.
    Second, I would suggest that we allow imports of ethanol 
without tariff but only for consumption above the RFS standard. 
We have an RFS standard that corn ethanol can meet. I even 
suggest we extend the standard up toward 15 billion gallons by 
2015. But if we allow imports above that without tariff, we 
will make it more attractive for consumers to buy E85 and we 
will accelerate the adoption of the E85 economy, which I 
believe will enhance the value proposition for all ethanol 
producers, including today's corn ethanol producers, in the 
United States through this mechanism.
    If, in fact, we do build the VEETC credit only for plant 
construction in the United States, any credits that go to 
Brazilian producers who import ethanol into the United States 
will only be for additional plant construction in the United 
States, enhancing our energy security and probably relatively 
safe under the WTO action because of the provisions for 
exceptions for national security under WTO.
    I suggest we institute a cellulosic ethanol credit, similar 
to the VEETC credit. In fact, the last energy bill contained a 
1.5X credit. I suggest we monetize that.
    I suggest a separate RFS standard for E85, as I have 
already said.
    I would recommend we reform and strengthen CAFE partially 
by making it a CAFE petroleum mileage standard with automakers 
incented to provide both increased fuel economy through 
technologies like hybrids and improved use of biofuels, the 
renewable fuels. Today they have almost no incentive to 
encourage the use of biofuels.
    I would suggest we provide loan guarantees for the first 
few cellulosic ethanol plants with every new technology, but 
only for the first few plants of each technology.
    It is not well known that if we institute a system for 
carbon trading, it should drop the effective price of a gallon 
of ethanol by between 20 to 30 cents a gallon depending upon 
what technology is used to produce the ethanol.
    Finally, I suggest we switch agricultural subsidies to 
energy crops, a much safer place to do it, and frankly, a place 
with much more social good.
    My dream with these recommendations is that Wal-Mart offers 
E85 at $1.99 a gallon at every store in America. They offer an 
all-American product, a much greener product, at a price that 
every consumer will want and will increase the demand for flex 
fuel cars.
    Let me stop there, Mr. Chairman, and offer to answer any 
questions.
    [The prepared statement of Mr. Khosla follows:]

  Prepared Statement of Vinod Khosla, Partner, Khosla Ventures, Menlo 
                                Park, CA

    Good morning. Chairman Lugar, esteemed members of the committee, I 
want to start by thanking you for allowing me the opportunity to speak 
to you today about our unique ability to secure America's energy 
independence. Since the President's State of the Union and rising 
prices at the pumps, there has been a lot of talk about our oil 
addiction. I come here to talk not about what must be done but rather 
how to get it done simply, and pragmatically, in a manner aligned with 
the major political interests that carry clout in this country. We can 
not only do the right thing, but also the politically correct thing, 
while asking each interest group to compromise a little.
    If it were not for the rapid growth of our domestic ethanol 
industry, Americans would see gas prices approaching $4 a gallon with 
no real alternative or hope in sight. In comparison, the Department of 
Energy estimates ANWR drilling would save 1 cent per gallon at the pump 
by 2025 as quoted in Fortune (May 15, 2006). We could be the architect 
of a global development plan. A Marshall Plan for our times that would 
support technological advancements and sustainable development of a 
global alternative to petroleum . . . and best of all it takes very 
little money to do.
    I come to you today with ambitious goals, but goals that are 
grounded in sound science, technology, and business. I am convinced 
that we can replace the majority of our petroleum used for cars and 
light trucks with ethanol within 25 years. This is not an alternative 
fuel--it can be a mainstream fuel. More importantly, with a few simple 
policy changes, we can be irreversibly traveling down this path in less 
than 7 years.
    You may ask, why ethanol? Ethanol is substantially cheaper to 
produce today than gasoline before all subsidies and taxes. For 
example, the cost to produce ethanol in Brazil is less than $0.75 per 
gallon, while a U.S.-based corn to ethanol plant's production costs are 
roughly $1.00 per gallon. That equates, even with U.S. costs, to about 
$1.25 per ``gasoline equivalent'' gallon of ethanol. Gasoline on the 
other hand costs $1.60-$2.20 or more per gallon to produce, depending 
upon the cost of a barrel of oil.
    Why shouldn't it sell for much less than gasoline at the pump, 
except for the oil interests distorting the price to ensure they don't 
lose their lucrative profit opportunity or temporary supply/demand 
dynamics? As new technologies ramp up, ethanol can be cheaper than 
gasoline even if oil drops to $35-$40 per barrel--a level it is not 
expected to reach according to the EIA. In addition to lower cost, E85 
reduces volatile organic compounds by 15 percent, carbon monoxide by 40 
percent, NOX by 10 percent, and sulfate emissions by 80 
percent when compared to gasoline according to an estimate from one 
environmental organization.
    With ethanol, we get a fuel that is cheaper for consumers and 
automakers, cleaner and greener, and it takes Mideast terrorism fueling 
dollars and moves them to rural America. We capitalize on American 
technology to create more jobs and cheaper transportation costs for the 
American public. What is wrong with this picture?
    The single biggest risk we face is the oil interests distorting the 
price to ensure they don't loose their lucrative profit opportunity? If 
you were making $36 billion of profit per year like Exxon, would you 
want things to change? Reports of oil company executives lying under 
oath are reminiscent of the 1985 price manipulation episodes, Enron's 
energy price manipulation, and other examples, be it Iran, Russia, or 
Sudan. I personally received a warning from a senior executive of a 
major oil company that they could drop the price of oil if biofuels 
started to take off. We cannot let this opportunity to change our 
dependence on oil slip away again.
    My friends from the Midwest tell me ethanol is the talk of coffee 
shops and maybe the most important thing in rural America in 30 years. 
It may also be the most important thing for global peace and welfare, 
the climate crisis, and for consumers. Fortunately, this time around 
the environmentalists, the automakers, the agricultural interests, the 
security and energy independence proponents, and even the evangelicals 
are all aligned. Finally, a cause all interests can rally behind. As 
Tom Freidman recites a New York Times poll: 89 percent favor a mandate 
of more efficient cars; 87 percent say no to a gasoline tax but that 
drops to 37 percent if the tax is to ``reduce our dependence on foreign 
oil'' and to 34 percent if the tax is to ``reduce global warming.''
    The oil interests keep propagating myths like insufficient land, 
poor energy balance, and high production costs to curb enthusiasm for 
ethanol. This is reminiscent of the tobacco companies funding studies 
to prove that smoking does not cause cancer. The NRDC, more concerned 
about land use than the oil interest, estimate a modest 114m acres of 
land needs, Argonne National Labs and UC Berkley, among many others, 
have discounted the energy balance claims. In my opinion, these are 
bogus if not ill-intentioned claims and I will address these falsehoods 
one by one.
    Crop Land: Yields of corn are increasing in the United States and 
Brazil. Brazil has had a 4X increase since 1975 and knowledgeable 
scientists are forecasting another 4X in the next 10 years. U.S. 
gallons per acre yields can reach 10X the current levels even without 
the innovations that are common place in Silicon Valley. Based on my 
forecasts, I can see my way to yields increasing more than 10X to 
between 3,000 to 5,000 gallons per acre compared to 400 gallons per 
acre today, demolishing all land use and energy balance arguments. I 
agree with Rick Tolman, CEO of National Corn Growers Association, who 
believes that corn can provide 14-17 billions of gallons of ethanol by 
2015 without impacting food supply. Based on my forecasts, including 
the considerable upside afforded by technology innovations, biomass-
based ethanol can replace most of our gasoline needs in 20 years, using 
less than 60m acres of land.
    Energy Balance: The only study that claims corn ethanol has an 
unfavorable energy balance is an outdated study performed by Professor 
Pimentel. Both USDA- and DOE-affiliated researchers claim that 
Pimentel's 2005 study overstates energy requirements. Professor Kammen 
at UC Berkley further states that corn ethanol results in more than a 
90-percent reduction in petroleum use and a moderate 10-30-percent 
reduction in greenhouse gases. The NRDC agrees, stating that (1) corn 
ethanol is providing important fossil fuel savings and greenhouse gas 
reductions; (2) cellulosic ethanol simply delivers, profoundly, more 
renewable energy than corn ethanol; and (3) very little petroleum is 
used in the production of ethanol . . . a shift from gasoline to 
ethanol will reduce our oil dependence. Remember tobacco claiming and 
funding studies, forever, to prove that smoking does not cause cancer?
    Though a 25-percent mileage reduction is the reality today, it can 
be immaterially small, over time, as engines are optimized for a flex 
fuel world. Saab sells a model in Sweden that adjusts itself to take 
full advantage of E85's higher octane--100 to 105, versus 87 to 93 
octane for gasoline. Called the Saab 9-5 BioPower, its turbocharged 
engine generates 175 horsepower on gasoline and a whopping 215 hp on 
E85. (USA Today, 5/4/2006). Even with the additional horsepower, the 
Saab 9-5 only has an 18-percent lower mileage on ethanol. If the engine 
was designed to provide the 175 hp on ethanol, we would get an 
additional substantial step increase in ethanol mileage. This proves 
that engines can be optimized for ethanol, thus substantially 
eliminating the mileage penalty which has been a convenient excuse for 
the oil companies.
    In the United States, in 2000, the ethanol industry sold about 1.6 
billion gallons of ethanol at about $1.20 per gallon. By 2005, the 
industry more than doubled its sales to 4 billion gallons, at a price 
of about $1.50 per gallon. In my view, plants can meet all their cash-
flow requirements and pay off construction debt at prices in the $1.30-
$1.40 per gallon range, given a cost of production of roughly $1 per 
gallon without subsidies or tax credits. At today's prices of over 
$2.50 per gallon, ethanol producers can pay off their plants in just 11 
months rather than the standard 7-year payoff period. It is 
indisputable that ethanol is not only cheaper to produce than gasoline 
at about $40/barrel, but also, that the returns can be outstanding. It 
is disturbing to me to see some factions calling for permanent 
extensions to the credits, instead of supporting a variable VEETC 
model, which is genuinely needed to prevent oil price manipulation by 
interested parties. We have sufficient land and the energy balances and 
economics are favorable for ethanol as a transportation fuel. All we 
need to do is kick-start the process.
    Chairman Lugar and members of the committee, the time has come for 
us to ask ourselves: Do we want to feed our farmers or Mideast 
terrorism? Do we want ANWR oil rigs or prairie grass fields. Fossil 
fuels or green fuels? Create farm jobs or Mideast tycoons? Gasoline 
cars or cars that offer the choice of biofuels? Expensive gasoline or 
cheaper ethanol? This appears to be nothing less than a Darwinian IQ 
test.
    Risk capital from investors is the only solution to the oil 
stranglehold. Three simple things that need a little bit of courage, 
not a lot of money are sufficient to get this capital flowing.
    These three are:

    (a) Mandate at least 70 percent of the new cars sold in America be 
FFVs by 2014 with 10 percent annual increases starting with 20 percent 
by 2009, and all such cars, old and new, be provided with a yellow gas 
cap, with possible tax incentives of $50 per car.
    (b) Mandate that 10 percent of all gas stations owned or branded by 
major gas station owners offer at least one ethanol pump. Alternatively 
mandating a separate RFS for E85 and cellulosic ethanol defined later 
would serve a similar purpose. For the first 20,000 stations that 
convert at least one pump, an incentive can be offered up to $30,000 
per station in the first year, $25,000 per station in the second year, 
and $20,000 per year in the third year, the proceeds being appropriated 
from the Leaking Underground Storage Tank Fund or through a special tax 
on oil company profits, up to a maximum of $600m over 3 years.
    (c) Make VEETC credit variable with oil price varying from $0.20 at 
current prices up to $0.80 instead of the current $0.51 credit as oil 
prices vary from $70 to $30 per gallon. This will insure that OPEC or 
the national oil companies cannot manipulate prices as easily, hence 
driving ethanol producers out of business. Such credits should expire 
once ethanol capacity exceeds 15 billion gallons in this country.

    These three policies will assure investors that a permanent market 
will exist for ethanol and will not be subject to price manipulation by 
the oil nations. Billions of dollars will flow into the ethanol economy 
creating a permanent alternative to gasoline, without material 
government funds.
    In addition, certain other policies can accelerate the process but 
are not essential:

    (1) Shift the $0.51 blender's credit to an ``ethanol producers 
credit'' preferably to be used only for plant construction instead of 
giving it to the oil companies as a ``blenders credit.'' This will 
build permanent U.S. capacity for new ethanol production, independent 
of whether the ethanol is U.S.-made or imported. In fact this format 
will supply all the capital required for plant construction the 
industry needs to replace all our petroleum and can be structured to be 
self effacing when we reach appropriate plant capacity.
    (2) Allow imports of ethanol for consumption above the RFS standard 
without tariff subject to switching the VEETC ethanol credit to one 
directed exclusively toward building plant-capacity in the United 
States. This will create permanent capacity for ethanol production in 
the United States. It is likely that we will see WTO action challenging 
the tariff's legality. A proactive program is more likely to be 
effective than a reaction in hindsight to WTO action. Besides early 
availability of lower priced ethanol in the market will accelerate the 
switch to E85 and take ethanol into the domain of a primary replacement 
for gasoline instead of just being an additive. Concurrent with this 
provision the ethanol RFS can be extended to 12b gallons by 2015. Based 
on the national security exemption of the WTO, an incentive or VEETC-
like credit, is probably allowed if it is directed toward building 
ethanol fuel plant-capacity in the United States. An alternative would 
be to eliminate the tariff only for E85 ethanol use, accelerating E85 
adoption while keeping the blending market protected against imports 
allowing U.S. farmers to get down the learning curve on ethanol costs. 
Tariff removal could be coincident with funding of additional E85 
stations.
    (3) Institute a similar limited-period credit for cellulosic 
ethanol or monetize the current ``1.5 times'' credit for cellulosic 
ethanol defined in the 2005 energy bill.
    (4) Institute separate RFS standards for E85 (and possibly 
cellulosic ethanol) to kick-start the E85 market which is currently 
being discouraged by the oil companies.
    (5) Reform and strengthen CAFE replacing CAFE mileage with CAFE 
``petroleum mileage'' to align and incentivize automakers to promote 
the use of ethanol and other gasoline alternatives, giving them credit 
for any technology used to replace petroleum; in addition to increases 
in mileage standards.
    (6) Provide loan guarantees for the first few cellulosic ethanol 
plants built with any new technology.
    (7) Institute a cap and trade system for carbon trading. This could 
effectively reduce the price of ethanol by as much as $0.20-$0.30 per 
gallon (based on the current trading price of carbon in the European 
Union) depending upon the ethanol production technology. This would 
provide incentives to make corn ethanol greener, and less dependent on 
fossil fuels.
    (8) Switch agricultural subsidies from row crops to energy crops.

    In the United States as oil prices continue to soar I see the 
following:

    1. Oil companies use big-budget advertising, expensive PR firms, 
and armies of accountants to prove they are not making too much money 
while making more money than any industry has ever made in the history 
of the corporate world. Amazing what money can buy.
    2. They blame everybody but themselves, but more importantly, are 
doing relatively little to invest in alternatives to gasoline, other 
than token investments and PR campaigns.
    3.They put obstacles in the way of their franchisees who want to 
offer ethanol instead of offering E85 themselves. Why don't we require 
them to sell ethanol at, at least, 10 percent of their gas stations? We 
have CAFE standards for automakers, why not E85 green fuel standards 
for the oil companies?
    4. With a fraction of their oil profits invested in new ethanol 
capacity or ethanol distribution we could be producing tens of billions 
of gallons of ethanol and solving our addiction to oil. Instead they 
are sending these profits to the Mideast instead of creating jobs in 
the USA.

    Are they entitled to their profits? I believe they are. But that 
should not prevent us from developing alternatives to their 
stranglehold on our transportation fuel for the good of society. Here 
are some examples of why it is clear we need to rein in big oil:

    1. Governor Pataki proposed a new bill in New York. The bill would 
exempt renewable fuels from the provisions of ``exclusivity'' contracts 
between fuel providers and retail service stations, which only allow 
the service stations to sell specific brands of fuel. In most cases, 
these brands do not include renewable fuels. Since the ``exclusivity'' 
contracts prohibit service stations from obtaining renewable fuels like 
ethanol (E85) from other sources, these fuels are not available for 
sale to consumers. The Governor's proposal would exclude renewable 
fuels from these contracts if the distributor does not offer these 
types of fuels.
    2. Mobil gas station in St. Louis does not allow use of credit 
cards for payment and warns against ethanol, is typical of how oil 
companies discourage consumer use with scary notices. An Exxon in 
Brazil stated that every third fill-up should be with gasoline for all 
flex fuel vehicles, another falsehood.
    3. The Foundation for Consumer and Taxpayer Rights released a new 
study of rising gasoline prices in California that found corporate 
markups and profiteering are responsible for spring price spikes, not 
rising crude costs or the national switchover to higher cost ethanol, 
as the oil industry claims. One can find the study at http://
www.consumerwatchdog.org/energy/rp/6132.pdf.
    4. The 1985 price manipulation and recoupling of an economy that 
was decoupling from oil is well known.

    Gaining independence from foreign oil would not be unique to the 
United States. I just recently returned from Brazil, which has declared 
independence from foreign oil. Let me share some insights with you:

    1. I got a very visceral feel for carbon capture. As I looked at 
sugarcane varieties capable of producing 200 (wet) tons per hectare, I 
could imagine the sound of carbon dioxide getting sucked out of the 
atmosphere.
    2. My estimates of less than 60 million acres required to fuel most 
of America's cars and light trucks by 2030 started to feel conservative 
as I saw Brazilian entrepreneurs developing technologies to produce 
over 3,000 gallons per acre. Imagine what would happen if we let 
Silicon Valley entrepreneurs and American scientists and technologists 
innovate in this area. Some fraction of the land used for export crops 
could replace much of our gasoline needs. We must signal to our 
innovators that this is a long-term, large market, as Brazil has done.
    3. As I saw bagasse roll off the conveyor belts into heaps of waste 
for burning, it struck me that because of the preprocessing already 
done on this waste material it could produce cellulosic ethanol very 
soon. Even today's semideveloped cellulosic ethanol processes could 
make economic sense without waiting for full development. Orange peels 
from Florida and wood chips from our Northwestern forests would be next 
in line.
    4. It became clear that America, Brazil, Australia, India, Africa 
could each produce enough ethanol to meet their local gasoline 
replacement needs and then export enough to serve much of the planet.
    5. It was surprising to learn that the average wage at Cosan, the 
largest Brazilian ethanol producer, was many times the average for 
similar industries in Brazil. Over a million jobs had been created in 
the ethanol economy in Brazil. Ethanol produces substantially more jobs 
per dollar invested than oil does.
    6. Almost astounding was the claim by some entrepreneurs that they 
could see technology driving costs well below 50 cents per gallon. 
There is no reason U.S. ethanol production costs won't come down, too. 
Run, don't walk, seems so compelling suddenly. The big manufacturers 
confirmed their ability to produce ethanol at below 75 cents a gallon 
today. Why are we paying over $3 a gallon for our gasoline?
    7. If ethanol supplies run low, Brazilian producers can switch 
production in hours away from sugar to produce more ethanol. Consumers 
constantly switch back and forth between ethanol and gasoline based on 
cost and availability. Wouldn't it be nice if consumers here had a 
choice and not be hostage to oil companies?
    8. It was embarrassing to see Brazilian experts laugh at the myths 
U.S. energy companies spread like we cannot use the same storage tanks, 
tanker trucks, or transport ethanol in pipelines. They have been doing 
this for years with no adverse consequences. Why do we let people 
interested in slowing down biofuels spread these myths by turning 
molehills into mountains? Some issues surely exist but they are easily 
resolved in the context of a market as large as the transportation 
fuels market.
    9. I was passionate about ethanol before I went. Going there seemed 
to completely confirm the potential and opened my eyes to all sorts of 
new possibilities.

    Finally, I will leave you with some thoughts on why now is the time 
to take action.

    1. We have a climate crisis, we have an energy crisis, we have a 
terrorism crisis, and they are all coupled.
    2. The price of oil is up, the cost of ethanol production is down, 
and we have a visible climate crisis and an overwhelming terrorism 
crisis.
    3. Economics and the right thing coincide this time around. 
Consumer pull has been proven in Brazil. Our risks are minimal.
    4. According to the firm Expansion Capital Partners, clean, or 
green, technologies netted less than 1 percent of venture capital funds 
as of 6 years ago. Today, however, the figure has risen to 8 percent, 
the firm told TechNewsWorld (http://www.technewsworld.com/story/
50076.html).
    5. Recent news reports that the U.S. insurance industry has decided 
to formally study the relationship of global climate change to rising 
insurance costs and availability concerns.
    6. Geopolitics and OPEC politics deserve a special mention.

    Venezuelan President, Hugo Chavez, is poised to launch a bid to 
transform the global politics of oil by seeking a deal with consumer 
countries which would lock in a price of $50 a barrel according to the 
Monday, April 3, 2006, issue of The Guardian. A long-term agreement at 
that price could allow Venezuela to count its huge deposits of heavy 
crude as part of its official reserves, which Caracas says would give 
it more oil than Saudi Arabia. A $50-a-barrel lock-in would open the 
way for Venezuela, already the world's fifth-largest oil exporter, to 
demand a hugh increase in its official oil reserves--allowing it to 
demand a big increase in its production allowance within OPEC. 
Venezuela holds 90 percent of the world's extra heavy crude oil--
deposits which have to be turned into synthetic light crude before they 
can be refined and which only become economic to operate with the oil 
price at about $40 a barrel. Newsnight cites a report from the U.S. 
Energy Information Administrator, Guy Caruso, suggesting Venezuela 
could have more than a trillion barrels of reserves.
    Saudi Arabia's Oil Minister scorned the popular notion that America 
can achieve energy independence as a myth (SF Chronicle, May 3, 2006).
    Iran, China, India, Sudan, Nigeria, Venezuela, Argentina, Bolivia 
are all responding to the scramble for oil. Rules and principles go by 
the wayside given the urgency of energy needs for each nation.
    Asset valuation--increase in Venezuela and Saudi Arabia (each) 
asset values of over a trillion for every $4 rise in the price of a 
barrel of oil. According to press reports, for similar reasons, the 
U.S. oil companies have resisted inventory revaluation methods proposed 
by FASB.
    I came to you today with ambitious goals. I hope that you, too, are 
convinced that we can replace the majority of our petroleum used for 
cars and light trucks with ethanol within 25 years. More importantly, 
with a few simple policy changes, we can be irreversibly traveling down 
this path in less than 7 years and achieve energy independence, reduce 
greenhouse gas emissions, and create more jobs for rural Americans. I 
thank you for your time and attention.

    The Chairman. Well, thank you very much for that very 
thoughtful and provocative testimony. I am certain our Senators 
will have questions of you, but we will hear first from Mr. 
Grumet. We will be provoked again and stimulated, as the case 
may be, and then proceed with our questions. I am delighted to 
have you, and we will ask you to proceed.

  STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, NATIONAL 
          COMMISSION ON ENERGY POLICY, WASHINGTON, DC

    Mr. Grumet. Thank you very much, Chairman Lugar. I 
appreciate very much the opportunity to be here today. I thank 
Senators Chafee, Coleman, and Martinez for joining. I welcome 
you to interrupt me whenever you actually need to do the 
people's business and cast a vote.
    The Chairman. Thank you.
    Mr. Grumet. It is a privilege to be here today on behalf of 
the National Commission on Energy Policy. It is a privilege to 
share a table with Mr. Khosla, whose optimism about cellulosic 
ethanol, buoyed by his willingness to put his own resources 
behind that optimism, I find one of the more constructive and 
compelling things that I have heard in the last several months, 
and it very much reinforces, I think, the Commission's view 
that cellulosic ethanol is one of a series of important 
solutions.
    Mr. Chairman, as you noted, our Commission was brought here 
to try to see if we could bring somewhat of a more constructive 
center in what has been a very polarized energy policy debate 
on a lot of topics. We were able to put together a consensus 
report in December 2004, and we are very happy that many of 
those recommendations were engaged with and some actually even 
adopted in the Energy Policy Act.
    But we are mindful that many were not, and we have decided 
to stay together and really try to address what we see as the 
three structural challenges to our energy system, those being 
the need to begin a long-term effort to address the risks of 
climate change, the need to figure out a way that we can start 
to build and site the 21st century energy infrastructure that 
we are going to need to support our economy, our security, and 
our environmental needs, and then, of course, the need to 
address oil security, which we placed as the first chapter in 
our report because we believed then, as we do now, that it 
represents some of the foremost challenges to our foreign 
policy, our national security, and our economic vitality.
    Mr. Chairman, I agree with almost everything you said in 
your opening statement. I am just going to take about four 
times as long to now repeat it back to you and hopefully add a 
few additional details.
    At $70 a barrel, we get asked--I am popular at cocktail 
parties for the first time in my life--what can we do to bring 
down the price of gasoline. And over the next 15 minutes, I 
commit to offer you not one good suggestion, Mr. Chairman, to 
bring down the cost of gasoline in the next 6 or 12 months, and 
that is because a defining aspect of this problem is that there 
are no good opportunities to meaningfully reduce the cost of 
gasoline.
    What is unfortunate is that much of our debate, 
understandably, focuses on that need for a quick fix, and what 
I would hope to suggest to you today is that we have an 
opportunity and this committee, I think, could lead that 
opportunity to, in a bipartisan way, seize this moment so that 
in the next 5, 10, and 20 years we will have a new future for 
this country that is far more secure.
    I would suggest to you that the components of that future 
are as easy to describe as they are difficult to implement. We 
simply must increase and diversify our sources of petroleum in 
the near term. We must aggressively pursue greater efficiency, 
primarily through increased fuel economy, and we must seek to 
significantly diversify petroleum through alternative fuels.
    What I would like to do, Mr. Chairman, with the bulk of my 
remarks today is to talk about what I think those big 
opportunities are. The back of my now slightly damp testimony 
is an Appendix A, what I like to call measures that matter. 
These are those things that could really take something on the 
order of, at least, a million barrels of oil a day off of 
domestic demand or add that to global production. Just as 
context, we presently use about 21 million barrels a day of 
petroleum. That is projected to grow to 26 million or 27 
million; the global market, 85 million, growing to 110 million. 
So you really need to think about these in the scale of a 
million barrels a day if you think you are really going to 
start to nibble at the problem.
    But before I do that, I want to--I guess at the risk of 
being branded somewhat a heretic--directly challenge what have 
been the dual aspirations for our energy policy over the last 
30 years, those being, I think, the mythologies of energy 
independence and foreign oil. This is not simply an academic 
exercise because it is my sense that our failure over the last 
30 years to make real progress toward these goals is twofold. 
One, I think they are unrealistic goals and actually probably 
undesirable if we retain them. But as importantly, I do not 
think they lay out a measurable or productive metric that 
allows us to be held accountable to the kind of long-term 
progress that is required.
    The litany of problems that you laid out, Mr. Chairman, are 
deeply compelling. It leads one to emotionally desire to 
basically take our marbles and go home, get away from these 
guys. The problem is we have 3 percent of the world's marbles 
and we use 25 percent of annual oil production. So the notion 
that we can somehow isolate ourselves from this global dynamic 
is a vestige of a past that really does not exist. We now live 
in a global reality, global markets and clearly a geologically 
global reality. And I can tell you more times than I would like 
that I have had really passionate discussions with people about 
energy independence which then end with someone suggesting we 
have got to make sure we site those LNG facilities because my 
chemical industry is really getting kicked in the teeth. I 
think that just further demonstrates that our energy markets, 
be they oil, natural gas, or others, are global markets. And if 
we can recognize and better manage our energy interdependence, 
I think we will be in a much stronger position to deal with 
this problem meaningfully.
    Let me say another word or two about foreign oil because 
that, of course, is the mantra. Right? Let us get off foreign 
oil. When it comes to economics, what people are paying at the 
pump, what our economy feels each and every year, oil is oil. 
There is one fundamental benchmark price for oil. The big 
variety in oil prices at the pump are purely a function of 
taxes and subsidies. The cost of a barrel of crude oil in 
Norway, which is an exporting nation, is the same as it is in 
Japan, which is an importing nation. The extent to which our 
economy is vulnerable to oil price shocks is solely a function 
of how much oil we use, the ratio of imports to exports, the 
continent from which that oil was originally brought to the 
surface has no bearing on that, Mr. Chairman. So it is my 
suggestion that if we can accept that our economic security is 
really more a function of how much oil our economy depends upon 
and not the province of that oil, we can then begin to 
articulate a set of solutions that really can start to have a 
real impact.
    Between 1975 and 2000, oil intensity per GDP--that is, the 
amount of oil we use to produce $1 of domestic product--was cut 
in half. What that did was make our economy twice as resilient 
to the kinds of oil price shocks that we have experienced 
recently, and many would argue that the fact that we have been 
able to increase and continue economic growth in the last 
several years in the face of high prices is, in many regards, 
due to that enhanced resiliency.
    An ambitious goal, Mr. Chairman, would be to try to do that 
again. Between now and 2025, if we could reduce 7.25 million 
barrels a day of oil, we would again have halved the dependence 
of our economy on oil.
    Now, before starting to review the measures that I think 
could get us there, I want to just note three themes that I 
think will hopefully resonate through the balance of my 
remarks.
    The first is that the components of this solution are 
complementary. We have to move beyond the divisive debate about 
whether it is supply or demand, whether we need alternatives or 
efficiency, because unless we put all of these pieces together, 
we will simply fail. While I think the future that Vinod lays 
out is the place we need to go--this is a future toward 
alternatives--if we do not buy time by better managing our 
global oil assets and by dramatically increasing efficiency, I 
fear we will suffer as a nation immeasurable pain on the road 
to that future.
    Second, Mr. Chairman, I believe the solutions are going to 
require activist government. Until and unless we internalize 
the true costs of oil dependence, foreign policy costs, 
environmental costs, economic shock costs, military costs, into 
the private marketplace, private decisions will inherently fail 
to provide efficient outcomes. So that is why I think 
Government is going to have an ongoing obligation to confront 
market barriers and to place standards in place such that those 
costs ultimately get borne by the private market decision.
    My final reflection is that this is, of course, a long-term 
challenge. There is incredible negative momentum in the system. 
No matter how ambitious we are today, no matter what policies 
we put into place this year, this problem will continue to get 
worse for a time before it gets better, as the ongoing demand 
for greater energy use outstrips our meager efficiency and 
relatively flat-line ability to produce more oil domestically.
    Finally, Mr. Chairman, if history is a guide, public 
support will wax and wane as the price of gasoline goes up and 
down. The solution, therefore, requires a kind of commitment 
and consistency that this country really only is able to muster 
when we truly understand that our future is at risk, and I 
think this committee's ability to frame this challenge and its 
true force is going to be a critical component.
    So, Mr. Chairman, if I can turn from the lofty to the 
specific and now start to talk a little bit about specific 
measures, I want to start on the question of oil supply.
    We are the third-largest oil producer in the world here in 
the United States, something that most people, I think, don't 
appreciate. We produce about 9 million barrels a day, roughly. 
We import about 12 million barrels a day. However, we have a 
very mature oil market. We have punched a lot of holes in these 
continental 48 States, and despite significant investment 
increases in the last decade, our production has stayed flat 
and has even begun to decline a little bit.
    Now, there is a tremendous focus on reserves that are off-
limits and a view that that is really an obstacle to our own 
energy security. I will tell you that there are very 
significant oil reserves in this country that are presently 
off-limits to drilling. Between the Pacific Coast, Alaska, gulf 
coast, we have about 25 billion barrels of proven reserves. 
Now, there are very serious choices, and the Commission did not 
make specific recommendations about how to balance those 
competing interests.
    I will note that if we drilled everywhere, Santa Monica, 
coast of Connecticut, ANWR, coast of Rhode Island, coast of 
Florida--sorry, Mr. Coleman, I can't bring you into that 
discussion--estimates are that we could raise domestic 
production by about 2 million barrels a day over the next 20 
years. Now, that is a lot of oil, but one must recognize that 
when thinking about the benefits of production measures, you 
have to think about those benefits on the basis of the global 
market because all the benefits of production are shared with 
all around the world who use that oil. So if we were to produce 
another 2 million barrels a day in the United States, it would 
have a salutary effect of about a 2-percent increase on the 
global oil market, certainly not insignificant. But I think 
thinking about that against the 20 or so million barrels a day 
we use here in the United States would be misleading.
    So to turn to global production, two-thirds of the world's 
oil is found in Saudi Arabia, Iran, and Iraq. The good news is 
that of late, the efforts in the former Soviet Union have been 
basically offsetting the demand growth in China. There has been 
an eery parallelism between their ability to increase 
production while China's demand has skyrocketed. So continuing 
effort to try to open investment in these countries to 
diversify global production is of critical importance.
    We have had real success there. When Kazakhstan opened its 
borders to foreign investment between 1996 and 2002, they fully 
doubled their oil production.
    One of the challenges I think we face, Mr. Chairman, which 
you mentioned, is that an increasing fraction of the global oil 
market is now being tied up by statist enterprises. So thinking 
about how we, in our foreign policy, are able to ensure that 
the competitive marketplace, American technology and investment 
has access to that global reserve is very important.
    I want to turn now to unconventional oil. These are the tar 
sands in Canada, the heavy oil in Venezuela, as well as the 
opportunity to take our incredibly abundant coal supplies and 
transform them into liquids like alternative diesel fuels. This 
is an incredible resource when one thinks about its magnitude. 
If, in fact, we were to include those heavy oils and 
unconventional oils in our global picture, it would 
dramatically shift the hemispheric balance such that the North 
American Hemisphere would move from 13 percent of global 
reserves up to 36 percent of the global reserves. If we brought 
in coal to liquid technologies, that would further increase the 
hydrocarbon potential of the people who we know and like.
    The problem is not enough resource constraint. The problem 
is not enough atmosphere. At present, developing oil out of 
unconventional reserves or out of coal basically has about a 3-
time impact on the greenhouse gas emissions of those fuels. If 
you were to sequester each and every molecule that was used in 
the production, you could basically hold it even. And I think 
that is an incredibly important and realistic aspiration 
because it is our view at the Commission that one need not 
solve our climate change problems through our oil security 
measures. But I think we feel equally strongly that we cannot 
fundamentally undermine an alternative and equally compelling 
national challenge by trying to solve our oil security problem. 
So, I guess I would suggest to you that it is incredibly 
important that if we seek to rely upon these unconventional 
resources, we begin a fundamentally very different series of 
investments to try to make sure we can understand how to 
develop those resources in ways that are compatible with our 
other challenges. Otherwise, I do not think that they will, in 
fact, become part of the long-term equation.
    Now, let me move on to efficiency, but just say one word 
about strengthening strategic reserves. As I think all are 
aware, we have a significant strategic petroleum reserve here 
in the United States, as do the other countries in the OECD who 
are members of the International Energy Agency. These reserves 
provide a very significant insurance policy and a real 
significant, I think, psychological deterrent against those who 
would like to manipulate the oil market.
    China and India and the developing countries in which much 
of the recent growth is occurring, are not members, do not 
participate in this global strategic reserve. I think this 
committee has begun this discussion and has taken up the 
serious question of what we can do to encourage all countries 
who play a significant role in putting strain on the system to 
pay into the security policy. There are a lot of rules to 
become a member of the OECD, a lot of things that deal with 
human rights and economic transparency and a lot of, I think, 
obstacles that will keep China out of the strategic reserve for 
some period of time unless we find a way to be creative, give 
them some kind of special observer status and welcome them in 
more quickly. But I think that is a critical component of the 
long term.
    I will now try to efficiently move into the discussion of 
efficiency measures, Mr. Chairman. I think that these measures 
deserve focus because not only do they have the largest impact 
potentially in purely absolute terms, but as I mentioned 
earlier, every barrel of oil we save or displace, the benefits 
of those accrue entirely to the United States. So if we can 
reduce our demand from 25 million to 24 million barrels, that 1 
million barrels is a 4-percent benefit to our country, whereas 
a 1-million-barrel production is about a 1-percent benefit to 
global security.
    Far and away, significantly strengthening and reforming 
CAFE is the single most important thing we can do in the near 
term to increase our energy security. There are a plethora of 
proposals around Congress right now about how to become energy 
secure. I would say to you, flatly, that unless those proposals 
contain a serious obligation to increase fuel economy, I do not 
believe they provide a serious option for a solution.
    Mr. Chairman, fuel economy in this country has been 
stagnant for over 20 years and many confuse that with the 
notion that we are not making technological progress, and 
nothing could be further from the truth. Each and every year 
for the last 20 years, energy efficiency of our engines have 
become much, much more efficient, by 2-3 percent a year. 
However, absent any obligation to take those technological 
gains and put them toward the public good of reducing our oil 
dependence, companies have done the understandable thing. We 
have made our cars bigger, heavier, and faster. A car today, on 
average, is about 25 percent heavier than it was 20 years ago 
and gets fully 100 percent more power. The economy cars of 
today outperform the muscle cars of the 1970s. So one of the 
key conclusions of our Commission was that looking at this 
incredible opportunity coming forward by hybrids and advanced 
diesels, that Government must act to both accelerate those 
programs and to direct the efficiency toward the public good of 
lowering our oil dependence.
    I want to talk for a couple moments about the challenges 
with CAFE that primarily revolve around safety and job 
concerns, and I will just skim these complicated topics. But 
for a long time, there has been an assertion that to increase 
fuel economy, we have to make cars smaller. That is simply not 
the case. We do not need to make cars smaller. We may need to 
stop making them bigger every year. We may need to stop making 
them more and more powerful every year, but if we just held the 
line on our rather delightful automobile fleet and started to 
direct the future efficiency gains toward making those cars go 
farther on a mile of gasoline, we would be on the way to a more 
efficient future.
    Now, the safety issue is far more complex. There are 
opportunities with new materials. There are opportunities to 
make cars safer. The problem we have is when Hummers eat Minis. 
It is the disparity of weight on the highways more than 
anything else that creates the safety issues we are concerned 
about. So there are ways to reform CAFE which I think can help 
in that regard.
    On the issue of jobs, there is a depressing reality that 
our domestic industry is less capable of competing to create 
the advanced cars of the future. We have worked with the UAW 
and experts at the University of Michigan and others to try to 
assess the validity of these concerns and believe that they are 
real. One of the recommendations we proposed, which has been 
batted about by many, is the idea to provide significant tax 
incentives for the retooling of domestic facilities and 
domestic parts suppliers, not unlike what Vinod was suggesting 
about the tax incentives for domestic production of ethanol. We 
believe that those would not only be GATT-legal, but they would 
allow us to both provide the cars people want while keeping the 
American auto base strong.
    We were caught a little short when I think a representative 
from Ford mentioned that they do not pay a lot of taxes these 
days, and so offering them tax incentives was maybe not the 
most efficient mechanism of giving them the relief that they 
desired. Senator Obama, who could not join us today, offered a 
new alliterative mechanism with the health care of hybrids, the 
idea that we address the catastrophic health care costs of some 
of the auto industry in exchange for a commitment to building 
hybrids. While I think we have work to do on finding the 
perfect mechanism, the tough love metaphor, I think, is going 
to be a component of the solution. We have to challenge the 
domestic industry and recognize at the same time that they do 
not have a level playing field with their foreign competitors 
and will have to address that.
    Finally, on CAFE, there has been a lot of discussion about 
reforming CAFE as of late. The Commission strongly believes 
that pairing a significant increase with significant reform is 
the right thing to do. We commend NHTSA for their restructuring 
of the recent light duty truck rule. We are a little bit less 
sanguine that they have significantly strengthened that rule. 
They have changed the model so that it is a much more effective 
tool. They just have not taken that tool out for a drive. And 
the key reason is that the way NHTSA tries to set CAFE is quite 
reasonable. They try to determine what is the value of a gallon 
of gasoline saved, social total value, and set the new CAFE 
standards such that the costs of new technology are offset by 
the fuel savings.
    In this last rulemaking, NHTSA determined that the total 
social value of a gallon of gasoline saved over the next decade 
was $1.70. They used the EIA projections, which they are 
obligated to do, which says real cost of gasoline will be about 
$1.60 and we are going to add 40 cents of taxes. So it is $1.60 
of real value. And then they looked at all of the different 
externalities they could think about, and they came up with 6 
cents. It is not because they are not good people who try hard. 
They simply do not have the authority or the tools to think 
about the issues that, I think, this committee cares about. 
They looked at dozens of different things. They looked at air 
pollution costs. They looked at protecting the economy from 
price shocks. They even placed a value on saving consumers time 
by not having to go to gasoline stations.
    Unfortunately, when they grappled with the question of 
military costs, they concluded that they could not ascribe any 
quantifiable costs that our country pays to have our military 
provide access to oil. So they factored that in as zero. They 
could not even begin to contemplate the issues, Mr. Chairman, 
that you addressed at the beginning: The likelihood of 
increased tensions with China, the extent to which our foreign 
policy prerogatives are inhibited. These are concerns that this 
committee, I think, understands well and that only this 
Congress has the ability to, in fact, instruct NHTSA as to how 
to engage.
    So, I believe, the President's request for greater 
authority is intelligent and should be supported. I think 
Congress should also try to provide some direction as to how 
the executive branch use that authority not only by suggesting 
that they incorporate the annual increases in efficiency and 
direct them toward improvements, but help NHTSA think about how 
to grapple with the very real costs of oil dependence that this 
committee is keenly aware of.
    I want to end, Mr. Chairman, by a few words on alternatives 
and will not begin to add to what, I think, Mr. Khosla has done 
a very fine job of. Simply to note that as long as our 
transportation system is 97 percent dependent upon petroleum, 
we will not be in control of our own destiny. Very much like 
Mr. Khosla, the Commission concluded that cellulosic ethanol is 
the most promising opportunity to displace a significant amount 
of petroleum, and there are four reasons. And we applied these 
tests to a number of different options, but there is an ample 
domestic feedstock, it has low net greenhouse gas--inching 
benefits. It can largely rely on existing infrastructure, and 
it has the potential to be cost competitive over time with 
gasoline. Those are kind of the four horsemen of a real fuel.
    Let me just note that I very much agree that infrastructure 
in the near term is the challenge. I support the suggestion 
that we really focus, as you have with Senator Obama and 
others, on bringing forth that infrastructure. I note that once 
we get above 10 or 15 billion gallons of corn-based ethanol, we 
start running out of corn flakes. So I think corn is the 
pathway to our biofuture. It is the pathway to our 
infrastructure but, like Mr. Khosla, believe that it is 
cellulosic ethanol that has the real long-term potential.
    And then, finally, a note on land. We very much agree that 
land is not ultimately a challenge for a big cellulosic 
industry. We concluded that you could displace half of the 
gasoline in this country with about 30 million acres of land. I 
will note that we presume significant increases, as Mr. Khosla 
does, in the yield per acre of energy crops, real but not 
remarkable increases in the conversion efficiency of that 
product to fuel, and a doubling of fuel economy. If you do not 
do those three things, you are looking at 180 million acres, 
which would be entirely unacceptable. These are incredibly 
realistic opportunities, but they all have to be pursued.
    Having begun with the heretical challenge of energy 
independence, I think I want to end with something equally 
provocative, thinking about authorization, appropriations, and 
noncompetitive earmarks.
    EPAct did a fine job. There are 10 programs in the Energy 
Policy Act which are directed toward providing incentives for 
the first mover of ethanol facilities that we all want about $4 
billion of authorizations. I think we all know that in this 
fiscal climate, the challenge of providing appropriations for 
that is a real one, and the Commission urges this Congress to 
do whatever it can.
    I will also note that in 2005 fully half of the DOE 
research budget for cellulosic ethanol was directed to 
noncompetitive earmarks. The irony here, Mr. Chairman, is I 
think this clearly reflects the keen interest that Congress has 
in this program. I will simply note that unless we try to 
channel that interest, we will literally love this program to 
death as we continue to pull it apart in ways that frustrate 
long-term research progress.
    So, truly, now in conclusion as promised, I am here to 
offer no near term solutions, whatsoever. I think there is an 
understandable frustration about that, which leads us to want 
to talk about windfall profits and price gouging and restricted 
environmental laws as if a few bad people or poorly crafted 
statutes were somehow responsible for the misery that people 
are feeling. I guess I would suggest to you that we need to 
look beyond those quick fixes and that if, in fact, we come 
together and agree that there is an opportunity in a bipartisan 
way to focus on increasing traditional oil supply, on 
significantly enhancing the efficiency of our fleet, and on 
simultaneously moving toward the vision that we share about a 
biofuels future, we can then put ourselves in a position where 
we will be in charge of our own destiny. It is clear to me that 
we will use less oil in this country in the future. I think the 
question is whether we do that on our terms or whether it is 
done to us on terms that will fundamentally be unacceptable to 
our health and happiness.
    Thank you for the opportunity to be here today.
    [The prepared statement of Mr. Grumet follows:]

  Prepared Statement of Jason S. Grumet, Executive Director, National 
              Commission on Energy Policy, Washington, DC

                              INTRODUCTION

    Good day, Chairman Lugar and members of the committee. I have the 
privilege to speak to you today on behalf of the National Commission on 
Energy Policy (NCEP), a diverse and bipartisan group of energy experts 
that first came together in 2002 with support from the Hewlett 
Foundation and several other leading philanthropies. In December 2004, 
the Commission released a report entitled ``Ending the Energy 
Stalemate: A Bipartisan Strategy to Meet America's Energy Challenges.'' 
The first chapter of that report was about oil security because our 
Commission believed then, and still does, that oil security is one of 
our Nation's foremost economic, national security, and energy 
challenges.
    This isn't news to anyone, of course--least of all this committee. 
In fact, as national policy obsessions go, America's oil dependence has 
been one of our most enduring. For more than 50 years, Congress and 
multiple administrations of either party have decried our reliance on 
imported oil and vowed to do something about it. Today, with oil prices 
topping $70 per barrel and gasoline prices at $3 per gallon, we are 
again enmeshed in an active debate over energy policy. The lack of real 
options to address near-term energy prices is a source of great 
frustration here in Congress and throughout the country. The challenge 
we face is to move beyond slogans, blame, and false promise of ``quick 
fixes'' and seize upon this moment of collective focus to develop long-
term policy responses that will meaningfully protect our economy while 
strengthening our national security.
    The basic elements of an effective response to our current oil 
predicament are as easy to summarize as they are difficult to execute. 
Put simply, the Commission believes we must:

          1. Expand and diversify supplies;
          2. Reduce demand; and
          3. Develop alternatives.

    At the outset, I want to stress four themes that I hope will 
resonate throughout my remarks.
    First, the elements identified above are complementary components 
of an effective strategy. If they are not pursued in concert the effort 
will fail. We must have supply increases and demand reductions. We must 
pursue greater vehicle fuel economy and aggressive efforts to displace 
petroleum with biofuels. Simply put, we must move beyond divisive and 
false choices to develop a comprehensive approach that does not seek to 
trade one element off against the success of another.
    Second, until, and unless, private markets reflect the full 
economic, security, and environmental costs of oil dependence--and 
until, and unless, consumers possess adequate information to make 
efficient choices--policies that rely solely on private market 
decisions will continue to fail. It is, therefore, incumbent upon 
government to overcome market barriers and motivate private sector 
innovation by creating incentives that better reflect the true benefits 
of greater energy security.
    Third, improving our energy security is a long-term challenge. If 
we commit the Nation to a fundamental course correction, a secure 
energy future is within our reach. It will take several years, however, 
before we begin to reap the benefits of improved policies and 
technologies. During this time, the problem of high prices and tight 
supplies will almost certainly get worse as growth in petroleum demand 
continues to outstrip the rate at which vehicle fuel economy improves 
and new sources of oil come on line. While biofuels hold great 
potential, near term gains will also be incremental when compared 
against our annual petroleum consumption. If history is a guide, public 
interest and support for long-term policies will wax and wane as the 
price of gasoline rises and falls. A real solution, therefore, will 
require the kind of commitment, consistency, and courage our Nation has 
mustered in the past when we understood that our future was at risk.
    Finally, we must better understand and articulate the risks of oil 
dependence and establish goals that encourage consistent progress and 
accountability. I believe that our failure over the past 30 years to 
implement measures commensurate with the risks is, in part, due to 
widely held misconceptions about the true nature and scope of the 
problem and to our inability to establish realistic interim goals and 
mechanisms to measure our progress in achieving them.

                   RETHINKING ``ENERGY INDEPENDENCE''

    Before delving into solutions, I would like to take on the somewhat 
heretical task of challenging the aspiration of ``energy independence'' 
with its attendant focus on reducing our Nation's use of ``foreign 
oil.'' While emotionally compelling, these concepts are vestiges of a 
world that no longer exists. By failing to recognize the fundamentally 
global nature of the oil market, and the increasingly global nature of 
markets for natural gas, the call for energy independence has become an 
obstacle to effective policy design. There is one world market for oil. 
It is a fungible global commodity that has a single benchmark price. 
Wide disparities in the price of gasoline around the world are the 
product of national subsidies and taxes, but have nothing to do with 
how much oil different nations import or produce. Our economic 
vulnerability to oil price shocks is entirely a function of how much 
oil we use--the continent from which the oil was extracted has no 
bearing, whatsoever, on this equation.
    Moreover, as members of this committee know better than anyone 
else, some of the most profound consequences of America's dependence on 
oil go well beyond the economic. It's virtually impossible to put a 
dollar figure on all the costs of that dependence, but there is no 
question that our thirst for oil constrains our foreign policy, imposes 
burdens on our military, accounts for, approximately, one-third of the 
U.S. current account deficit which soared to $805 billion in 2005, 
swells the coffers of undemocratic and even actively hostile 
governments, and directly, or indirectly, provides some of the funding 
for terrorist organizations that mean us harm. These risks and 
vulnerabilities too, like those we face strictly in terms of our own 
economic well-being, will surely continue to grow if we don't take 
action. Put simply, if current trends don't change we face a global 
scramble for energy resources within this century that is sure to be 
economically and geopolitically damaging to all concerned.
    Confronted with these realities it is tempting--but wrong--to 
imagine that if we could only become energy self-sufficient everything 
would be fine. I can't underscore this point too strongly: Energy 
``independence'' must not be confused with energy ``security.'' Energy 
independence is simply unrealistic and has been ever since President 
Nixon first proposed to enshrine it as a national goal in the 1970s. 
U.S. oil imports have been rising inexorably ever since. The United 
States, alone, currently accounts for fully one-quarter of world oil 
demand. What may be less well known is that we are also the world's 
third-largest oil producer at present. But this will not last forever. 
Our Nation holds less than 3 percent of the world's proved oil 
reserves. Sixty-one percent of world reserves, by contrast, are located 
in the Middle East.

------------------------------------------------------------------------
                                                           Percent of
                           Region                        world's proved
                                                            reserves
------------------------------------------------------------------------
Middle East...........................................             61.7
Europe/Eurasia........................................             11.7
Africa................................................              9.4
South and Central America.............................              8.5
North America.........................................              5.1
Asia Pacific..........................................              3.5
------------------------------------------------------------------------
* Only 9% of world reserves are held by countries considered ``free'' by
  Freedom House.

    Current projections indicate that oil production by the United 
States and other industrialized countries will decline by 6 percent 
over the next two decades, even as oil production in the former Soviet 
Union increases by nearly 50 percent and OPEC output increases 33 
percent. This means that U.S. oil imports will continue to grow in the 
future, as they have for the last several decades, and that we like 
everyone else will increasingly need to rely on oil supplies that 
originate in what are now unstable and undemocratic regions of the 
world. Nor will our dependence on foreign sources of energy be limited 
to oil: Given declining domestic production of natural gas--another 
fuel that plays an extremely important role in the U.S. economy--it 
appears inevitable that we will increasingly need to rely on overseas 
sources for natural gas as well. The key, then, to greater energy 
security for the United States lies in recognizing--and better 
managing--our fundamental energy interdependence.

                        OIL MARKET FUNDAMENTALS

    Nearly all experts agree about the fundamental drivers behind 
today's high oil prices and extreme market volatility. For some time 
now, rising global demand for petroleum--driven not only by growing 
U.S. demand, but in part by the very rapid modernization of countries 
like China and India--has been outpacing the discovery and development 
of new sources of supply. The result is that we now live in a world 
that requires approximately 85 million barrels of oil daily, but has 
only very little spare production capacity (as little as 2 percent, 
according to various estimates) and barely sufficient refining 
capacity. In this environment even small disruptions along the supply 
chain can cause serious repercussions. The dynamics are further 
strained by OPEC's ability to manipulate production quotas and by the 
participation of market players that operate on motives outside the 
bounds of economic efficiency.
    Unfortunately, this set of conditions seems unlikely to change 
soon. U.S. and total world demand for oil are expected to increase 
substantially over the next 20 years. (See Fig.1) Between 2004 and 
2025, U.S. demand is projected to grow 24 percent (from 21 to 26 
million barrels per day) and total world demand is expected to increase 
34 percent (from 82 to 110 million barrels per day). (In the last year, 
the U.S. Energy Information Agency has downgraded its 20-year domestic 
demand projection by 3 million barrels a day based on expectations that 
high global prices are here to stay.) The world is suffering from what 
can best be described as a ``demand shock'' as China, India, and much 
of the developing world modernize their economies and dramatically 
increase their use of motor vehicles. Equally concerning, there is 
currently very little spare capacity in the global oil market to make 
up any shortfall in oil supplies that arises as a result of political 
instability, unforeseen demand growth, acts of terrorism, or weather-
related events. In 2005, global spare-production capacity totaled 
approximately 1.5-2.0 million barrels per day; by contrast spare-
production capacity in 2001 was approximately 7.3 million barrels per 
day. This means that any event that prevents even a relatively small 
amount of oil from reaching today's global markets can have a dramatic 
impact on prices.
    In partnership with the organization, Securing America's Energy 
Future (SAFE), NCEP has been exploring the potential consequences of 
today's tight supply margins by examining the impacts of any number of 
possible disruptions in global oil supply. With help from industry and 
military experts, as well as from the Wall Street analysis firm, 
Sanford C. Bernstein and Co. LLC, we concluded that any number of truly 
unexceptional circumstances could cause global oil prices to literally 
skyrocket. As part of an oil crisis simulation called Oil ShockWave, we 
found that a mere 4-percent shortfall in daily world oil supplies could 
lead to a 177-percent increase in world prices. It wouldn't take much, 
in other words, to send oil prices even higher--perhaps significantly 
higher--than they already are. With the U.S. transportation system over 
97 percent reliant upon petroleum, the impacts of such an increase 
could be devastating. As then-Chairman of the Federal Reserve, Alan 
Greenspan, observed in 2002, ``All economic downturns in the United 
States since 1973 have been preceded by sharp increases in the price of 
oil.''

                     A BETTER GOAL FOR OIL SECURITY

    If we accept that the key measure of our energy security is not how 
much oil we import, but how much our economy depends on oil, we can 
begin to articulate more realistic goals and actually set about 
achieving them. In fact, the oil intensity of the U.S. economy, as 
measured by gallons consumed per dollar of GDP generated, was cut in 
half between 1975 and 2000. (See Fig. 2) There were multiple reasons 
for this decline and they are worth reviewing as we explore our policy 
options for the future. First, there were structural shifts in the U.S. 
economy that led to reduced oil consumption, including a shift to less 
energy-intensive enterprises generally, together with more efficient 
oil use in some industries and a shift away from oil to different fuels 
altogether in other industries, notably in the electric power sector. 
Second, and very important, were vehicle fuel economy standards 
introduced in the late 1970s that doubled the average mileage of our 
passenger car and light-duty fleet.
    An ambitious goal is to cut the oil intensity of the U.S. economy 
in half again over 20 years. To achieve this goal would require roughly 
a 7.25-million-barrel-per-day reduction in oil consumption by 2025. 
Unfortunately, progress in further reducing the overall oil intensity 
of the American economy has slowed in recent years, while progress in 
improving the efficiency of the Nation's vehicle fleet has stalled 
altogether. But for a modest recent increase in light-truck standards, 
fuel economy requirements for passenger vehicles have been essentially 
unchanged since 1980. As a result, average fleet efficiency actually 
began to decline in recent years as large trucks and SUVs captured ever 
larger shares of the U.S. auto market. Simply stated, the United States 
will not have a serious policy to increase oil security until we 
achieve a significant increase in the fuel economy of our vehicles.
    A fundamental premise underlying the Commission's oil security 
recommendations is the belief that we can neither drill nor conserve 
our way to energy security. We simply must address both the supply and 
demand sides of the equation if we are to have any hope of lasting 
success. As Congress and ordinary Americans search for solutions to the 
current costs of gasoline, it is painfully clear that there are no good 
near term options. We must accept this unfortunate reality and direct 
our attention to minimizing the harmful effects of the oil shocks that 
are likely to occur with increasing regularity and severity over the 
next 20 years.

                               SOLUTIONS

    As noted at the outset, the Commission believes that there are 
three essential elements to enhanced oil security: Increasing supply, 
reducing demand, and developing alternatives. The first two of these 
imperatives can be seen as buying us time to achieve the more 
fundamental benefits of a diversified portfolio of transportation 
fuels. We must seek to widen the gap between available supply and 
demand in the short to medium term as a means of calming today's 
extremely volatile markets and putting downward pressure on prices, 
even as we begin developing clean and affordable alternatives for the 
long term. The Commission's specific recommendations for widening the 
gap on the supply side include:

          1. Expanding and diversifying conventional supplies of oil, 
        both at home and abroad;
          2. Expanding the global network of strategic petroleum 
        reserves; and
          3. Exploring technologies and processes that would allow for 
        the use of unconventional oil resources in a manner that is 
        compatible with climate change and other environmental 
        concerns.

    On the demand side, the Commission recommends:

          1. Significantly strengthening fuel economy standards for new 
        passenger vehicles, while simultaneously reforming the existing 
        CAFE program to reduce compliance costs and provide cost-
        certainty for manufacturers and consumers;
          2. Creating incentives to accelerate the market penetration 
        of highly efficient hybrid vehicles while also helping the 
        domestic auto industry retool to meet growing demand for these 
        vehicles; and
          3. Exploiting opportunities to boost the efficiency of heavy 
        duty vehicles and to improve the fuel-economy performance of 
        the existing light duty vehicle fleet.

    Finally, to develop long-term alternatives to petroleum, the 
Commission recommends a sustained and vigorous effort to spur public 
and private sector investment in the development and early deployment 
of domestically produced transportation fuels derived from biomass and 
organic wastes. Of all available alternatives to petroleum fuels, the 
Commission believes that cellulosic ethanol holds the most potential 
for displacing a significant fraction of transportation oil demand 
within the next 20-30 years and should, therefore, be a focus of near 
term RD&D activities.
    A summary of the potential benefits of supply and demand measures 
can be found at Appendix A.

                          OIL SUPPLY MEASURES

    The Commission believes that opportunities exist to substantially 
boost global oil production within the next 10 to 20 years. This would 
help to relieve upward price pressures and reduce the risk of 
significant supply disruptions over the same timeframe.
    Domestic Production: The United States is currently the third-
largest oil-producing nation after Saudi Arabia and Russia. As such, 
U.S. production clearly has a significant impact on the stability of 
the global oil market and efforts to expand production within our own 
borders must be pursued. Currently, the United States produces about 
8.5 million barrels per day of oil (crude and products) and consumes 
about 21 million barrels per day of finished oil products. Domestic oil 
production is important to the Nation's economy--it remains an 
important source of jobs and tax revenues in some regions of the 
country--and it offers the important advantage of reducing financial 
transfers to foreign nations. Although domestic production has 
generally declined over the past decade, it is now projected to 
increase modestly in the near term (1 million barrels per day in 2016) 
and to resume a gradual decline thereafter.
    The United States is thought to have about 25 billion barrels of 
proved, conventional oil reserves, the great majority in Alaska and off 
our Pacific coast with a smaller fraction off the Atlantic coast and 
the eastern Gulf of Mexico.

------------------------------------------------------------------------
                                                            Crude oil
                    Conventional reserves                 (billions of
                                                            barrels)
------------------------------------------------------------------------
Alaska (ANWR).........................................            10.36
Pacific Offshore......................................            10.71
Eastern Gulf of Mexico................................             3.58
Atlantic Offshore.....................................             2.31
------------------------------------------------------------------------

    Though technically recoverable, much of this oil is currently off-
limits to leasing. If all of it were tapped, it is estimated that U.S. 
oil output could be increased by about 2 million barrels per day in 
2020. Obviously, many issues must be considered in weighing whether it 
is appropriate to open a particular area to oil drilling and the 
Commission takes no position on whether the status of specific regions 
that are currently off-limits should be changed. To provide a sound 
basis for future decisionmaking, however, the Commission does believe 
that an inventory of domestic petroleum reserves should be undertaken 
as part of a regular, comprehensive assessment of the Nation's known 
and potential energy resources. Again, however, it cannot be stressed 
often enough that while U.S. production makes an important contribution 
to global supplies (and hence is critical to maintaining the near term 
stability of global markets), our Nation's economic vulnerability to 
oil price shocks is largely a function of how much oil we use and not 
how much we produce.
    Global Production: Much more substantial oil reserves exist, of 
course, in other parts of the world, including--besides the Middle 
East--parts of the former Soviet Union, Africa, and South and Central 
America. The Commission, therefore, recommends that the U.S. Government 
encourage nations with significant underdeveloped oil reserves to allow 
foreign investment in their energy sectors to increase global oil 
production. Kazakhstan, for example, provides an example of the 
benefits of liberalized investment policies. Having opened its oil 
resources to significant foreign investment in the mid-1990s, 
Kazakhstan's crude oil production rate more than doubled between 1996 
and 2002. (See Fig. 3) Output from this one nation is now expected to 
reach 2 million barrels per day in the next few years and could peak at 
as much as 4 million barrels per day further down the road. The 
Commission also recommends that the U.S. Government consider impacts on 
world oil markets in cases where unilateral economic sanctions imposed 
by our Nation may be limiting investment in foreign energy markets 
without necessarily achieving their stated policy objectives.
    Unconventional Oil Supplies: Accounting for unconventional oil 
supplies--such as tar sands in Canada, heavy oil in Venezuela, and oil 
shale in the United States--would significantly shift the hemispheric 
balance of world petroleum resources. (See Fig. 4) With today's high 
prices, these unconventional resources are already being tapped to a 
greater extent and by 2015 it is likely that Canada and Venezuela 
together will produce nearly 3.5 million barrels per day of 
unconventional crude. At the same time, the Fischer-Tropf process, 
which has been used for over 50 years to convert coal into a form of 
clean diesel fuel, could--at prices above $50 per barrel--become a 
significant source of domestic transportation fuel.
    Further reliance on unconventional oil resources in the future, 
however, will require substantial progress toward reducing the 
substantial energy requirements and negative environmental impacts 
currently associated with extracting and processing them. Absent 
efforts to sequester the carbon used in producing unconventional oil, 
for example, the total greenhouse gas emissions associated with these 
resources are roughly two and a half times greater than the emissions 
associated with conventional oil production. While the Commission does 
not believe that our Nation's oil policy must be viewed as a vehicle 
for achieving its climate protection objectives, it seems equally clear 
to us that it would be foolhardy to pursue an oil policy that is at 
odds with other compelling public policy objectives. Unless and until 
we learn how to develop these resources without significantly 
increasing greenhouse gas emissions, the Commission believes that 
exploiting unconventional oil reserves does not offer a viable long-
term pathway toward a more secure energy future. Therefore, the 
Commission has recommended increased funding to improve the 
environmental performance of technologies and practices used to produce 
unconventional oil resources.
    Strategic Reserves: Oil stockpiles provide an important insurance 
policy against the potentially dire consequences of a significant 
short-term global supply disruption. Combined with private stocks, the 
U.S. Strategic Petroleum Reserve currently provides us with enough 
spare capacity to cover the loss of all imports for approximately 150 
days, or a partial disruption for much longer. To improve global and 
domestic oil security, the Commission recommends that the U.S. 
Government work with other major oil-consuming nations to increase 
their public reserves and participate in the global network of 
strategic reserves.
    In particular, membership in the International Energy Agency (IEA) 
could provide major emerging oil-consuming nations like China and India 
with: (1) A greater feeling of ownership on their part in how the 
``global energy system'' is run; (2) improved transparency in energy 
statistics and policymaking; and (3) an established forum to 
communicate concerns, success stories, and partnership ideas. IEA 
membership also brings with it a requirement that nations maintain 
strategic oil stocks sufficient to supply 90 days of demand and agree 
to manage them in coordination with IEA member countries (although this 
requirement is not legally binding). Because the IEA is a cooperative 
group of the Organization for Economic Cooperation and Development 
(OECD)--the IEA's 26 member nations include most OECD countries--a 
number of issues would have to be addressed with respect to the 
inclusion of currently non-OECD developing nations. In the past, 
initiation into the OECD has been a lengthy and sometimes controversial 
process in which standards of economic development, openness, and human 
rights are considered. Given the potential benefits noted above, 
however, possibilities for bringing countries like China or India into 
the IEA on an expedited or alternative basis--perhaps with special 
observer or some other unique status--should be explored.

                          OIL DEMAND MEASURES

    While the Commission firmly believes that both supply and demand 
measures must be pursued as part of an effective strategy to enhance 
the Nation's energy security, it is important to emphasize that when it 
comes to protecting the economy from oil price shocks, a barrel 
produced and a barrel conserved are not the same thing. The benefits of 
every added barrel of supply--whether produced domestically or abroad--
accrue to oil consumers the world over, in the form of a marginal 
reduction in the market price. By contrast, the benefits that can be 
achieved through demand side measures and alternative fuel production--
besides being much larger in absolute magnitude--are largely captured 
by those who implement them. The Commission, therefore, devoted 
significant attention to the potential for reducing our Nation's oil 
demand, particularly in the transportation sector, which because it 
accounts for nearly 70 percent of current domestic consumption and is 
nearly solely dependent on petroleum fuels--is key to oil use in the 
broader U.S. economy.
    Strengthening and Reforming CAFE While Promoting Advanced-
Technology Vehicles and Addressing Jobs and Competitiveness Concerns: 
Improving passenger vehicle fuel economy is by far the most significant 
and reliable oil demand reduction measure available to U.S. 
policymakers. As noted previously, CAFE standards played an important 
role in substantially reducing the oil intensity of the U.S. economy 
between the late 1970s and early 1990s. However, a longstanding 
political stalemate has blocked significant progress in fuel economy 
for over two decades. (See Fig. 5) People often confuse our failure to 
increase domestic fuel economy with the view that technology options 
for improving vehicle efficiency have not advanced over the past two 
decades. Nothing could be farther from the truth. The efficiency of our 
automobiles increases annually. Estimates of this annual increase vary 
substantially from a low estimate of roughly 1.5 percent per year to a 
high estimate of over 5 percent per year. However, absent any 
requirement to direct these substantial efficiency gains toward 
achieving the public good of reduced oil dependence, vehicle 
manufacturers have instead devoted recent technological advancements to 
simply maintaining fuel economy while dramatically increasing vehicle 
size and power. While vehicle fuel economy is now no higher than it was 
in 1981, vehicle weight has increased by 24 percent and horsepower has 
increased by over 100 percent over this same time period. In fact, most 
of today's economy cars outperform the ``muscle'' cars of the 1970s. If 
we enhance the rate of efficiency advancement and channel the majority 
of this improvement into greater fuel economy, we can maintain the 
amenities of the current vehicle fleet while gradually increasing fuel 
economy every year.
    In proposing to significantly strengthen and reform vehicle fuel 
economy requirements, the Commission sought to address the three issues 
we believe are most responsible for the last two decades of stagnation 
in this critical policy area: (1) Uncertainty over the cost of future 
fuel-saving technology; (2) concern that more stringent standards will 
compromise vehicle safety; and (3) fears that new standards will put 
the U.S. auto industry and U.S. autoworkers at further competitive risk 
relative to foreign automakers.
    CAFE Reform: Pairing a significant increase in standards with 
reforms that would make the CAFE program more flexible and reduce the 
compliance burden for manufacturers would help to address cost 
concerns. The Commission commends recent efforts by the National 
Highway Traffic Safety Administration (NHTSA) to introduce program 
reforms as part of its 2005 rulemaking to update CAFE standards for 
light trucks. Further reforms that should be considered include 
allowing manufacturers to trade fuel economy credits with each other 
and across the light truck and passenger vehicle fleets, as well as 
``safety valve'' mechanisms that would set a defined upper limit on 
compliance costs in the event that fuel savings do not mature as 
expected or prove more expensive than anticipated.
    The adequacy of NHTSA's authority to craft effective CAFE standards 
for passenger cars has recently been called into question. The 
Commission believes that NHTSA should be granted the requested 
authority and similarly that Congress should provide NHTSA with clear 
direction about how to apply it. When NHTSA sets new standards, the 
Agency seeks to fully offset the costs of new fuel-saving technology 
with the value of saved gasoline. This approach has obvious merit, but 
its application depends significantly upon NHTSA's ability to assess 
the full societal benefits of avoiding a gallon of gasoline 
consumption. At present, NHTSA lacks both the tools and authority to 
adequately factor in many of these broader externalities. This 
inability results in a systematic undervaluation of the benefits 
achievable through improved vehicle fuel economy and results in 
standards that are lower than would be justified by a more 
comprehensive assessment. It's not that NHTSA doesn't work hard to 
assess these externalities--in its recent light truck rulemaking, the 
Agency sought to include factors such as reduced vulnerability to oil 
price shocks, reduced air pollution, and even the value of spending 
less time at gas stations.
    However, NHTSA has no ability to quantify the value of reduced 
future tensions with China over tight oil supplies or the constraints 
that oil dependence imposes on our foreign policy. After considering 
the costs of protecting our access to global oil resources, NHTSA, in 
its recent rulemaking, decided not to include any value in reduced 
military costs as a result of increased fuel economy. The Regulatory 
Impacts Assessment reads: ``The U.S. military presence in world regions 
that represent vital sources of oil imports also serves a range of 
security and foreign policy objectives that is considerably broader 
than simply protecting oil supplies. As a consequence, no savings in 
government outlays for maintaining the Strategic Petroleum Reserve or a 
U.S. military presence are included among the benefits of the light 
truck CAFE standard adopted for MY 2008-2011.''
    All told, NHTSA's recent rulemaking assesses total petroleum market 
externalities to be slightly less than 6 cents per gallon. When added 
to projected gasoline costs of $1.60 per gallon over the next decade 
($2 pump price minus roughly $.40 in taxes), NHTSA arrives at a total 
societal value of a gallon of gasoline saved at just under $1.70 
gallon. This number clearly helps explain why the increase in truck 
standards that emerged from the rulemaking process was so modest.
    When considering the administration's recent request that Congress 
grant NHTSA broad authority to reform passenger car standards along the 
same lines as the recent light truck rulemaking, Congress must also 
consider giving the Agency specific, updated guidance about the factors 
to be considered in establishing standards and about how these factors 
should be weighted and analyzed. Moreover, given the apparent political 
difficulty of revisiting fuel economy regulations, Congress should also 
consider establishing--or directing NHTSA to establish--a dynamic fuel 
economy target that becomes gradually, but steadily, more aggressive 
over time, rather than picking a single number. A defined percent-per-
year improvement goal, coupled with an effective cost-capping mechanism 
or well-defined ``off ramps'' in the event that later requirements 
begin to impose unacceptable trade-offs in terms of cost or other 
vehicle attributes, may prove more effective over time and more 
palatable in the short run, than choosing a particular mpg requirement 
that remains fixed for years or even decades.
    Vehicle Safety: Safety concerns have long contributed to the 
prevailing CAFE stalemate, but there is reason for optimism that the 
terms of this debate, too, have begun to shift in important ways. 
First, the rapid emergence of hybrid-electric-vehicle technology 
clearly demonstrates that substantial fuel economy improvements can be 
achieved while maintaining, or even increasing, horsepower and without 
reductions in vehicle weight or size. Second, a more sophisticated 
approach to the issue of safety--one that accounts for the impact of 
heavier vehicles on other vehicles in the event of a collision and 
their effects on overall fleet safety as well as on the safety of their 
individual occupants--has served to illuminate the fact that while the 
relationship between vehicle weight and safety is clearly important, it 
is far from straightforward. Finally, some argue that advances in light 
but very strong composite materials that allow for significant weight 
reductions to be achieved in concert with ongoing safety improvements--
together with other advances in vehicle design and safety features--
will prove fundamentally game-changing, although for now cost issues 
remain.
    Domestic Industry Competitiveness: Given the recent, well-
publicized troubles of U.S. automakers, concerns about jobs and 
competitiveness will continue to figure prominently in any debate over 
vehicle fuel economy. The Commission worked with the United Auto 
Workers and experts at the University of Michigan to assess the 
competitive impacts of a significant increase in fuel economy 
requirements on the domestic automobile industry. Our analysis suggests 
that the domestic automakers currently are at a disadvantage, relative 
to their foreign competitors, in terms of the expertise and 
manufacturing capacity needed to design, produce, and incorporate the 
most advanced hybrid electric and diesel technologies. Therefore, the 
Commission urges policymakers to consider mechanisms for addressing 
jobs and competitiveness concerns that would strengthen the domestic 
industry and better position it to meet future global demand for 
advanced technology vehicles. Specifically, the Commission recommended 
in its 2004 report that consumer tax incentives to stimulate consumer 
demand for highly efficient, advanced-technology vehicles be extended 
and coupled with business tax incentives aimed at helping parts 
suppliers and manufacturers with U.S. facilities retool their plants to 
produce these vehicles. Importantly, the Commission's analysis showed 
that such incentives could be designed to ensure that their cost to the 
U.S. Treasury would be more than covered by the additional tax revenues 
associated with increased domestic production. In light of the fact 
that domestic manufacturers are presently losing money and, hence, not 
paying much in the way of taxes, additional work is underway to design 
alternative mechanisms to provide the suggested incentives.
    Oil Savings Through Increased Fuel Economy: The oil savings 
achievable through improved new vehicle fuel economy depend, of course, 
on specific assumptions about how quickly and aggressively new 
standards would be introduced and on whether other aspects of the 
current CAFE program are reformed at the same time. Appendix A 
summarizes the results of a bounding exercise intended to portray the 
savings that could be achieved if new vehicles technologies were 
employed to increase fuel economy over the next 20 years. The results 
are cumulative (that is, each row includes the demand reductions 
associated with all of the rows above it) and reflect oil savings in 
2025 from a baseline business-as-usual demand forecast of 26 million 
barrels per day. The table suggests that the United States could reduce 
oil consumption in 2025 by 2.2 million barrels per day by implementing 
a 40-percent improvement in gasoline vehicle efficiency. If a 
significant fraction of fuel-efficient hybrid vehicles were added to 
the mix, the savings would rise to roughly 3.5 million barrels per day. 
Under the most aggressive scenario considered, U.S. oil consumption 
could be reduced by nearly 5 million barrels per day if the new-vehicle 
fleet in 2025 were comprised of a combination of efficient gasoline, 
gasoline hybrid, and plug-in hybrid vehicles.
    Fuel Economy Improvements in the Heavy Duty Truck Fleet and 
Existing Light-Vehicle Fleet: Smaller, but nonetheless important, 
opportunities exist to reduce U.S. oil consumption by improving the 
fuel economy of the heavy duty truck fleet and of the existing light-
car fleet. The Department of Energy's 21st Century Truck Program, for 
example, is being undertaken with the cooperation of major heavy-truck 
engine manufactures; it estimates that the fuel economy performance of 
so-called ``Class 8'' long-haul trucks, which are the largest fuel 
consumers of all heavy trucks, could be improved as much as 60 percent. 
Enhanced diesel technology and improved aerodynamics in the heavy duty 
truck fleet could produce oil savings of as much as 1 million barrels 
per day in 2025. As an initial step, the Commission recommends that EPA 
be instructed to develop a test procedure to assess heavy duty vehicle 
fuel economy so that we have an opportunity to seek reductions from 
this sector should the will to do so emerge in the future. For the 
existing light duty vehicle fleet, simply ensuring that replacement 
tires have the same low-rolling resistance as original-equipment tires 
can improve vehicle fuel economy by as much as 4.5 percent at very low 
cost to the vehicle owner.
    Efficiency improvements are important not only because they produce 
demand reductions that will allow us to ``buy time'' to develop new 
alternatives to oil (a serious effort to diversify our fuel supply will 
likely take decades), but because they are essential to making many of 
those alternatives technologically and economically viable on a 
commercial scale. Biofuels and most other alternative fuels suffer from 
feedstock constraints, a lower energy density than gasoline, or both. 
Unless the vehicle fleet becomes more fuel efficient, efforts to 
promote a greater reliance on alternative fuels will likely falter due 
to inadequate supply or inadequate driving range. Conversely, the land 
requirements for cellulosic ethanol production or the battery 
requirements for a plug-in hybrid electric vehicle become much more 
manageable if the vehicles that employ these fuels or technologies are 
also highly efficient to begin with. Once one recognizes that the 
successful development of petroleum alternatives depends on highly 
efficient vehicle technologies, it becomes apparent that current 
provisions intended to promote the production of flexible fueled 
vehicles by providing credits that weaken overall fleet fuel economy 
are shortsighted and ultimately counterproductive.

                     DEVELOPING ALTERNATIVES TO OIL

    The United States burns nearly 140 billion gallons of gasoline each 
year and relies on petroleum-based fuels to supply nearly all of its 
transportation energy needs. To meaningfully improve our Nation's 
energy security, alternative transportation fuels must be capable of 
being economically and reliably produced on a truly massive scale. The 
Commission identified four criteria that characterize a promising 
alternative fuel: (1) It can be produced from ample domestic 
feedstocks; (2) it has low net, full fuel-cycle carbon emissions; (3) 
it can work in existing vehicles and with existing infrastructure; and 
(4) it has the potential to become cost-competitive with petroleum 
fuels given sufficient time and resources dedicated to technology 
development. Among the variety of alternative fuel options potentially 
available for the light duty vehicle fleet, the Commission believes 
that ethanol produced from cellulosic biomass (i.e. fibrous or woody 
plant materials) should be the focus of near term federal research, 
development, and commercial deployment efforts. Let me briefly discuss 
the attributes of traditional corn-based ethanol and then turn to 
cellulosic ethanol.
    Corn-based ethanol is far and away our most successful nonpetroleum 
transportation fuel. The Renewable Fuels Standard adopted in the 2005 
Energy Policy Act imposes an annual ethanol sales requirement that 
grows to 7.5 billion gallons in 2012. Ethanol sales were roughly 4 
billion gallons last year. Despite the beneficial sales-volume credits 
given to producers of cellulosic ethanol, virtually all of this mandate 
will be met with traditional corn ethanol. A requirement to sell 250 
million gallons of cellulosic ethanol takes effect in 2013. To an 
extent, Congress's effort to stimulate demand for cellulosic ethanol 
may be undermined by the unexpected demand for ethanol of any kind. 
Present expectations are that demand for ethanol will exceed the 
requirements of the RFS for most, if not all, of the program. In this 
context, credits may have little or no value and the 2.5:1 cellulosic 
credit advantage may provide no meaningful benefit. Congress may want 
to investigate other policy approaches to achieve the intended aims of 
these credit provisions.
    For years, detractors of corn-based ethanol have asserted that the 
energy content of a gallon of ethanol is matched or even exceeded by 
the energy required to produce it. The Commission's analysis disputes 
this conclusion, finding that corn-based ethanol provides nearly 20 
percent more energy than it takes to produce. A more recent study by 
Argonne National Laboratory finds nearly a 35-percent benefit. 
Nevertheless, the fundamental liability of corn-based ethanol is that 
there is simply not enough corn to begin to keep pace with expected 
growth in transportation energy demand, let alone to reduce current 
U.S. gasoline consumption in absolute terms. Put simply, it takes 
roughly 4 percent of our Nation's corn supply to displace 1 percent of 
our gasoline supply. Even organizations devoted to ethanol advocacy 
agree that it will be difficult to produce more than 10-12 billion 
gallons of ethanol a year without imposing unacceptable demands on corn 
supply and significant upward pressure on livestock feed prices.
    Cellulosic ethanol is chemically identical to corn-based ethanol 
and is equally compatible with existing vehicle technology and fueling 
infrastructure. The added advantages of cellulosic ethanol lie in its 
significantly lower energy inputs and greenhouse gas emissions, its 
much larger base of potential feedstocks, and its greater potential to 
become cost-competitive with gasoline at very large production volumes. 
For cellulosic ethanol to succeed on a commercial scale, however, 
important concerns about land requirements must be overcome and 
production costs must be reduced. The central challenge is producing 
enough feedstocks without disrupting current production of food and 
forest products. Some cellulosic ethanol can be produced from currently 
available waste products such as corn stalks, sugarcane bagasse, and 
wheat straw. Production volumes on the order of 50 billion gallons per 
year, however, will require improved high-yield energy crops like 
switchgrass, the integration of cellulosic ethanol production into 
existing farming activities, and efficiency improvements in the 
processes used to convert cellulosic materials into ethanol.
    A Commission-sponsored analysis of the land required to produce 
enough cellulosic ethanol to fuel half of the current U.S. passenger 
vehicle fleet reveals the importance of the advancements noted above. 
Using status quo assumptions for crop yields, conversion efficiency, 
and vehicle fuel economy, Oak Ridge National Laboratory has estimated 
that it would take 180 million acres or roughly 40 percent of the land 
already in cultivation in the United States to fuel half the current 
vehicle fleet with cellulosic ethanol. Estimated land requirements can 
be reduced dramatically--to approximately 30 million acres--if one 
assumes steady but unremarkable progress over the next two to three 
decades to (1) double per-acre yields of switchgrass, (2) increase the 
conversion efficiency of ethanol production by one-third, and (3) 
double the fuel economy of our vehicle fleet. As a point of reference, 
there are roughly 30 million acres in the Conservation Reserve Program 
(CRP).
    Another central challenge is reducing production costs for 
cellulosic ethanol. Because energy crops like switchgrass can be grown 
with minimal inputs of energy, fertilizer, and pesticides, the use of 
such feedstocks offers obvious economic benefits, as does producing 
ethanol from materials that would otherwise be treated as waste. The 
National Renewable Energy Laboratory and a separate analysis sponsored 
by the Commission both suggest that mature cellulosic ethanol 
production could compete economically with gasoline. However, these 
studies are projections. At this time, no full-scale production of 
cellulosic ethanol exists anywhere in the world. Until cellulosic 
ethanol is produced in a variety of commercial facilities, it will not 
be possible to prove, or disprove, current cost estimates. These are 
serious challenges, but they are achievable if we dedicate ourselves to 
a serious, coordinated, and sustained research, development, and 
commercialization effort.
    As a critical first step in this direction, the Energy Policy Act 
of 2005 contains at least 10 major programs to promote ethanol derived 
from cellulosic feedstocks. These programs include explicit 
authorizations for more than $4.2 billion over the next decade to 
support critical R&D as well as ``first mover'' commercial facilities 
through a combination of grants, loan guarantees, and production 
incentives. While these programs demonstrate Congress's clear intention 
to promote biofuels, continued vigilance will be required to ensure 
that this vision is achieved. Historically, efforts to promote biofuels 
have been undermined by a lack of appropriations, inconsistent funding 
year to year, and an unusual degree of congressional earmarks. These 
factors, if continued, will make it difficult to achieve the critical 
objective of diversifying our Nation's fuel supply.
    The 2005 Energy Policy Act also took steps to ensure that increased 
use of ethanol will not undermine air quality and public health 
standards. Eliminating the opportunity for ethanol-blended gasoline to 
meet less protective evaporative emission standards remains necessary 
to ensure that our efforts to increase energy security do not undermine 
our clean air goals. Finally, carmakers will need to take some steps to 
better accommodate ethanol-blended gasoline. The Coordinated Research 
Council, which is supported by the automotive and petroleum industries 
and the State of California, has been conducting research to examine 
the extent to which automobile evaporative emissions increase in cars 
using ethanol-blended fuels. The research appears to indicate that when 
a small quantity of ethanol is blended into gasoline, the resulting 
mixture escapes more readily through the hoses and seals in the 
vehicle's fuel system leading to more smog-forming emissions. The 
problem appears less prevalent in newer vehicles but demonstrates the 
type of challenges that will arise as we begin to transition toward a 
more diverse suite of transportation fuels. One of the many reasons for 
interest in promoting flexible fueled vehicles capable of running on up 
to 85 percent ethanol blends is that when ethanol is the dominant 
constituent, the overall volatility of the fuel is reduced and 
evaporative problems go away. Efforts by Chairman Lugar, Senator Obama, 
and others to increase the number of flexible fueled vehicles sold over 
the next decade and significantly increase ethanol refueling 
infrastructure deserve serious consideration.
    In sum, the Commission urges Congress to make every effort to fund 
the research and demonstration projects authorized in the Energy Policy 
Act of 2005. While it is clear that all discretionary programs must 
come under continual budget scrutiny, inconsistent funding from year to 
year can be devastating to long-term research efforts by making it 
impossible to hire and train experts, build infrastructure, and amass 
knowledge based on iterative experimentation. The Commission recognizes 
that Congress alone is responsible for appropriations, but can't help 
but note that the high level of noncompetitive earmarks is undermining 
the strategic goals of our Nation's bioenergy programs. For example, in 
2004, of the $94 million in appropriations for DOE's bioenergy 
programs, nearly $41 million was directed to earmarked projects. In 
2005, earmarks accounted for nearly 50 percent of the program's budget. 
Paradoxically, this high level of earmarks reflects the enthusiasm of 
many Members of Congress for promoting domestic alternatives to 
petroleum. However, an effective national effort that coordinates the 
efforts of Federal, State, and private institutions cannot be mounted 
under these circumstances.

                               CONCLUSION

    Sadly, there are no good options for delivering immediate relief 
from high prices at the gas pump. And while it's understandable at 
times like this that people want to focus on price gouging, windfall 
profits, or restrictive environmental laws--as if our plight was 
somehow the result of a few greedy people or poorly written statutes--
we must direct the vast majority of our attention to confronting the 
fundamental roots of our oil security predicament. To make real 
progress, we must substitute thoughtful analysis for rhetoric and rise 
above the temptation to take political advantage of the current crisis 
by crafting a truly bipartisan response.
    Prices may, of course, fall again in the months ahead. But there is 
almost no scenario in which the underlying causes of the current crisis 
simply resolve themselves without a concerted effort by the United 
States and other major oil-consuming nations to change course. The real 
tragedy would be if this ``moment'' simply passes as others have with 
no real progress toward a lasting solution. In short, there is no 
question that we will someday use less oil than we do now. The question 
is, rather, whether we arrive at that point on our own terms or on 
someone else's. The Commission believes that the sacrifices we choose 
are infinitely preferable to those imposed on us by forces we cannot 
control. The National Commission on Energy Policy looks forward to 
working with this committee in its ongoing effort to chart a more 
secure energy future for our Nation.
                                 ______
                                 

                               APPENDIX A

            SUMMARY OF MEASURES FOR IMPROVING U.S. OIL SUPPLY
------------------------------------------------------------------------
                            INCREASING SUPPLY
-------------------------------------------------------------------------
                  Measure                         Projected impact
------------------------------------------------------------------------
Exploit all domestic conventional reserves  Increase U.S. output by 2.0
                                             MBD.
Exploit global reserves of unconventional   Increase global supply by
 oil.                                        4.0+ MBD.
------------------------------------------------------------------------


------------------------------------------------------------------------
                             REDUCING DEMAND
-------------------------------------------------------------------------
                  Measure                       Projected oil savings
------------------------------------------------------------------------
Heavy Duty Trucks:
    Enhanced diesel technology and          1.0 MBD.
     aerodynamics.
    Reduce average highway speed by 10 mph  0.3 MBD.
Passenger Vehicles and Delivery Trucks:
    Advanced gasoline engine technology     2.2 MBD.
     (32 mpg).
    Advanced gasoline engine technology +   3.5 MBD.
     50% advanced hybrid/diesel sales (40
     mpg).
    Advanced gasoline engine technology +   4.6 MBD.
     advanced hybrid/diesel + 25% plug-in
     hybrids (50 mpg).
------------------------------------------------------------------------


------------------------------------------------------------------------
                      DEVELOPING ALTERNATIVE FUELS
-------------------------------------------------------------------------
                  Measure                       Projected oil savings
------------------------------------------------------------------------
Quadruple ethanol production post-2012....  2.0 MBD (30 billion
                                             gallons).
Dramatically increase biodiesel production  0.5-1.0 MBD (7.5-15 billion
                                             gallons).
Create Domestic Fischer-Tropsch Industry    0.5-3.0+ MBD (7.5-45+
 (Coal to Diesel).                           billion gallons).
------------------------------------------------------------------------

    
                                             

    The Chairman. Well, thank you very much, Mr. Grumet. We 
really appreciate the extraordinary testimony of both of our 
witnesses.
    I want to recognize now the distinguished ranking member of 
our committee, Senator Biden, for his opening statement or 
comments.

 OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR 
                         FROM DELAWARE

    Senator Biden. Mr. Chairman, I would ask unanimous consent 
that my opening statement be placed in the record.
    The Chairman. It will be placed in the record in full.
    Senator Biden. By way of brief explanation, I had 170 
Delawareans that I had agreed to meet with prior to this 
hearing being set.
    But I just want to reference your leadership again here. 
There is not a single more significant thing we could be doing 
than what we are doing right now.
    My dear old mother has an expression. Out of everything 
bad, something good will come if you look hard enough for it. I 
think this has presented us with an overwhelming opportunity, 
if we seize it, to be able to regain control of our national 
security and our destiny here. It would not have happened had 
we not reached this crisis state and the cost of oil 
skyrocketing. I hope we do not shrink from this as we did 25 
years ago.
    So I want to thank you, Mr. Chairman. I will read the 
witnesses' statements with great interest. I thank you again 
for your leadership in this area.
    [The prepared statement of Senator Biden follows:]

  Prepared Statement of Hon. Joseph R. Biden, Jr., U.S. Senator From 
                                Delaware

    With gasoline at $3 a gallon, and with our most pressing foreign 
policy challenges centered in the oil-producing countries of the world, 
today's hearing before the Foreign Relations Committee could not be 
more timely or more important.
    We heard a few weeks ago in this committee about the hidden costs 
of our dependence on foreign oil. The United States has just one third 
of the world's oil reserves, and less than 5 percent of its population, 
but we consume fully one-third of the global oil output.
    Over 60 percent of the world's oil reserves are held in the Middle 
East, and as one of our witnesses points out today, only 9 percent of 
world reserves are held in countries we would call ``free.''
    We are dependent on oil, and that makes us dependent on countries 
with whom we will continue to have, at best, many differences and, at 
worst, open hostility. What Michael Mandelbaum has called ``the axis of 
oil''--an axis that stretches from Russia to Iran to Venezuela to Saudi 
Arabia--will have as great an impact on our national security as the 
so-called ``axis of evil.''
    That dependence means we pay a huge price militarily for access to 
a resource that we cannot do without. One estimate suggests we pay as 
much as $825 billion a year in security expenditures to project our 
influence and secure access to oil.
    Some part of every dollar we pay for imported oil finds its way 
into the hands of our sworn enemies. As some observers have put it, the 
war on terror is the first war in which we are paying for both sides in 
the conflict.
    Disruption to our economy from interruptions in supply can be huge, 
and will grow as our dependence grows. As Alan Greenspan has warned us, 
all economic downturns since the 1970s have been preceded by spikes in 
the price of oil.
    We pay a price environmentally for our dependence on oil, most 
profoundly in dealing with the repercussions of climate change, driven 
by our use of fossil fuels.
    There can no longer be any doubt that our dependence on oil is a 
critical problem, one that must be addressed.
    The sheer size of this problem is such that there will be no quick 
fix. Oil represents about 40 percent of our energy consumption and we 
import about 60 percent of the oil we use. Fully 70 percent of our 
transportation is dependent on oil. That statistic will not be 
transformed overnight.
    But there are other statistics that will not change, as well. China 
has accounted for fully 40 percent of the recent increase in global oil 
demand. It will put another 120 million vehicles on the road over the 
next 5 years. Along with India, and a reindustrializing Eastern Europe, 
that growth in global demand is not going to be reversed.
    The fit between global supply and demand today is extremely tight. 
Billions of dollars of new investment may keep pace with demand, but 
will do little to ease the price at the pump. And new supply, from 
conventional or unconventional sources of oil, will only hasten the 
process of climate change, and will simply delay our transition to the 
alternatives than can address our addiction to oil.
    What are our alternatives to oil? In the short term, ethanol from 
corn could be a first step away from our oil addiction, by providing a 
liquid fuel that is compatible with existing internal combustion 
engines that power our cars, trucks, and buses. We will hear today 
about the costs and benefits of taking such a step, and the steps that 
must follow toward sugar or cellulosic ethanol.
    Ethanol will be just part of a broader energy policy that will 
reduce our dependence on oil, and will reduce the leverage that the 
oil-producing nations have over our foreign policy and our national 
security.
    If it was not clear before, it is now. Domestic energy policy is at 
the center of our foreign policy.

    The Chairman. Well, thank you very much, Senator Biden.
    Let me just indicate, as the witnesses have, that in this 
area there has been strong bipartisan cooperation on this 
committee and with members of other committees, for that 
matter. But almost all of the significant legislation has 
bipartisan cosponsorship and many cosponsors, 24, 25, maybe 
upward, which is important because sometimes it is difficult 
for the Congress to move, even for this body to move. But I 
think there is an impelling need that you have illustrated.
    Now, at this point, at the risk of losing the entirety of 
the committee, the vote has commenced, and as I indicated, we 
will have a recess, we will vote, and hopefully then we will 
have time to ask our questions without interruption. But I 
wanted both of you to give your testimony and for all of us to 
get set and then we will come back and commence our 
questioning.
    For the moment, the committee is recessed for the vote.
    [Recess.]
    The Chairman. The committee is called to order again.
    We will have a 10-minute round of questioning by members of 
the committee, and I will commence with my questions.
    Mr. Khosla, you mentioned some intriguing possibilities 
with regard to the acreage issue. As you pointed out, sometimes 
critics of alternative plans point out that we are limited in 
this country by the number of acres we could devote. Usually 
the argument is made, first of all, with regard to corn 
ethanol, but then as you observe, maybe more generally with 
regard to switchgrass or biofuels materials that might come in 
the cellulosic ethanol in addition.
    In the figures that you gave--and sort of retrace this for 
us, if you will--you talked about 400 to 500 gallons of ethanol 
per acre coming from, as I understand, current practices. Is 
that in the corn field or the cellulosic field? What are the 
400 or 500 gallons at this point?
    Mr. Khosla. Sir, roughly 140-some bushels per acre times 
2.7 or 2.8 gallons of ethanol per bushel would result in about 
400 gallons per acre, roughly.
    The Chairman. So that is the corn yield, the 140 bushels.
    Mr. Khosla. Yes.
    The Chairman. Now, how do we get from there to some 
multiple? And, ultimately, in the years beyond, you were even 
talking about 3,000 to 5,000, which is quite a jump.
    Mr. Khosla. I expect that we can get to yields of corn, 
according to the National Corn Growers Association, approaching 
2,000 bushels per acre.
    The Chairman. 2,000 bushels per acre.
    Mr. Khosla. By 2015. And we might improve some yields. But 
corn is fundamentally limited.
    Sir, my presentation has a slide on the various 
technologies, but I believe cellulosic technologies have the 
most impact when it comes to achieving yields of 3,000 gallons 
per acre.

    [Editor's note.--The slides and graphs contained in 
``Biofuels: Think Outside the Barrel'' and shown by Mr. Khosla 
during his presentation at this hearing, were not reproducible 
but will be maintained in the permanent record of the 
committee.]

    The Chairman. Now, let me just run back through this 
because 2,000 bushels per acre in a timeframe of 2015----
    Mr. Khosla. I'm sorry; 200 bushels per acre.
    The Chairman. OK; 200. I have sort of a parochial view as a 
corn farmer.
    Mr. Khosla. I apologize.
    The Chairman. For a moment, I was beginning to do the math 
here and thinking I really have something going out there at 
the farm. [Laughter.]
    However, 200. And that seems within the ballpark of what I 
understand. From my father's experience on the same farm, 60 
years ago, we were getting 40 or 50 and we are now getting 140 
or 150 in our generation. There really has not been a great 
deal of impetus to improve the yield of corn.
    As one of you pointed out just obliquely, you suggested 
that if we have another agriculture program, the subsidies or 
whatever payments that are made to farmers ought to come this 
time for energy. That will be a big sell, putting on capital 
over in the Agriculture Committee, because I would just have to 
advise you we have had a hearing, and a very good one, on 
sugar, recently, and on one other southern crop that is heavily 
subsidized, currently, with all sorts of intricate payment 
systems.
    Now, into the hearing on sugar--and this is why this is on 
my mind--Saxby Chambliss, our chairman, had to go off to 
another meeting and left me in charge of the hearing, which is 
a dangerous situation because we engaged the sugar people, the 
users, the growers, the whole lot in a very good conversation. 
Their future lies in producing ethanol from sugar, not really 
from doubling the price to American consumers and trying to 
extract their due. And that will be a tough sell but not 
impossible. I notice papers throughout sugar land, whether it 
was the sugar beet people up north or the ones down south, 
picked this up in the same spirit in which you are talking 
about it this morning. Not only Brazilian sugar might be 
available, but, in fact, American sugar, which is in abundance 
and which now keeps out other people and ruins our CAFTA 
agreement with Central America and CARVAS with South America, 
and creates all sorts of diplomatic problems.
    But, nevertheless, as you point out, even if we get to 200 
bushels to the acre times 2.7, that gets you to 540 or so, 
which is not 3,000. So when you get to the 3,000 mark, there 
has got to be something else, and this is more in the 
cellulosic variety, I gather.
    Mr. Khosla. Yes, sir. If you might refer to the 
presentation that you have, slide 58 speaks to the yield for 
various technologies.
    The Chairman. All right.
    Mr. Khosla. A basic assumption I make is we can now get 
about 6 tons per acre of biomass yields. The best plant 
biologists in the country I have talked to completely support 
the notion that in 25 years, that yield can go up to 27.5 tons 
per acre. If we can do 27.5 tons per acre and 118 gallons per 
ton of biomass, then the numbers are what we get in this chart 
on page 58, roughly about 3,000 gallons per acre.
    The Chairman. Yes, and that chart is very instrumental in 
our understanding and as a part of your presentation.
    I want to just develop the point from the standpoint that 
this often is a criticism of all we are talking about today. 
The skeptics would say, after all, there is not enough land 
left in America to do all these sorts of things. At best, this 
is still a niche idea in which you do a little bit of it, get 
maybe, single digits or 20 percent of our needs, but that is 
about where it ends. So, therefore, all this talk about 
independence--you are not claiming independence today. We still 
have a foreign policy going in both of your testimonies.
    But in my opening statement, I am talking about some grim 
facts, and that is, even if there is a lot of oil left on earth 
and if, in fact, there are a lot of reserves that are still not 
exploited, 77 percent plus are held by other governments. And 
these are not benign people. Somebody that shuts off the tap to 
Ukraine, for example, accomplishes something that you do not 
have to send aircraft over or tanks or what have you to do. You 
can obliterate a country this way. It is not advisable people 
do this very often. And that is one reason that we are talking 
about this because we have said as these things begin to close 
in, the knives get sharper and the elbows, likewise. People in 
a strategic position decide to use this aggressively against 
others and maybe against us. People who do not understand the 
existential problem here, not just for Ukraine, but, 
ultimately, for the United States, really need to wise up.
    You have pointed this out in different ways. Let me just 
touch on some.
    Both of you have mentioned, in one form or another, oil 
sands, Canada, Alberta. Now, the Energy Minister was in last 
week, and he said the problem there is that we cannot get 
people to do the work. Literally this is very tough work. It is 
very cold. It is very messy. It is very dirty. They cannot get 
enough Canadians, Americans, Mexicans, anybody in the 
hemisphere. The Mexican Energy Minister was there. They cannot 
furnish enough people from Mexico to make that work. So, 
theoretically, you have oil sands up there. We have, 
unfortunately, some human problems. How do you get people to 
work the oil sands? Now, eventually, we may get through that.
    You have touched on the coal business. There is a lot of 
coal underneath this country, all of it dirty from an 
environmental standpoint. The whole clean coal technology 
business, whether you finally get it into transportation fuel 
or the more conventional power, really requires a sequestering 
process. How do you do this? Where do you put the carbon? These 
are critical measures. We talk today about the transportation 
side principally, but the other side of heating, power, and so 
forth is, obviously, equally important. And with great 
resources here, there was no need really to think about it.
    First of all, we still have people in denial that climate 
change or global warming is a real problem. This is almost a 
theological debate even with major newspapers and publications 
in this country. So although you are in a group of people that 
believe this is for real and we have to deal with it, as 
politicians we find a lot of people who do not believe in this, 
who think essentially it is sort of an elite group of people 
who meet with the Foreign Relations Committee from time to time 
and talk about things that are vaguely subversive to normal 
American practice.
    Senator Biden. To the oil industry. They think it is 
subversive.
    The Chairman. Now, finally, while I am spouting off about 
all of my prejudices, which you have listened to, on the CAFE 
standards, we have got a situation here. We debate this issue 
all the time. In the House committee last week, by a vote of 28 
to 26, they, at least, had a nominal CAFE standard. Democrats 
on the committee, who voted en bloc against that--and they were 
the 26--said, well, this does not amount to anything. What you 
really need is a 33-miles-per-gallon standard. That was offered 
by one gentleman and that lost 37 to 16, as I recall. I do not 
know where they all stand now, but we go around and around with 
this.
    I am curious as to whether your view is that this is an 
essential aspect almost in the way of pegging the price of oil. 
You have suggested another way of getting at this, these 
flexible credits, 20 to 80 cents and so forth. In other words, 
you have to offer some certainty to the public. First of all, 
the problem is not going to go away, and second, the oil 
companies cannot subvert it, so it will not go away that way. 
In essence, we are confronted with it. Is that basically the 
strategy you have in mind in offering these pegs?
    Mr. Grumet. I think you wrapped your arms around it very 
aptly, Senator. I guess I would say that I do believe that 
efficiency, whether you call it CAFE or by any other name, is 
an instrumental component of the solution not only because of 
the land issues and the need to actually reduce the amount of 
biomass we need, but also because we have a global challenge 
here. Not every country in the world is going to have the same 
kinds of biomass attributes that we have, and so we have an 
obligation for our own benefits, as well as to protect 
ourselves from the kind of economic shocks as we transition 
toward biofuels also to export these technologies to make our 
fleet more efficient.
    I guess I just point out again and again that this is not 
about putting us all into little VW bugs from the 1970s. If we 
simply capture the increases in vehicle technology that are 
happening each and every year and are really now on a very 
strong up-slope because of hybrids and were to direct those 
increases toward fuel economy, that in and of itself would put 
us on a 2- to 3-percent upward trajectory each year.
    So I think the CAFE debate, like so many of these debates, 
are stuck in these old, well-worn grooves. They are stuck in a 
technology posture of the 1970s. They are stuck with an 
economic policy of the 1970s. And if we think a little bit 
creatively, I think the safety issue can be taken off the table 
with intelligent reform. I think the jobs issues is something 
that we have to grapple with as a nation, whether we are 
increasing CAFE or not, and that there is a tough love metaphor 
that both gets us better cars and better jobs. So we need to 
bring these two ideas together. But absent strengthening fuel 
economy standards, I do not think we can get the job done.
    I would just note that it was bewildering to me that we 
spent a lot of time debating whether the President and NHTSA 
really needed the authority or not. Who cares? Give it to them 
three times if, in fact, that is what they think they need, but 
let us give them some direction as to how to apply it because I 
think the reason why there was resistance in the House was that 
the President was asking for the same authority they just 
applied when regulating light duty trucks and they used that 
authority with the assumption that a gallon of oil saved was 
worth $1.70 and they raised the light duty truck standards by a 
couple of miles per gallon.
    So there is a sense that giving the administration the 
authority without then giving them better tools and better 
direction as to how to apply that authority is just kicking the 
can down the road for 18 months. So I think that is where this 
debate now needs to be put back together.
    The Chairman. Now, as I yield to Senator Biden, I would say 
to my colleague that earlier on, Mr. Grumet testified that his 
group has been visiting with the automobile companies and the 
UAW, both, because they take seriously the jobs issue, as both 
of us do. Now, in my State, there is an article in the 
Anderson, IN, paper today that states that the UAW is selling 
its headquarters. The number of members is down by 80 percent, 
and the jobs are gone. Ditto for the automobile industry, 
basically, in a place that was totally auto. That is not unique 
in our country.
    So, as you are talking about tough love presently, we are 
almost back to the situation we were in with the Chrysler 
company in the 1970s and the question of how to save Chrysler. 
The legislation that the Senate and the House passed, then, was 
a tough love measure. President Carter had offered simply a 
loan guarantee without many strings attached. The Congress said 
you have got to do a lot of things. UAW's Woodcock came here 
and said we have never backed down on any of these things, 
period. Ditto for Lee Iacocca and those folks. But they made 
some changes. They made huge changes. They paid off the whole 
loan because Paul Volcker raised the interest rate and it was 
very uncomfortable, rapidly, and there was still a Chrysler 
until they merged.
    So I mention that this is not hypothetical. We have been 
down that trail before, many of us around here, and that is why 
I was interested in your testimony.
    Yes, sir.
    Mr. Khosla. Senator, if I might comment on the question of 
oil shales and alternative technologies. Today I proposed a 
variable tax credit on ethanol. In fact, the superior way to do 
it would be to have a price floor on gasoline. If we had a $40 
floor on oil and I suggested in the past that if we use any 
money anytime oil drops below $40 as a fee to be put into a 
price stabilization fund, which can be used to reduce the price 
of oil when the price goes high, it has multiple benefits. The 
variable credit for ethanol would help the ethanol business.
    I prefer the mechanism of a price floor because it would 
encourage all alternative technologies, not just ethanol. It 
would encourage the development of oil shale, coal to liquids, 
and other opportunities. So, in fact, theoretically and from an 
economic point of view, that is a superior option if we can 
enact it.
    I might also add, specifically, to the issue of oil shales. 
Personally, I believe the biofuels approach, the ethanol 
approach, is so much easier to do and so much more cost 
effective and has so many side benefits. That arises from the 
fact that we have three major problems here. We have an energy 
problem. We have a climate crisis, and we have a terrorism 
crisis. All those are coupled and all of them are 
simultaneously addressed by the biofuels approach or any 
renewable fuels approach. Oil from shales and sands does not 
solve the climate issue.
    I might also add on CAFE, as much as I completely agree 
with Jason on increasing and pushing hard to increase CAFE 
mileage, Senator Daschle and I coauthored an op-ed in the New 
York Times, a week ago Monday, that suggested that we can 
decouple the issue of how far we push CAFE up. And I am very 
much in favor of doing that, but we decouple it from the issue 
of measuring petroleum mileage, not mileage because that will 
incentivize the automakers to reduce petroleum use in this 
country.
    So some people would suggest we couple reforming CAFE to 
increase petroleum mileage to the issue of efficiency. I very 
much favor pushing hard on both fronts, but I do favor 
decoupling the two issues and solving the efficiency problem 
separately from the issue of switching to petroleum mileage so 
almost immediately the auto companies are aligned with the 
environmentalists in reducing the use of petroleum.
    The Chairman. Thank you.
    Senator Biden.
    Senator Biden. Thank you very much.
    Let me ask you both, maybe you, Mr. Grumet, first. You 
indicated, I am told, that the National Highway Transportation 
Safety Administration, although it is well intended--the 
discussion of CAFE standards may not produce the effect we 
desire. What should we be doing here in Congress?
    Mr. Grumet. Thank you, Senator Biden.
    I think this really does come down to a question of 
institutional capacity. The people at NHTSA are well-intended, 
hard-working people, and when they imagine how to make the 
optimum changes in CAFE, what they try to do is figure out what 
is the total social value of saving a gallon of gasoline and 
what is the cost of new technologies to achieve that, and they 
try like any good economists to make the lines cross.
    So what NHTSA just did was they reformed the structure of 
CAFE in ways that I think bring greater economic efficiency to 
the program. It gets you out of the idea that all cars have to 
meet the same standards. So it is kind of a continuum of 
weight-based results. And all of that is perfectly fine and 
good.
    But the key input was the number they put into the model to 
say what is the total social value of saving a gallon of 
gasoline over the next 10 years, and that was $1.70. They used, 
by law, the EIA projections of the cost of a gallon of 
gasoline, which are presumed to flatten out by around $2, and 
they take the taxes off that. So we get $1.60 of real value of 
a gallon of gasoline. And then when they looked through 50 
different ways that gasoline and oil also affect our economy, 
the sum total of the benefits of reducing a gallon, they come 
up with is about 6 cents.
    And they looked hard within the abilities of a guy with 
green eyeshades and a computer. They looked actually at the 
value of spending less time standing at a gasoline station 
squeezing fuel into your tank. They looked at what they 
perceived to be the value of reducing air pollution. They 
looked at what they perceived to be the value of reducing the 
vulnerability to price shocks. They looked at the value of 
military, and I will read to you the quote from the regulatory 
impact statement. ``The U.S. military presence in world regions 
that represent vital sources of oil imports also serves a range 
of security and foreign policy objectives that is considerably 
broader than simply protecting oil supplies. As a consequence, 
no savings in Government outlays for maintaining the Strategic 
Petroleum Reserve or a U.S. military presence are included 
among the benefits of the light duty truck CAFE standards.''
    Now, I do not think that it is fair to say to the people at 
NHTSA or Guy Caruso at EIA, ``tell me how much it costs and put 
it in your model.'' I think it is fair to say to this 
committee, ``you tell NHTSA how much it matters.'' One 
suggestion was that when they put the number in their model, at 
least they should look at the actual real cost of gasoline over 
the last 12 months, that the idea of the price going forward 
should be less than what people are actually paying might be 
one floor, and then have Congress tell them to double it, tell 
them to put 5 percent on it. But someone has to help NHTSA 
think about tensions with China, foreign policy prerogative, 
military costs, and things that are simply beyond their tools 
and competence.
    Senator Biden. You indicated that the idea of moving to 
alternative fuels here, biomass fuels, biofuels, ethanol, 
cellulosics, depends upon dealing with efficiency in 
automobiles. What number do you have to get to in order to 
reach the efficiency under whatever you want to call them, CAFE 
standards or whatever the new standard may be? What do you have 
to get to? How much do you have to save in the models you have 
done to get you to the point where it intersects with the 
amount that we can produce to render the outcome we are looking 
for?
    Mr. Grumet. There are a number of different ways to look at 
that question. When we looked at the question of land mass, 
which I agree most people see as the dominant constraint--and 
we did similar analyses to Mr. Khosla--the conservative 
assertion is it would take 180 million acres--this is based on 
Carnegie Mellon analysis that has been around for 5 years--to 
displace half of the petroleum supply. We were somewhat more 
conservative in saying, well, let us say we just doubled the 
yield of an acre, much less than I think Mr. Khosla suggests is 
possible, that takes you down to 90 million acres. Let us say 
we increased the efficiency of converting that mass to fuel by 
50 percent, also I think very realistic to conservative. That 
takes you down to 60 million acres. And then we said, well, let 
us double the fuel economy. That takes you down to 30 million 
acres.
    Now, the reason that a doubling of fuel economy, I think is 
notionally the right way to think about the issue, goes back 
again to what we believe would be a useful goal, and that would 
be to, again, halve the amount of oil we use per dollar GDP 
over the next 20 years. We did it from 1975 to 2000. If we did 
it again, we would make our economy twice as resilient to price 
shocks so that we could get to the future that I think we both 
want without suffering too much along the way.
    To do that, would require about a 7.25 million barrel 
reduction of oil a day over 20 years. If you brought fuel 
economy of the country over that same timeframe up to about 45 
miles per gallon, 50 miles per gallon, that would get you about 
5 million barrels a day reduction.
    One third way to think about it is if, in fact, you believe 
that we can achieve about a 3-percent increase in efficiency 
each year going forward and say, we are not going to tangle 
with the questions about safety and making cars smaller and 
lightweight materials, but we are just going to say put that 3 
percent a year into efficiency, you compound 3 percent a year 
over about 20 years, and you are also getting to about a 
doubling. So there are a lot of different ways, both in terms 
of technology and cost and goal and aspiration of doubling fuel 
economy over 20 years, and is notionally, I think, the right 
model to work toward.
    Senator Biden. What percentage of oil consumed in the 
country is transportation?
    Mr. Grumet. About 70 percent.
    Senator Biden. And how much natural gas and coal do we 
consume in the nontransportation area?
    Mr. Grumet. I guess, coal into locomotive engines and very, 
very little amounts of natural gas; 97 percent of 
transportation is petroleum.
    Senator Biden. Mr. Khosla, you spoke about moving past 
talking and moving toward making things happen. What needs to 
get done? What do we have to do to get more flex fuel vehicles 
on the road? Who do we talk to? Who do we call in to sit down 
in front of us? You indicated that there are between 5 million 
and 6 million flex fuel automobiles on the road right now. What 
do we do from a Government standpoint that encourages a 
significant change? What are the factors we have to----
    Mr. Khosla. Sir, the most important role Government can do 
is send the right signal, and that signal to Wall Street will 
serve all our purposes. First, if you mandate 70 percent of new 
cars be flex fuel cars, that is a relatively low-cost option. I 
believe it costs an automaker about $35 to produce a flex fuel 
car over a gasoline car. They will quote a higher number of 
about $100 because they include a sensor that is also required 
to meet pollution requirements. They include it in the cost of 
conversion. So that is item number one.
    Item number two is to mandate distribution of E85 stations. 
I have chosen to push the idea of 10 percent. Higher numbers 
would be better, but 10 percent could get us to the minimum 
critical mass we need to get it started. Obviously, the more we 
have, the faster----
    Senator Biden. Excuse me. 10 percent?
    Mr. Khosla. I'm sorry. Ten percent of all gas stations in 
this country offer one E85 pump. Specifically, I am suggesting 
that for any owner or brander of gas stations with more than 25 
stations, to not put an undue burden on the mom-and-pop 
stations, should be required to offer E85 at 10 percent of 
their stations, which means at least one E85 pump.
    The last thing I am suggesting is this variable credit on 
ethanol, and what that does is protect ethanol producers and 
investors if the oil companies were to manipulate the price of 
oil down to, say, $30 a barrel. With this variable tax credit, 
the actual amount of credit given out will probably decline. 
The farmers will get no less, and they will have the benefit of 
essentially getting insurance against price manipulation.
    Senator Biden. What would you estimate the cost of that to 
be?
    Mr. Khosla. Today we have a 51-cent-a-gallon credit. I 
expect with oil prices where they are likely to be in the next 
5 or 10 years, it will be a net savings because I am suggesting 
that that credit be dropped to 20 cents while oil prices are 
high. If we have an 80-cent tax if oil prices are low, I think 
it is highly unlikely the oil companies or the oil nations will 
try and manipulate the price of oil down because they will 
believe that ethanol will still be competitive. So just the 
fact of instituting a variable tax will eliminate or discourage 
the possibility of price manipulation down to low levels to 
drive ethanol producers out of business. So I actually believe 
it will be a net savings to Government.
    None of the things I have recommended require Government 
money, either the mandates on flex fuel cars or the 
distribution or the variable tax credit. I think those three 
would get us 90 percent of the way there.
    Senator Biden. My time is about up. What would the floor of 
$40 do? Would that be a fulsome way to deal with this?
    Mr. Khosla. Absolutely. If we can enact that, that is not 
only the simplest, but economically most efficient way to do 
it. Once we have a floor--and frankly, I believe we will only 
need a floor for about 10 years at the most--we will have 
signaled to investors that they can invest in ethanol capacity 
in this country without being subject to the manipulation of 
oil prices.
    Senator Biden. One of the things I have found in my 
experience here, when you try to affect the economic impact on 
average families out there, it is a lot easier to deal with 
something and pass something that in the future may have an 
impact than it is to deal with something that will have an 
immediate impact. So a $40 floor now, it seems to me, would 
be--not in terms of the politics down here, but the public at 
large--a fairly painless suggestion.
    Mr. Grumet. Many would welcome it as a problem they would 
like to have.
    Senator Biden. Exactly right. Seriously.
    If I can editorialize for a second here, Mr. Chairman. I 
think the American people are a lot smarter than we give them 
credit for. I found it astounding that when the chairman began 
to talk about--we had a discussion one day about 6-8 months ago 
about the need for this committee--it took no urging from me. I 
mean, it was just responding to the chairman's raising the 
question about us beginning to focus very heavily in this 
committee on energy. I saw a poll that absolutely reconfirmed 
my faith in the instincts of the American people. About a month 
ago, there was a poll--I think it was the New York Times and 
whoever they do it with--that showed that slightly more people 
thought that our security and our foreign policy flexibility 
depended more upon energy and how we dealt with that issue than 
upon the war in Iraq, for example. They happened to be right, 
but it was really, I think, confirmation of the fact folks get 
it.
    We are all just sort of grappling with this in a very 
fulsome way now. I think the American people are really ready 
to take on some genuine challenges and I think they are 
prepared to even make significant sacrifices long term. Imagine 
if after 9/11 the President said, by the way, I am going to go 
to the Congress in 2 weeks and introduce an energy bill to free 
us from the grip of the oil oligarchs and it is going to be 
painful and I expect your help. Who the heck would have said 
no?
    Mr. Khosla. I would completely agree with you. In fact, Tom 
Friedman had an article in the latest issue of Foreign Policy 
magazine that says there is a strong inverse relationship 
between our energy dependence and human rights outside this 
country.
    I would suggest further, to reinforce what you said, that 
we are very, very close to a tipping point of permanently 
getting away from petroleum. And where I would like to disagree 
with Jason is I believe we have the capacity in this country to 
meet all of our needs within a relatively short period of time. 
Bottoms-up forecast based on technologies I have seen in the 
labs today, not even unimagined technologies, say we can 
achieve our energy independence with less than 60 million acres 
even with modest assumptions about efficiency. With 1 percent a 
year demand-growth on oil, which would be modest energy 
efficiency improvements, compared to the 2 percent a year 
growth we are seeing today, we can get to energy independence 
on less than 60 million acres. That is less land than we use 
for export crops today by a lot; by half. It is almost equal to 
the 40 million acres of CRP land that we have today, and 
millions of acres would be returned to prairie grasses, which 
is a wonderful thing to do.
    So I will just suggest that these simple measures need very 
little money but are focused, laser-like, and instead of 
having, if I might be bold enough to say, 15 different versions 
of bills, if we could have three or four simple things happen, 
we will put ourselves past the tipping point. And 7 years from 
now, we will be at a place where no oil company can decouple 
the two. That is what I mean by irreversibly down this path 
within 7 years.
    Mr. Grumet. Senator Biden, if I could just add, we are 
very, very good at framing a problem with great rhetorical 
flourish and we then go to the American people and say, by the 
way, here is a solution and it will not really cost anybody 
anything and no one is going to mind, I do not think it is 
credible. I think I agree with you that while we do not need to 
tell people that they need to go have cold showers and warm 
beer--this is not going back to the 16th century. What we need 
to say to people is you can have the amenities that you are 
used to, and you are going to have to pay a little bit of money 
in order for all of these other amenities that we also care 
about.
    Senator Biden. Look, every single time in American history 
we have been faced with a genuine crisis and people believe it 
is genuine, that it is not manufactured, and that it is not 
something that you are going to ask just one part of the 
community, one part of the population to bear the burden of, 
when have we ever not done it? We have never failed to do it. 
People rode on bald tires for a long time during the war. A 
safety hazard. But I do not get it. I do not get why we think 
the American people are not prepared.
    By the way, I apologize for taking the time, Mr. Chairman, 
but I hope I have an opportunity to spend some time with each 
of you off this podium here. Jason, I come from an autoworker 
State. Ten years ago, we had the largest percentage of UAW 
members of any State in the Union outside of Michigan, and as a 
matter of fact, as a percent of population, probably higher. We 
had a workforce, when I began in the Senate back in 1973, of 
only 350,000 people; 31,000 were UAW members. That is a 
gigantic percent. We now have grown. We have almost doubled our 
population. We are close to 1 million now, and we were only 
570,000 then, and our workforce is a lot larger and the 
autoworkers are fewer. But guess what. They figured it out. 
They get it.
    I have the guys where we make the Durango. I have the guys 
where we make a number of General Motors systems installed in 
some other vehicles. Guess what. They are worried. They are the 
ones raising the questions about we are not going to be able to 
sell the vehicles we are making because of the fuel economy.
    This is not a labor or management--I am not trying to have 
sort of a theological debate about labor and management. But 
the truth of the matter is labor does not get to make many of 
these decisions. They do not get to vote on what product is 
made. I am not suggesting they should. So the idea that there 
is this resistance among autoworkers to moving in the direction 
where 70 percent of the automobiles are flex fuel automobiles, 
I think they see that as a way in which maybe they will 
preserve more of their jobs instead of costing them their jobs.
    I was here at the same time when we had the first Clean Air 
Act. I will never forget a guy named Ricardo, who was chairman 
of the board of Chrysler at the time--not Iacocca, Ricardo--and 
a guy named Leonard Woodcock. I was a young Senator in this 
building in a garret on the sixth floor. I remember them both 
coming to see me, and I remember thinking is my office set up 
nicely enough. I had been there several months. They both came 
in to tell me how I could not possibly vote for the Clean Air 
Act. And I ran on that issue. I said, no, no, no.
    I remember Leonard Woodcock, who was a revered President of 
the UAW, and Ricardo sitting there and Ricardo saying, look, we 
are going to move from Chrysler having 18 percent of the large 
car market to 30 percent of the large car market, and that is 
our goal. We are going to build bigger cars, more of them. I 
remember knowing nothing from nothing sitting there and saying, 
that does not seem to make sense to me and Woodcock saying, it 
is the only way we can preserve our jobs.
    I did not listen to their advice, but the generic point I 
am making is I think that everybody is a lot more 
sophisticated. They may not know what you know, but they do 
know certain basic things. There is no painless way to get from 
here to there. They think there is a rational way to do it, and 
they are prepared to do it and they think maybe their future 
lies in the fact that our independence may generate other kinds 
of technologies where we become a net exporter of energy of 
sorts, and that is, energy technologies that work.
    At any rate, I am really impressed with both your 
testimonies, and I am happy to invite any comment you all have. 
Again, I warn you. I am going to get to both of you, if I can, 
to spend a little more time with you.
    Mr. Khosla. Sir, if I might add a very hopeful sign to what 
you just said. I believe GM management has decided, for lots of 
business reasons, that flex fuel cars make a lot of sense for 
them, and in fact, I believe the 2007 model year they will be 
producing more flex fuel cars than the credit they get under 
CAFE. So they are doing the right things for lots of good 
business reasons. They have lost the branding for hybrids to 
Toyota. The only other brand they can have is flex fuel, and 
that helps America and American farmers. It is a very hopeful 
sign. So I think it is not only something that the workers can 
support, but I think management is well down that path and we 
can accelerate it.
    I think they are hurting themselves by saying we do not 
like the idea of a 70-percent mandate because it will make so 
much more ethanol available in the marketplace because 
investors will believe the cars will be there, that their 
competitive advantage over Toyota will go up substantially. And 
that is what they should be doing if they were looking beyond 
just the natural reaction saying, I do not want any mandate, no 
matter what it is.
    Mr. Grumet. I will just close, Senator, by saying that the 
notion that we cannot effect the kinds of technological, 
environmental, security outcomes we want without damaging the 
domestic auto industry is so fundamentally at odds with the way 
we imagine ourselves as a country. We cannot ignore it, but we 
cannot let it stand.
    I have many friends in the UAW and they hate coming down 
here opposing these kinds of things because I think they know 
that it is where they have to go. But they do have real fear. I 
do not think they have any disadvantage when it comes to 
flexible fuel vehicles. We made some bad choices and we are 
behind the Japanese when it comes to hybrids. We are behind the 
Europeans when it comes to diesels, and the domestic auto 
industry does have to deal with things like health care costs 
and other aspects of their business that are somewhat less 
competitive with their competitors.
    So we can, without, I think, tremendous effort, right that 
ship and give them the tools so that they can, in fact, not 
only make the cars we want but do it here in the United States. 
I think that is where the UAW sees the future. It is where the 
coal miners see the future on climate change. And it requires a 
broader kind of economic policy consistent with our foreign 
policy and our environmental interests.
    I would very much welcome the opportunity to work with you 
and your staff.
    Senator Biden. Well, I thank you very much. I knew if I 
stayed in this job long enough, Senator, I would live to see 
the day where I have an issue that unites my autoworkers and my 
farmers, literally. The largest industry in my State, as you 
know, Mr. Chairman, is agriculture. Everybody thinks it is the 
auto industry or the chemical industry. It is agriculture. This 
is one of the uniting factors.
    I will end with a strange little story. Mr. Chairman, you 
will appreciate this. I got involved in politics because of the 
civil rights movement, and my last campaign 2 years ago, I had 
a meeting in August at a Boys and Girls Club in a town called 
Bear, DE. I think I may warrant the Nobel Prize for this. I 
drove up to the town meeting and the county police officers 
were in the parking lot of this brand new Boys and Girls Club. 
They said you cannot go in. I said why. They said the Ku Klux 
Klan is in there.
    This is the only area in my State where there is genuine 
integration in the new developments. It is the only place you 
can buy a new construction home that you can sell somewhere 
between $125,000 and $200,000 in decent neighborhoods. They are 
truly integrated. My State has the ninth largest black 
population in the country.
    So I went down and I said, no, no, I have to go in. In 
summer garb, there were a dozen members of the Ku Klux Klan 
there, and they wear blue pressed khaki pants, white shirts, 
the grand kleagle emblem and a blue hat with a white middle. 
They looked very orderly and they stand against the back wall. 
Thirty to thirty-five percent of the audience of roughly 100 
people were African-American. The first question I got asked 
was about immigration. I have a view similar to President 
Bush's view on immigration. That is what built this country and 
we ought to be able to figure this out. I got finished my 
answer and the guy who asked the question was a Ku Klux Klan 
guy. He said, well, I totally disagree with you, Senator Biden, 
and with that, 35 African-Americans stood up and clapped for 
him. And I started laughing and no one quite got the humor. I 
said I never thought I would live to see the day where I could 
unite the Ku Klux Klan and the African-American community. 
[Laughter.]
    Now with the opportunity to do the same for the UAW and 
farmers in my State, this job is getting much more exciting.
    Thank you very much for your testimony. I appreciate it a 
lot.
    The Chairman. Senator Biden has demonstrated the affinity 
between the ranking member and the chairman because corn 
farmers have been talked about a bit today, also UAW members. 
We even claim not a per capita basis but the second largest 
number, aside from Michigan. We have been trying to help both.
    You have offered some formulas. I just want to explore the 
nitty-gritty of your three simple action items. The first one 
is to require 70 percent of new cars to be flex fuel vehicles. 
Just to get this straight, if we pass such a law, does that 
mean that in 2007 car companies have got to produce 70 percent 
of all the cars they are doing that year? Or is this a 
graduated thing? Be more explicit, if you can, as to how 
rapidly we arrive at this.
    Mr. Khosla. Yes. Sir, the number I have suggested in my 
written testimony is 20 percent by 2009 because they need the 
time to adjust their models.
    The Chairman. Why would they need that? If you have a 
simple process, as you have described, $110 deal you think, 
although the car companies might say $180 or whatever, why the 
long delay?
    Mr. Khosla. Sir, they probably do not, but they will argue 
they do. So I used to use a 90-percent number and GM convinced 
me because of certain esoteric testing requirements in 
California, that I should use a lower number, and they 
suggested the 60- to 70-percent range. So I did accommodate 
them, to get their support, to suggest 70 percent. I think it 
would be very, very conservative to say 2009 model year which 
starts in 2008 should be 20 percent and we should increase it 
10 percent a year to, by 2014, having 70 percent.
    The Chairman. Let me stop you a second there because you 
diplomatically were negotiating with these people trying to be 
amicable. Let us say that Senator Biden and I say, listen, you 
folks are headed to chapter XI bankruptcy. You may not get to 
2009. You may not have that option at all, as a matter of fact. 
All this may be decided by a judge in a court of law, as a 
matter of fact, as to how in the world you even stay in 
business. So as friends of the family, we are coming to say you 
may have to wrench around your bureaucracy, the same way we may 
have to wrench around our Department of Energy to get some 
things straight.
    We talk in terms of our vital national interests, how 
predator countries are about to do us in, but then we say, but 
we have a simple timetable. We incrementally, 10 percent, 20 
percent at a time, go all the way out to 2009, 2015. I 
understand how you, as an investor and a diplomatic person, 
have to deal with these people. Perhaps we do, too, ultimately.
    But, nevertheless, if this is serious, I just pick up your 
70 percent thing and, just for sake of argument, have asked 
you, why not in 2007 say 70 percent of the cars? Because then 
you would say, well, that is great, but it takes 12 years to go 
through the whole fleet. We have got a lot of cars out there. 
So even if 70 percent of all the new cars are flex fuel, do the 
math and this will barely get you a single digit number. That 
is what worries me about this.
    Mr. Khosla. Sir, the most aggressive number you would like 
to support and enact, I will cheerlead and clap and support you 
on. [Laughter.]
    The only thing to keep in mind is they have an engine 
testing requirement and they claim they have limited capacity 
to retest these engines. So there is an engine certification 
requirement because they have to recertify each engine, and 
even, for example, the Ford----
    Senator Biden. Excuse me. Would you explain that more? They 
have to recertify each engine.
    Mr. Khosla. Yes.
    Senator Biden. They manufacture in the Chrysler plant in 
Newark, DE, an engine for whatever vehicle. There are several 
vehicles they make there. So as it goes off the line, they have 
certified it. Correct?
    Mr. Khosla. They have certified it for gasoline use.
    Senator Biden. No, but if we mandated that 70 percent of 
those vehicles going off that line had to be flex fuel, what is 
the added difficulty of certifying it before it gets off the 
assembly line?
    Mr. Khosla. They claim it costs $1 million or $2 million to 
recertify it to take ethanol and meet all EPA and California 
requirements. Now, how long should that take?
    Senator Biden. $1 million or $2 million per plant?
    Mr. Khosla. No. Per engine.
    Mr. Grumet. Per engine family.
    Senator Biden. So they are talking about $50 million to $75 
million total. Right?
    Mr. Khosla. I believe they would do it by engine, not by 
engine family because the Ford F-150, they have one of the 
engines certified but not the others.
    But if they were to prioritize this, which I believe is in 
their interest, given how much of a branding benefit they get 
from it, I think an aggressive time line would be to mandate 
something in 2 to 3 years. Now, we know the same companies, 
Ford and GM, have done that in Brazil already.
    Senator Biden. Yes.
    Mr. Khosla. So I would be a supporter of more aggressive 
time lines.
    The Chairman. Very well. Well, in any event, we are agreed 
on that and we will see, pragmatically, what the tide will 
bear, I guess.
    Now, you have made some interesting comments today and in 
your charts, Mr. Khosla. You have the hybrid business and 
flexible fuel and point out how you get more for the dollar and 
so forth with the flexible, which sounds good.
    Now, then, I begin to ponder in my own mind, well, how do I 
find one of these hybrid flexible fuel cars? Now, you have got 
a picture of a Saab 9-5 launched May 2005. Are these cars 
selling anywhere? Is this a case in which you are trying to 
make also the point that you do not have to have a small car--I 
do not know how large that car is--but you can have the regular 
cars, to which we have become accustomed, and somehow change 
the engines and what have you?
    Mr. Khosla. Absolutely. Sir, let me give you the history of 
Saab 9-5 because it is a very interesting car in many, many 
respects. It is being sold in Sweden by General Motors.
    The Chairman. In Sweden.
    Mr. Khosla. Yes. And surprisingly for General Motors, it 
has become one of the hot General Motors models in Sweden. So 
it has been a commercially extremely successful car. It is a 
regular car, a mid-sized sedan, lots of peppy performance.
    What they did different in this car--and they often talk 
about a 25-percent reduction in fuel mileage for ethanol--they 
optimized it somewhat to accommodate ethanol, not just take a 
standard engine and recertify it. Suddenly the mileage 
reduction in the Saab 9-5 went to only an 18-percent reduction. 
It went to an 18-percent reduction and they got in a 175-
horsepower car an extra 30 horsepower out of it.
    If you were really designing it for ethanol, you would 
design it to run at 175 horsepower with ethanol, which means 
you would make the engine smaller, improving the mileage 
efficiency with ethanol. Suddenly the difference to get 175 
horsepower and a performance of 0 to 60 in, whatever their 
specification is, 8 seconds, you would have almost the same 
mileage, single digit percentage differences between an ethanol 
car and a gasoline car. That is the kind of change that is not 
figured into any of my projections or anybody else's 
projections, and I believe that will start to happen because we 
are starting to see it happen in Sweden. We are starting to see 
examples of that in Brazil. And this is a car that is a 
peppier, more hard-performing car than the gasoline version of 
the same car. So it is very, very encouraging.
    And the most encouraging thing to me is consumers are 
demanding it. If they were to bring that car into this 
country--and as of now, I know of no plans to do that, which is 
a shame--it would be a hot-selling car in America.
    The Chairman. Well, this is astonishing. That was the 
question I was going to ask. Where are they? In other words, it 
is a hot car in Sweden and elsewhere. It is General Motors, the 
same General Motors to which we have become accustomed. I was 
once an employee as a summer student. I would just say, why not 
here? Do you have any idea, as you have queried your General 
Motors friends, why has this car not ever appeared in the 
United States?
    Mr. Khosla. They gave me a long story. Sir, in a 
bureaucracy, you can give an excuse to not do anything. It 
takes time. It takes recertification, retesting. In fact, 
General Motors is hurting from not having hot-selling models.
    The Chairman. Well, that we have noticed.
    Mr. Khosla. This could be that, and if I were CEO of 
General Motors, I would make it my highest priority, especially 
since long term they want flex fuel vehicles as their corporate 
brand. This is brain-dead simple to me.
    The Chairman. Yes. They are advertising that 250,000 will 
be built this year, but that raised the question, why not 
500,000, why not a million? If you have got problems moving 
cars, that is a basic question. Hopefully, the chief executive 
of General Motors will catch all this on C-SPAN and be advised 
by your testimony.
    Let me just ask this, because in a personal way I asked Jim 
Woolsey, when he appeared before us, and you all know him. In 
fact, he sort of preempted the situation. He knew that I bought 
a Prius 14 months ago, but he wanted to disabuse me that I was 
that much ahead of the curve. He said, Lugar, what you need is 
a battery on that Prius that you can plug into the wall in your 
garage. That way you can get enough juice in that car that you 
can drive to the Hart Building every day and drive back, which 
is essentially what I do in this car, and never use any 
gasoline at all.
    Now, we are going to see a demonstration, I understand, 
here at the Senate in the next week, in which there will be 
some batteries and a car and so forth, showing that the state 
of the art is bumping ahead, I hope, a whole lot.
    But what about all of this? Is there something to this sort 
of thing in competition with the other ideas you have?
    Mr. Grumet. Keeping up with Woolsey is no small feat, 
Senator. So I think we should let him get one first.
    But it is an absolutely intelligent design for the kind of 
vehicle that we need in this country because it is a vehicle 
that is a hybrid vehicle, but it allows you to operate the 
entire driving cycle on the battery for some 30 or 40 miles, 
which, as you said, is really in urban driving what we 
generally do.
    Five to ten years ago, the car companies said that hybrids 
were not going to work because it was bringing two systems 
together. You were going to have a gasoline engine and an 
electric motor and it was too complicated and it was not going 
to work. Now we are being told that plug-in hybrids are not 
going to work because it is adding a third system. You have the 
gasoline, you have the electric motor, and then you have this 
demand for a larger battery. And it is true that you are 
bringing three different ideas together.
    My understanding is that the challenge is not that you 
cannot drive around one of these cars, because you will figure 
that out yourself next week. The challenge is creating a 
battery that has longevity to stick with the car and the owner 
for 130,000 or 140,000 miles. What the car companies will tell 
you is that these batteries are going to be a couple thousand 
dollar items and that they cannot get them to last more than 3 
or 4 years. So, I think this is a challenge. It is well within 
the ability, I would think, of this great Nation if we really 
wanted to get batteries that could last three times as long.
    So it is a vehicle that I think would have a great 
possibility. Of course, if you really want to get Jim happy, 
you then put E85 in that hybrid. Then you can get what is a 
functional equivalent of 500 or 600 miles of distance per 
gallon of petroleum. I think that is, for the moment at least, 
the highest aspiration of automobility that we have been able 
to describe.
    The Chairman. That then brings your second point and that 
is this E85 distribution. This only works for me or anybody 
else if, in fact, there is such an E85 pump within 50 miles of 
where I am. Now, all of us, whether it is in Delaware or 
Indiana, we are all riding herd on this situation. We 
celebrated the 30th such pump in Indiana last week. We know it 
is the 30th because this is a big event. The Secretary of 
Energy, himself, was in Indiana for the dedication of this one 
pump.
    Now, having said that, this has not impressed the oil 
companies to whom this committee has written. They have written 
back, respectfully, that you have to understand the impurities 
of ethanol, the fact that you cannot just put one of these 
pumps together with our pumps. It requires a very separate 
situation. It is very expensive. Furthermore, we are not really 
enthusiastic about the idea to begin with.
    Now, it is almost like the automobile companies. You sort 
of say, ``what century are you living in, what country are you 
living in? Do you understand the foreign policy thing, getting 
back to all of the grim situations?'' And surely they do, but, 
nevertheless, this is cumbersome.
    We have General Motors in Indiana now sponsoring E85 
stations. So giving credit where credit is due, not the oil 
companies, but in this case, the auto company and the UAW 
people and the people who are our constituents. It is important 
that there is a group interested in this sort of thing.
    But I must say I am not sure how we move these situations 
out. We have got charts of 92 counties in Indiana, explaining 
how many flex fuel cars there are in the State of any kind, 
about 160,000, and where they are positioned. Most of them are 
not positioned very close to the 30 tanks. There may be 60 by 
December. But even if there were, right now all the ethanol in 
Indiana seems to be going to California and to New England to 
solve the MTBE problem. The cost of the ethanol is $2.75, not 
$1.50 or whatever we prophesied. Supply and demand.
    Now, eventually all these places that we are all talking 
about get built, but as working politicians now, we really are 
riding all sorts of horses going off in different directions, 
encouraging these pumps. We need a supply for the pumps. We are 
encouraging the car that could use the pumps, and it is hard to 
get people to build enough of these cars. Clearly, these are 
the practical solutions, and we have these hearings really to 
cheer ourselves up, I suppose, and try to find a few supporters 
out there----
    [Laughter.]
    The Chairman [continuing]. Because this really works.
    This can make a very large difference in the perception of 
Vladimir Putin of the United States, or of other people who do 
not wish us well, Hugo Chavez, Evo Morales, and so forth. For 
the moment, they think we are on the run. In many ways they are 
right because we are fixed in our own attitudes, as I cited, 
yesterday, in a debate. The Wall Street Journal had an 
editorial the other day sort of aimed at people like us. They 
said, essentially, if you have a virtue feeling about a Prius, 
go ahead. But nevertheless, in essence, real people want safe 
cars and they are big. Therefore, cars save lives if they are 
big cars. Now, of course, you are coming along and saying, 
well, you can have a big car and save your life and still 
perhaps have a flex fuel car, have a car with an engine that 
gets mileage. These things are not altogether separate. But I 
think that is the debate, and it is out there in print.
    I am intrigued by your talking about South Dakota. You have 
here a chart about South Dakota, which is fascinating. You say, 
``Turning South Dakota,'' and you have got 44 million acres 
today and tomorrow, and you have got tons per acre. Well, they 
go up by three times presumably because they are doing 
cellulose, switchgrass out there now in South Dakota in your 
tomorrow chart. So there are thousands of barrels a day coming 
out of South Dakota, 3,429,000.
    Then you have a chart and you ask, is South Dakota a member 
of OPEC. The only two countries that produce more at that point 
per day are Saudi Arabia and Iran. South Dakota comes in third, 
ahead of Kuwait, Venezuela, UAE, Nigeria, Iraq, all very 
difficult cases. Now, that is astonishing. I am not sure South 
Dakotans really have seen that chart.
    Mr. Khosla. It could become the most valuable State in the 
country.
    Senator Biden. Who did you coauthor that article with 
again? That was a joke.
    The Chairman. Yes; our dear colleague of South Dakota.
    But in any event, now let us have a reality course. When 
does South Dakota become third in the batting order with OPEC? 
What is tomorrow here and what has to happen?
    Mr. Khosla. Sir, practically it will not happen this way. 
The 44 million acres we are talking about would be spread 
throughout the Midwest and probably throughout most of the 
country. There are good biomass regions in Florida, in the 
South, in California, in the Northwest in terms of our forests 
and wood chips that are a great source of cellulosic ethanol, 
even in Canada. So this was more for illustration. It was a 
chart done by a friend of mine that I chose to use for 
illustrative purposes.
    But practically, these numbers are achievable. In fact, I 
talked earlier about getting to 3,000 gallons per acre. When I 
talk to my plant biologist friends from what they can actually 
yield with 25 years of biomass development geared toward 
producing more energy, the numbers I hear are more like 45 tons 
per acre, best case, and then you are talking about 5,000 
gallons, and even with modest demand increases over the next 25 
years, that would mean our energy needs with 40 million acres 
or some small number like that. Those are astonishing numbers.
    I would only add that ex-Secretary of State, George Shultz, 
and Jim Woolsey have coauthored an article that talks about 
over 60 million acres. So the land use requirements are not 
humongous. In fact, they are relatively modest because we now 
have 72 million acres of soybean crop in this country, which 
did not exist some time ago. Our corn crop has gone from 120 
million acres to 80 million acres over the last 75 years or so. 
So we have more than enough land.
    We do need to enforce--back to your second question--
distribution. I have recommended a very modest number of 10 
percent. I would love to see it be like Sweden which has a 50-
percent requirement by 2009. I think the independent gasoline 
operators are dying to do this if they are not obstructed. 
Governor Pataki last week introduced a bill in New York State 
that could ban all franchises like Chevron and Exxon from 
discouraging the adoption of E85 by independent gas station 
owners. I think that is a wonderful idea and I think we should 
do it for the whole country, and I would love to see a more 
aggressive target than the 10 percent I have recommended.
    The Chairman. Well, I appreciate very much your chart, 
imaginative or not, with regard to South Dakota. I would just 
observe that they might not want to put all of their acreage 
into ethanol production. Some people might still want wheat or 
corn or other items, at least that will be the claim of the 
turkey growers, the cattle people and so forth.
    Mr. Khosla. This was more fun than anything.
    The Chairman. Leaving aside that point, however, it 
illustrates what could occur--and this is another story 
altogether--in terms of wealth production in our own country. I 
was in Jasper County, IN, giving a commencement speech at St. 
Joseph College, a Sunday ago. I went down the road to the 
ethanol plant that should be completed by December. I pray that 
it will be completed by December so that somehow the ethanol 
gets out to these E85 stations, few as they may be. But 40 
million is the tag for this one. It is a fairly small plant, 
but 40 million times $2.75 is a lot of new wealth into Jasper 
County, a county of 31,000 people. People have no idea of the 
impact that this is going to have. When you talk about the 
impact in South Dakota, 44 million acres into this sort of 
thing, that is extraordinary.
    One of the reasons we talk about OPEC is because this has 
made some rulers very wealthy, not necessarily the people of 
the country, but somebody in Saudi Arabia and Iran and so forth 
is, as a matter of fact, stowing away a lot of cash. Our 
problem, as a country, is that sometimes this cash is not used 
to our benefit. In the case of Iran right now, we are going to 
have a hearing tomorrow, and a part of the reason we are having 
the hearing is because of the subject we are discussing today.
    And Tom Friedman, right in this article that you have 
cited, shows a graph that political scientists have helped him 
with. As the price of oil went from $20 to $40 to $60, civil 
liberties in each of the countries involved went down, 
precipitously, almost by the same amount. There was no need for 
democracy. There was no need for anybody else. In fact, the 
rulers of the country had the stuff. And we can talk until we 
are blue in the face about democracy in the Middle East or in 
these countries, but we will be blue in the face and there will 
not be much democracy simply because that is where the wealth 
is, the patronage, all of the sinews that keep the system 
going. That is very serious.
    That is why I highlight the illustration of specific States 
and specific locations in the United States--and I would 
encourage you and those who work with you on these publications 
to do much more of this because the reality of this makes a big 
difference when we are saying to our constituents this is for 
real and we believe we have an idea here.
    Mr. Khosla. I want to just reiterate these three simple 
things that do not cost very much money and are not too much of 
a burden on any industry, not the auto industry or the oil 
industry, and do not take Government money. These three simple 
things can completely forever change the face of America in a 
way that is hard to imagine. If we have 200 billion gallons of 
ethanol coming out of America even at $1.50 a gallon production 
cost, we are talking about 300 billion dollars' worth of extra 
GDP in rural America. That is transformative in this world.
    I might also, since this is a Foreign Relations hearing, 
refer you to a chart that has a map of the world.
    The Chairman. That is equivalent almost to the $320 million 
deficit we have in our foreign accounts from imported oil.
    Mr. Khosla. If you can imagine going beyond America, 
because it is transformative of rural America, it will repeat 
that phenomena all over the world. If one was to address the 
question of poverty, another question I am personally very 
interested in--and microfinance is my other area of endeavors--
and you draw a poverty belt, it is all around the equator. The 
poverty belt runs 20 degrees north and 20 degrees south of the 
equator. That is the part of the world that will be rejuvenated 
completely by a switch to biomass fuels. We will address the 
poverty question much more effectively with this transformation 
and have global impact.
    Also, if one might imagine a map of the world, one can see 
America meeting its needs and Canada's needs, sort of North 
America meeting its needs; South America supplying South 
America and Europe; Australia with lots of land supplying 
China; India being relatively self-sufficient; and Africa sort 
of being a big buffer zone for biomass. So one can almost paint 
a global picture of supply and demand and the regional and 
local balances that I am happy to elaborate in more detail, if 
you would like. That to me is the most exciting part of this 
transformation beyond just meeting our energy independence 
goals. It changes the planet beyond changing the face of rural 
America, and that is exciting. That is very exciting.
    The Chairman. It certainly is.
    Mr. Khosla. And it is very doable. It is not esoteric.
    The Chairman. Senator Biden.
    Senator Biden. This is one of the most interesting hearings 
I think we have ever had. Mr. Chairman, I think whether you and 
I do it or not, but I just think that we should be, with your 
leadership, just setting the standard here, just taking these 
three things and putting them in the form of legislation and 
laying them out there and start to make the case. Every single 
major change, since you and I have been here in the Senate, on 
any area, whether it has been domestic or foreign, has begun 
with a couple of our colleagues being out front and setting a 
goal and forcing a debate around those issues.
    I cannot tell you how much I appreciate the time and the 
effort that you fellows have put into this because, again, the 
thing that excites me about this is the attitude of the 
American people is one that they are wondering where their 
leaders are. They are looking for some hope. They understand 
that things, as they are now, if the status quo remains, look 
relatively bleak for them. They look bleak for them in terms of 
jobs. They look bleak in terms of rural development. They look 
bleak to them in terms of our dependence. They look bleak to 
them in terms of our current account deficit. They look bleak 
to them, and they are an optimistic people. They are 
optimistic. They know there is something else out there. They 
know it does not have to be that way.
    I just think merely by raising the expectation of the 
American people that there is a way, a path, it will unleash a 
whole lot of energy. It will unleash a whole lot of energy in 
the States. It will unleash a whole lot of energy from the 
Governors. It will unleash a whole lot of energy from local 
communities. You will find in my State and I suspect in yours, 
Mr. Chairman, you will have everyone from city councils to 
county councils deciding that they want to figure out how to 
promote the access, that 10 percent. Was it Thomas Paine who 
said we have the ability to remake the world? I am paraphrasing 
it. We really do. I do not want to make this sound too 
grandiose.
    Mr. Khosla. Absolutely. I want to stress again how much 
support we can get among normal people. Not only that, for the 
first time in this issue, we can involve a whole new 
generation. It is the one thing I have worked on in my career--
and I have four children between the ages of 13 and 18--that 
they are really excited that I am working on it. Every time 
there is a story, they share it with their friends. It is 
hugely motivating when young people care enough and get excited 
about the idea to share it with their friends. Many in my 
daughter's class watched the Dateline piece with their parents. 
That is very exciting, but it also tells us how much potential 
we have to mobilize people who you would not think are normally 
part of effecting a change like this.
    I think this has implications all over and completely 
changing even the way the youth of America look at these kinds 
of issues. Otherwise, they are boring, old issues decided in 
Senate Chambers, but they can get involved this time. I just 
see my own children and that is all the energy I need to keep 
doing this.
    The Chairman. Well, you have stimulated not only your own 
children, but both of us, and we thank you both for 
extraordinary testimony. Senator Biden and I will be thinking 
together about how we can proceed with the important ideas and 
objectives you had, and this is why we have tried to explore 
the nitty-gritty of some of these to understand better in our 
own mind's eye the negotiations you already had in your public 
lives, as well as the ones we must have. We thank you very much 
for coming.
    Senator Biden. Gentlemen, thank you very much.
    Mr. Khosla. Thank you very much, sir.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 12:03 p.m., the committee was adjourned.]
                              ----------                              


             Additional Statement Submitted for the Record


   Prepared Statement of Hon. Russell D. Feingold, U.S. Senator From 
                               Wisconsin

    I appreciate the Chair's unfailing commitment to the issue of 
energy security. He has been a constant voice, using this committee's 
area of jurisdiction, warning us about the implications of our energy 
choices and today's hearing continues these efforts.
    As we all know, our current over-dependence on oil poses grave 
risks for our country--for our national security, for our economy, and 
for our environment. While I remain saddened that we didn't use last 
year's energy bill to really push the envelope, I am optimistic that we 
will soon get it right and provide an energy vision to bring us into 
the 21st century.
    Today's hearing should prove useful as we look for ways to move 
forward and I am thankful for both witnesses, Vinod Khosla and Jason 
Grumet, joining us this morning.

                                  
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