Presentation by API President and CEO Red Cavaney
to the DOE/USDA Renewable Energy Conference
St. Louis, Missouri October 11, 2006
I am honored to be a part of this DOE/USDA Renewable Energy Conference. All of us who share a commitment to meeting our nation’s future energy needs owe a debt of gratitude to Secretaries Bodman and Johanns for arranging this event. It epitomizes the cooperative effort between government and the private sector that is so essential to meeting the energy challenges of the 21st century and ensuring that the transportation fuel needs of U.S. consumers are addressed in the decades ahead.
Given the current and projected worldwide energy demand, our nation needs all sources of commercially viable energy, as well as a greater commitment to energy efficiency and energy conservation. We do not have the luxury of limiting ourselves to only a few sources of energy supply, to the exclusion of others. Nor should our leading sources of energy -- oil and natural gas – be written off before we have found cost-competitive and readily available alternatives.
Energy sources must be viewed in their proper perspective. Alternative sources have great potential but, for the near and intermediate-term future, oil and natural gas will provide nearly two-thirds of U.S. energy consumption to the year 2030, including more than 90 percent of motor fuel consumption, according to projections by the U.S. Energy Information Administration (EIA). However, energy efficiency and renewable energy sources, in particular, will be clearly on the march, growing faster than their historical rates.
Companies in our industry are focused primarily on oil and natural gas, but have long been pioneers in developing alternatives and expanding our utilization of virtually all sources of energy. From 2000 to 2005 and within North America alone, the U.S. oil and natural gas industry invested an estimated $98 billion in emerging energy technologies, including renewables, frontier hydrocarbons such as shale and oil sands, and end-use technologies such as fuel cells. This investment represents 73 percent of the total $135 billion spent by all of industry and the federal government on emerging energy technologies during this time period, according to a May 2006 study by the Institute for Energy Research. I would also like to cite a couple of example projects more recently announced:
- One company will spend $500 million over the next 10 years to establish a dedicated biosciences energy research laboratory, the first facility of its kind in the world;
- Another has formed strategic research alliances with Georgia Tech and the University of California at Davis to pursue advanced technology aimed at making cellulosic biofuels and hydrogen-viable transportation fuels, as well as transportation fuels from renewable sources such as forest and agricultural residues and municipal solid waste; and
- Yet another has a $46 million partnership with Iogen Corporation for the development and commercialization of cellulosic ethanol.
Add to this list, announcements by several companies of joint ventures to construct and operate a number of biofuels plants, and you get a sense of the high level of interest that exists. Oil and natural gas companies are also among worldwide leaders in wind energy, photovoltaic solar cells, geothermal energy and hydrogen fuel cell technology. We are proud of our credentials as a participant at this conference.
Our companies are committed to meeting the energy needs of industrial and transportation consumers well into the future, and their research and development efforts are continuing in the search for the most competitive, efficient, and economical energy technologies. Already, it is becoming clear that, going forward, the mix of our fuels will be more diverse. However, we feel a free market will determine the technologies and fuels that work best.
Some industry critics erroneously claim that our industry is “opposed to ethanol” and is doing all it can to discourage its use. Nothing could be further from the truth. Our companies are in the business of producing and supplying transportation fuels, with individual companies following differing strategies and approaches. There is a bright future for the full range of alternative sources.
API was a partner in the development of the original Renewable Fuels Standard (RFS), along with the Renewable Fuels Association, the American Farm Bureau Federation, corn growers and others. This initiative was envisioned as expanding ethanol use and helping the ethanol industry gain the critical mass and economies of scale that would allow it to compete in the fuels marketplace.
The RFS is already producing results beyond expectations -- given the number of new ethanol plants, the ethanol industry’s production forecasts, and our industry’s ethanol use thus far in 2006. Our companies have been working hard to markedly increase the ethanol content of the nation’s gasoline pool. Nearly half -- 46 percent, to be specific -- of all gasoline now consumed in the U.S. includes ethanol. Some 4.6 billion gallons of ethanol will be used this year – exceeding the RFS-required 4 billion gallons for 2006. In our view, ethanol is here to stay, and it is a very important part of our nation’s gasoline pool.
It is absolutely essential that ethanol and the entire biofuels industry become strong, vital and self-sufficient. Why? Because these are the characteristics critical for long-term success in the highly volatile motor fuels business. We know because we have nearly 100 years of experience and infrastructure developed in order to reliably serve U.S. consumers with the fuel they need, when and where they need it.
Reliability is key. Just ask those who sat in gasoline lines during the 1970s oil embargo days. Or those trapped when their supply of boutique fuel could not be readily replaced. A reliable fuels “partner” is essential to the future success of both the oil and biofuels industries.
In the early years of consumer exposure to biofuels, we do not want to be a party to any “over-promise and under-perform” commitment. All of us have to be realistic in our expectations and pronouncements about the relative merits of various alternative energy sources. One need only look at the auto industry’s experience in overpromising performance to the U.S. consumer in introducing diesels in automobiles in the late 1970s and early 1980s to see that wishful thinking, absent merit, can end up hurting everyone. For a generation, U.S. automakers have experienced great difficulty in promoting diesel engines for the U.S. passenger car market. Why? Because the confidence of U.S. consumers was eroded by their long memory of a 1980s passenger car diesel product that was neither reliable nor performing as advertised. We want consumers’ early experience with biofuels to be a positive one. This is a common good I suspect we all embrace.
We are concerned that some ethanol proponents are focused exclusively on E-85 fuel. While the industry does not object to E-85 in a free market, so long as it meets standardized technical specifications and is of reliable quality, a national emphasis on increasing ethanol volumes through E-85 can prove unnecessarily expensive and risky. If we are to encourage more long-term use of ethanol, we need to avoid surprising consumers with unanticipated problems.
Recently, Consumer Reports put a 2007 U.S. manufactured SUV FFV through an array of fuel economy, acceleration, and emissions tests, and interviewed more than 50 experts on ethanol fuel. Their findings were consistent with EPA’s annual reporting of FFVs running on E-85 compared with gasoline. FFVs operating on E-85 incur a 25-30 percent fuel mileage penalty. In short, their miles-per-gallon rating suffers a 25 percent reduction. Interested consumers need to be aware of these facts before they make their purchase decisions.
Looking at demand, more than 97 percent of cars on the road today are not designed to operate on E-85, without risk of damage. We appreciate automakers’ efforts to produce more flex-fuel vehicles. However, given that the current useful life of new cars is in excess of 15 years, it will take decades for significant market penetration of these new flex-fuel vehicles to occur. In fact, EIA projects that FFVs will comprise 6.5 percent of the U.S. light-duty vehicle fleet in 2025, compared with 2.6 percent today.
More than 90 percent of the 169,000 retail gasoline stations nationwide are owned or operated by independent entrepreneurs – typically small businessmen and women. They will decide whether or not to offer E-85 to consumers, balancing customer demand with per-station investment and conversion costs that can range from $10,000 to as high as $200,000. This investment hurdle is a major concern to many, since most service station owners will insist on seeing demand aplenty before making this level of investment commitment.
Currently, there are almost 900 retail outlets nationwide, located principally in the upper Midwest, that are equipped to distribute E-85. The number appears to be growing rapidly on its own, absent any government mandate.
We believe allowing market forces and consumer preferences to determine where and how ethanol is consumed is the most effective and least costly way to integrate ethanol into the nation’s transportation fuels pool. Already ethanol consumption is above the RFS level by a substantial amount. The ethanol industry is now strong enough to stand on its own and compete in a free market. Isn't this what many had hoped to achieve through the RFS? There is far less uncertainty in today’s ethanol market and an attractive future ahead.
The price of ethanol has exceeded that of regular gasoline on a volume basis for 28 of the past 33 months and significantly exceeded gasoline on an energy-content basis -- ethanol has about 70 percent of the energy per unit of volume as gasoline. It seems obvious that ethanol is a better value for most consumers as a gasoline additive than as E-85. As long as ethanol can be added to gasoline up to its legal limit of 10 percent by volume as a gasoline additive, it enhances octane, reduces toxics and is a viable approach. This approach creates market pressures preventing ethanol prices from falling below those of gasoline until its possible use as an additive is exhausted. And, with a 140 billion gallon national gasoline pool currently, there is considerable growth opportunity for ethanol.
Emerging energy technology will be a key driver in facilitating the transition to increased use of ethanol and other biofuels in blends compatible with existing fleets and fueling infrastructure.
Government has a role to play here, too, but it is important that we not ask government to pick technology winners and losers. History has often demonstrated that we should not focus prematurely on just one approach, which may or may not prove effective, while discouraging others that may have more potential over the long-term. Like other fuels already approved by EPA, a thorough evaluation of ethanol’s potential environmental and related effects over its full lifecycle should be undertaken as recommended by EPA’s 1999 “Blue Ribbon Panel on Oxygenates in Gasoline.”
To avoid significant degradation of transportation fuel flexibility, individual states should not mandate that gasoline sold in their states contain a prescribed amount of ethanol. A patchwork of state-by-state laws mandating ethanol use will likely result in fuel and price volatility similar to that experienced with the so-called “boutique fuels” – a problem much despised by consumers and many of their elected officials. Discouraging the use and spread of boutique-type fuels is pro-consumer, not anti-ethanol.
Just as the patchwork approach of boutique fuels has made it much more difficult to deal with tight supplies and get fuel to where it is most needed, state ethanol mandates will have the same effect on both our industries. As you know, ethanol cannot be moved by pipeline and requires its own supply chain to serve consumers. That means a longer reaction time between when supply problems arise and when relief fuels can be sourced into the market under pressure. State ethanol mandates will significantly add to that reaction time. This development is bad for both the oil and ethanol industries, and particularly bad for U.S. fuel consumers.
The uniform national RFS enacted last year is a much better alternative. It will integrate more ethanol into the nation’s gasoline pool at concentrations of up to the maximum permissible 10 percent per gallon. It can also be utilized in the entire U.S. automotive fleet without vehicle modifications or fear of engine damage. And, E-85 can grow in those locales and instances where it meets regulatory and marketplace demands. Biodiesel, renewable diesel, and blends with conventional diesel will likely grow as companies look for flexibility in complying with Energy Policy Act requirements and with Ultra-Low Sulfur-Diesel (ULSD) regulations. According to the National Biodiesel Board, the production of biodiesel grew from 500,000 gallons in 1999 to 75 million gallons in 2005 and is expected to double to 150 million gallons in 2006. Biodiesel has an attractive future, and that potential will be best realized through a market-driven approach. Cold weather impacts and quality control issues can be more readily resolved through competitive, market forces.
In closing, the path forward on renewable energy will best be determined by technology, consumer preference, and a free marketplace. If we are wise enough to seize the moment and build on the success as we have already achieved, I have every reason to believe that we will meet the energy challenges our nation faces in the 21st century and that renewable fuels will play a very important role in the 21st century and that renewable fuels will play a very important role in that regard. Thank you.