Bringing It All Back Home, Clark for Washington Monthly

November 4th, 2010

Washington Monthly

Bringing It All Back Home

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Want to really fix the economy? Stop spending $300 billion a year on foreign oil, and invest it instead in ethanol and other homegrown fuels.

By Wesley K. Clark

America has a dirty secret, and a mortally dangerous problem. You will occasionally see it mentioned in the press, but almost no politician will give it more than a passing reference. Many despair of finding a solution; others fear offending powerful constituencies. Scholars now consider it so banal that they seldom study it. Most businessmen accept it as a sad, sorry fact of life, though it makes some of them very rich.

It’s an $821-million-a-day addiction to foreign oil. That’s $300 billion a year, or about $1,000 for every American—man, woman, and child. In June we sent $27 billion abroad; in July it was over $29 billion.

Our dependency on foreign oil costs more than the wars in Iraq and Afghanistan. It’s about 60 percent of the total U.S. trade deficit. If we weren’t sending the money away, it would be enough to repair America’s woeful infrastructure in a few years. Enough to send every child in America to college, and fix public education to boot. At a time when we’ve lost 8 million jobs, it would be enough to hire 3 million Americans at $100,000 per year, or almost 8 million at about $40,000 per year.

If a foreign country came here and said, “Pay us this tax,” we would consider it an act of war. Yet when a political party discusses trying to recapture $300 billion a year in taxes, it’s political suicide. Americans pay billions of dollars per month to foreign countries—some of them incubators of terrorism, nearly all of them unstable dictatorships—and it isn’t even a campaign issue.

But this tragic situation also presents us with the greatest opportunity in a decade to recharge America’s economy and build a platform for renewed economic growth. I want to tell you how it can be done. And without a tax on gasoline or carbon.

I’m in the energy business. When I left the Democratic presidential race in 2004, I returned to investment banking and consulting. The opportunities were in energy and commodities. Climate change was emerging as yet another energy-related threat to our national security, and as a national security specialist I thought I could add value in this area. Over the last few years I have served on the boards (or sometimes the advisory boards) of an oil refinery, an oil exploration and production company, a shale gas company, an electric cable producer, a wind turbine manufacturer, an electric car company, two wind development companies, a solar energy developer, an ethanol producer, a biodiesel producer, and an ethanol advocacy group. Along the way, I have spoken at wind and solar conventions, biofuel meetings, and electric and hybrid automobile groups. My knowledge of the energy sector has also come from consulting with governments and foundations, and studying policy papers. But, fundamentally, I’m in business, and I’m focused on energy because it’s the key to saving our economy from decline and creating the jobs America needs.

First, an analysis of the problem. The United States today is consuming almost three times as much crude oil as it produces. Fully 71 percent goes for transportation. During the second quarter of 2010 America consumed 9.2 million barrels per day of gasoline, plus 5.1 million barrels for other transportation, such as jet fuel and diesel for trucks and locomotives. Ninety-four percent of the energy used in transportation is derived from petroleum, according to the Energy Information Agency. So energy independence is largely about transportation—not about insulating our houses, turning down thermostats, or swapping out light bulbs.

We do have opportunities to produce more oil domestically. One big new example is the Bakken Shale formation in North Dakota and Montana, which could be producing almost a million barrels per day. More offshore drilling might bring in another million barrels a day (we are currently bringing in about 1.6 million barrels per day from the Gulf of Mexico). According to Department of Energy estimates, opening up the Outer Continental Shelf and the Arctic would yield perhaps another 2.3 million barrels per day by 2030. But it will take several years to bring on these additional sources, and even then they won’t be sustainable; oil well production depletes at an average of about 2 percent a year. Even under best-case assumptions, we can’t drill our way out of the problem. (And many of us wouldn’t want to anyway, due to environmental concerns.)

A second approach is conservation. We could, for example, drive less. We know how to do this. In 2008, for the first time since we’ve kept track of the statistic, Americans drove their cars and trucks less than the year before. Thanks to $4 gas and spreading unemployment, total vehicle miles traveled declined by 58.9 billion. But to keep that in perspective, Americans still drove nearly 3 trillion miles in 2008, and we are driving still more today.

Moreover, improving the fuel efficiency of vehicles does not necessarily help reduce total gas consumption. Getting more miles per gallon reduces the cost of driving, which causes at least some people to drive more. In the early 2000s, newly available hybrid technology helped boost SUV sales, thereby increasing total gasoline consumption.

To be sure, there is much we can and should do to promote true conservation. As this magazine has reported, just diverting more long-haul freight from trucks to electrified railroads has the potential to cut the nation’s oil consumption by as much 15 percent. (See “Back on Tracks,” January/February 2009.) If only 30 percent of the freight that currently goes by truck went by barge instead, it would result in a reduction in diesel fuel consumption of roughly 4.7 billion gallons. (“The Shipping News,” July/August 2010.) In the current issue, Patrick Doherty and Christopher Leinberger explore the vast strides toward energy independence that could be achieved through mass transit and more “walkable” communities.

But let’s not pretend that conservation alone will get us to where we need to be. There is only so much rural Americans and most suburbanites can do to avoid driving—and that will be true for a long, long time. Yes, more freight could go by rail and barges, but store shelves would be empty in a few days without trucks making local deliveries.

Recognizing these realities, many people are excited about the promise of electric vehicles. We could use wind or solar power to produce the electricity they need, and at a stroke be done with imported gasoline while also reducing greenhouse gas emissions. It’s a compelling vision, and in the long run an achievable one. But getting there is easier said than done. Currently, electric cars are too rare to have an impact and too expensive for most Americans to afford. The price will no doubt come down, but the cars under development still don’t have enough range to satisfy many consumers.

To generate all the electricity we’d need, we’d also have to burn a lot more coal, because there is no way we can get that much juice from windmills and solar panels right away, or even soon. Even if we could, our already overstrained electrical grid will lack the capacity to handle the load until we make massive investments in the infrastructure.

Then there is the question of who makes all the batteries we’ll need. It might well not be us. China, for example, has a major industrial effort dedicated to producing lithium batteries, while also controlling about a quarter of the world’s production of the raw material used to make them, lithium carbonate. Unless major progress is made, shifting to electric vehicles will further erode the U.S. balance of payments and could leave us highly vulnerable to foreign sources of raw material other than oil.

The Obama administration is well aware of the challenges and is making an extraordinary effort to develop U.S.-supplied advanced batteries. But the adoption of electric cars is still likely to be slow due to lags in technology development, production scale-up, infrastructure build-out, and consumer preferences. Most studies show that twenty years from now, 200 million liquid-fuel cars will still be on the road. That means we are still talking about a tax, or tribute, of as much as $9 trillion sent abroad to pay for oil over the next twenty years—unless we get moving toward energy independence on other fronts.

If we cannot depend on electric cars to get us off foreign oil anytime soon, what about natural gas? There is a lot to be excited about here. One of the great, largely unheralded technical innovations of the late twentieth century has been the advent of precision horizontal drilling and a process known as hydraulic fracturing (injecting liquid into hydrocarbon-bearing shale rock). Together, these techniques have opened up huge reserves of natural gas that were previously too expensive and difficult to tap. In just the last five years, U.S. natural gas reserves have increased by almost 25 percent.

But as welcome as this news is, natural gas hardly provides us with a panacea. Thanks to the efforts of Mr. T. Boone Pickens, a great deal of study has gone into the prospect of using natural gas to fuel vehicles. But natural gas, whether in compressed or liquid form, is less energy intensive than gasoline or diesel fuel, meaning you need a bigger tank to go the same distance, which isn’t always practical. Or you need lots and lots of natural gas fueling stations, and at the moment we have practically none. Because such stations are quite expensive to build, the only real practical application of natural gas in transportation is to power vehicles that return daily to centralized fueling stations, such as local buses and trucks that always follow the same route.

This means that the promise of natural gas is real, but limited. A recent study by the Center for American Progress shows that with the right program of incentives and government support over a period of twenty-five years, compressed and liquefied natural gas could replace perhaps 1.2 million out of the 10 million barrels of oil we are currently importing per day.

So, then, what about coal? The United States has abundant coal resources, and various coal-to-liquid technologies are now available. Older technologies, like the Fischer-Tropsch processes, have been used in South Africa for decades to produce oil from coal. Fischer-Tropsch can also be combined with deep underground coal gasification to produce distillates such as diesel and jet fuel. At current prices, Fischer-Tropsch is quite competitive with imported oil, but has been plagued by environmental considerations and very high start-up capital costs. New technologies on the horizon, however, like coal refining and 3D seismic and precision horizontal drilling, could offer us the distillates we need to run our transportation system for as little as a third to half the cost of imported oil.

Large amounts of capital are needed to make this possible. At a nominal cost of $35,000 to $50,000 per barrel of daily production, creating a million barrels a day of coal-originated liquid fuel in the United States might require investments of $35 to $50 billion. But that’s not so much compared to the $25 billion we paid just in the month of July for imported oil. To completely replace all imported petroleum might require between $400 and $700 billion, over a decade or more. These costs would be borne by private capital, of course, not taxpayer funds, and these would be highly profitable investments, assuming oil prices remain in the range of $75 a barrel. Start-up of these processes has already begun, with a 35,000-barrel-per-day production facility using the Fischer-Tropsch process to convert Wyoming coal to diesel now planned, permitted, and ready for funding. But the scale to really impact our energy needs is missing. We require the right market conditions to bring these technologies here—regulatory and environmental approvals, some infrastructure construction (also privately funded), and appropriate support from the large energy companies that dominate the American economic landscape. It could happen, at least in part, if oil prices remain in the current range.

To be sure, many people have serious environmental reservations about hydraulic fracturing, coal refining, and the other technologies discussed above. Many of these concerns, in my view, are exaggerated or can be addressed through regulation and improved technology. But regardless of how the details work out, there are two overarching points that need to be kept in mind in thinking about the tension that sometimes exists between energy independence and environmental concerns.

First, so long as we are sending $300 billion a year abroad to pay for foreign oil, our economy will be increasingly starved for the financial resources it needs to invest in the transition to a truly green economy, from building high-speed rail lines to constructing a smart grid powered by wind and sun. Yes, producing our own energy hardly means that energy will be free, but the money we spend on domestic energy multiplies through many other domestic sectors and becomes part of our jobs and tax base, rather than, at best, going to other nations’ economic development, or, at worst, contributing to corruption, waste, and terrorism.

Second, we need to remember just how dirty current oil production is and will become on our current course. Because we import so much oil from faraway places we tend not to be aware of the day-to-day damage that oil exploration and production causes even without any catastrophic spills. In the Niger Delta, soot from oil flares and leaks from pipelines poison fields and fisheries, devastating indigenous people and creating the conditions for what may yet become one of the world’s bloodiest civil wars. The longer we continue our gluttonous consumption of foreign oil, the more oil production will extend to environmentally sensitive areas where more often than not it will be subject to very little environmental regulation and cause intense social conflict. And so we have to ask ourselves, “Compared to what?” when confronted with the real but manageable environmental challenges posed by energy independence. It’s all one planet, after all.

Now we come to perhaps the most rapid and cost-effective contribution to solving the problem of American oil imports: biofuels, and specifically, ethanol. Ethanol, essentially alcohol, is produced from the fermentation of sugars. It burns much more cleanly than gasoline, and has a higher octane. Although a gallon of ethanol has only about two-thirds the energy of a gallon of gasoline, its higher octane enables engines to run more efficiently when used in pure form or as a fuel additive. Performance varies depending on the make of the car and the ratio of gas to ethanol, but according to Motor Trend, for example, the 2011 Buick Regal Turbo running on a mixture of 85 percent ethanol will get only 4 percent fewer miles per gallon than when running on pure gasoline. With some stability in policy, manufacturers could design engines for higher ethanol blends, producing savings in weight and improved performance over gasoline engines.

More than thirty years ago, Brazil decided to require that all automobiles sold in that country be able to run on ethanol, which it today produces in large quantities from sugarcane. Brazil also invested heavily in the development of its domestic infrastructure to deliver ethanol, such as cheap credit for the construction and operation of sugarcane ethanol mills and financial backing for installation of ethanol fueling pumps and delivery and storage terminals. There is also a domestic mandate that all fuel in Brazil must contain at least 20 to 25 percent ethanol. This effort has been enormously successful, enabling the Brazilian economy to retain tens of billions of dollars that would otherwise have gone to pay for imported fuel. Today, almost all the vehicles in Brazil are flex-fuel, allowing Brazilians to use even 100 percent ethanol in their tanks without engine problems.

In the U.S., most ethanol comes from corn, which is our most abundant and affordable feedstock. It requires a different process than sugarcane to turn into ethanol, but it also has an important by-product in livestock feed called dried distillers grains. Since the 1970s, American ethanol producers have been using enzymes to convert the starch in corn into sugar, and then using yeast to ferment the sugar into alcohol.

The big break for America’s ethanol industry came in the 1990s when the gasoline additive MTBE, a derivative of fossil fuel whose use had been mandated by some states to reduce smog, was discovered to be contaminating drinking-water supplies. A consensus formed that ethanol, which promotes cleaner combustion of gasoline, was a better alternative. Tax policy supported the emerging ethanol industry with a “blender’s tax credit,” which provided an incentive for oil companies to use a competitor’s product, and a complementary tariff on imported ethanol prevented foreign producers from benefiting from these U.S.-taxpayer-funded incentives.

As an industry in its infancy, without access to market or the ensuing capital to drive technological development, early ethanol production was predictably inefficient. In addition to using far more energy than is required today, more water and enzymes were also needed. And energy was needed to till, plant, and harvest the corn, dry it, and transport it to the ethanol plant.

Nonetheless, as oil prices shot up in the mid-2000s from $40 per barrel to over $75 per barrel, ethanol production exploded. It was good business. In 2000, only 1 percent of the gasoline sold in the U.S. contained ethanol. By 2006, that number had jumped to 4 percent and by 2009 to 8 percent. Today, domestically produced ethanol allows the American economy to retain some $43 billion a year that would otherwise go to the purchase of imported oil.

Along the way, the U.S. ethanol industry has become much more efficient. Some plants now use the methane from local landfills or waste wood chips to generate heat; in most others, abundant and relatively clean natural gas has replaced coal as a heat source in the fermentation and drying processes. Bioscience has brought us improved enzymes and yeasts. One study showed that between 2001 and 2006, the average ethanol plant used 25 percent less water and 20 percent less energy, and produced 6 percent more ethanol per bushel of corn. According to a study released in June by the USDA’s Office of Energy Policy, a gallon of ethanol produced in modern plants contains about 2.3 times the energy needed to produce it, including the energy required for planting, cultivating, fertilizing, and harvesting corn. That ratio could go as high as 26, the USDA found, if corncobs and other currently discarded parts of corn plants were burned to produce the heat needed for producing ethanol.

Ethanol also puts much less carbon into the air than oil or natural gas. Again, this is true even if we include all the carbon emissions caused by growing corn. Modern ethanol is about 60 percent less carbon intensive than gasoline, and about 35 percent less intensive than natural gas, measured on a life-cycle basis that includes the effects of planting, cultivating, fertilizing, harvesting, drying, storing, transporting, and converting the corn into ethanol.

Some academics and policy analysts have attempted to show that when an acre of land is used for ethanol rather than food, another acre of uncultivated land somewhere in the world will be converted to food production, and that when this “indirect land use” effect is taken into account, corn ethanol produces more CO2 than gasoline. Such arguments have turned many environmentalists against ethanol. But the EPA determined earlier this year that even when theoretical indirect land use effects are taken into account, corn ethanol still emits 20 percent less greenhouse gases than gasoline. Moreover, the indirect land use change model has simply failed to account for the many varied causal factors contributing to land use abroad. While ethanol production soared in the U.S., for example, Brazilian deforestation decreased, contrary to what the model would have predicted.

Moreover, while we can’t eat the corn we use to make ethanol, we can and do use a major by-product of ethanol production, distillers grain, to feed to animals who are part of our food chain. Over 90 percent of the food value of the corn—its oils, proteins, and fiber—is used for livestock and poultry production after the starch is removed for ethanol. Distillers grain is also now a significant U.S. export. Many people worry nonetheless that increased ethanol production will cause spikes in food prices or cut into America’s food exports. Yet these concerns fail to take into account the likelihood that corn yields per acre will advance robustly in the future, as major biotech firms such as DuPont and Monsanto promise will happen through the application of rapidly advancing bioscience. But even if corn yields don’t increase as expected, there is still a strong case for ethanol.

That’s because years of research have put us on the brink of being able to produce ethanol and other biofuels out of everything from corncobs and corn stover to pulp, trees, other agricultural by-products, and municipal solid wastes. In each case organic material is converted to alcohol, either through fermentation or other processes. These potential feedstocks are virtually unlimited; according to several new business ventures, ethanol from municipal wastes can be converted to ethanol for less than a dollar per gallon when municipal tipping fees are included. There is enough waste cellulose and other organic material, in combination with corn, to produce 80 to 100 billion gallons of ethanol per year—effectively replacing all requirements for imported gasoline.

But ethanol production today is effectively capped by regulatory fiat. The Environmental Protection Agency limits the amount of ethanol in gasoline to no more than 10 percent (the so-called “blend wall”), except in the cases of specially modified flex-fuel vehicles. Capped out by regulation and by lack of suitable blender pump infrastructure, the ethanol industry has held roughly steady over the past two years while appealing for relief from the blend wall. Evidence collected by the auto industry itself shows that most cars produced over the past twenty years run just about as effectively on a 15 or 20 percent blend of ethanol as they do on the 10 percent blend.

In March of 2009, ethanol industry representatives formally petitioned under the Clean Air Act for a change in regulations that would allow refiners to add up to 15 percent ethanol into gasoline—or E15, in the jargon of the debate. Such a change in regulation requires that government testing be done to assure no degradation of air quality in the automobile emissions with the new blend. What has followed, though, has been a prolonged battle with the ethanol opponents. Small-engine and marine-engine owners have petitioned and taken out newspaper ads. Environmentalists who are misinformed or misled on the benefits of grain ethanol are largely opposed. Some automakers have taken positions against it, even though Ford, General Motors, and other major automakers have little trouble producing cars for the Brazilian market that run on 100 percent ethanol. But now, eighteen months later, and despite emotionally charged opposition, the first results of government testing have been announced, and as of this writing the EPA is expected to approve E15 for use in cars produced after 2007.

Some voices in the environmental and nutrition movements have directed another set of arguments against both the industry and agriculture itself. Worried about fertilizer runoff and the nutritional hazards of cheap corn syrup, these voices contest the agricultural subsidies flowing to American farmers, as well as the blender’s tax credit and ethanol tariff. But these arguments are misplaced. Modern agriculture has become increasingly efficient in its cultivation and fertilizer practices. No-till farming and precision application of fertilizer have much reduced agricultural runoff. Moreover, the estimated $7 billion annual cost of the blender’s tax credit is more than offset by the savings in farm price support payments for corn and from the tax paid by domestic ethanol producers.

Ford, Chrysler, and General Motors have each promised that half of their vehicle production will be flex-fuel by 2012, provided that enough gas stations are equipped to sell higher blends of ethanol. (Today, the U.S. has 2,259 E15 blender-pump fueling stations, out of a total of more than 159,000 gas stations.) If we also allow more older cars to run on an E15 mix, rapidly approve the use of higher-level blends, and make a national commitment to flex-fuel vehicles, we have the opportunity to do away with another 1 to 2 million barrels per day of imported oil within the next five to eight years. And if we choose, we could continue to develop this industry to the point of replacing 4 to 8 million barrels per day of imported oil in the longer term—and there’s no reason why federal, state, and municipal governments can’t lead the way by procuring only flex-fuel vehicles now.

Further out are more advanced liquid fuels, ranging from diesel-producing, CO2-fed algae to even genetically modified bacteria that secrete gasoline, as well as alternative fuels like methanol, or hydrogen. Research dollars are flowing; each fuel has its appeal and advocates and will eventually have its chance in the marketplace if we break the grip of imported gasoline. But with tens of billions of dollars per month flowing overseas, we have to recognize the value of using current technology like ethanol while more advanced alternatives emerge.

Already some states, like Arkansas, are providing assistance to commercial firms which seek to convert their existing stations to handle higher blends, including E15. (In Arkansas, the conversion cost is estimated at approximately $70,000 per station, which includes a new tank for ethanol and the new blender pumps.) Growth Energy, an ethanol producers’ advocacy group with which I am associated, has proposed diverting some of the blender’s tax credits to assist in the conversion of infrastructure.

So, can America take back that $300 billion a year? Unequivocally, yes. But probably not through waiting for any single technology. The government cannot afford to delay confronting the enormity of the problem, but neither can it afford to pick single winners here. There is simply no way to predict accurately the pace or extent of tech developments, changing consumer demand, or capital flows. Instead, our policy must be to adopt a portfolio of possible solutions. Each of the approaches outlined above must be vigorously pursued.

In the near term, the most effective approach is a stronger emphasis on ethanol as a substitute for gasoline. Rapid approval of higher ethanol blends, encouragement to install the requisite infrastructure, and a national commitment to flex-fuel vehicles are all that’s needed. The suppliers are standing by and anxious to begin; they only need access to the market.

An expansion of offshore oil exploration and production is also warranted, particularly in the contiguous U.S., aiming to add another 1.5 million barrels per day to U.S. production. Here the restraints are industry skills, environmental compliance, and safety—and industry, in particular, must invest in and demonstrate its commitment to sound standards.

In the middle term, unconventional technologies like coal refining and underground coal gasification bear enormous promise. They have been studied and worked on by the Department of Energy for many years. If adopted here, they could add another 1 or 2 million barrels per day or more to U.S. liquid fuel. But these projects need expedited approval processes at all levels of government. Otherwise, the technologies will just move overseas, where they will face less environmental scrutiny and won’t do our economy any good.

Incentives to encourage our heavy vehicles to shift to compressed and liquefied natural gas from diesel will also be important, and could further reduce U.S. demand by perhaps 1 million barrels per day. Altogether, these programs could account for up to 7 million barrels a day of liquid fuel, and perhaps more. And of course, we must encourage more and more Americans to adopt hybrid and electric vehicles as they become available in greater numbers.

Each and every one of these measures will create more jobs, and retain more wealth inside America. Today, the investment dollars are on the sidelines; businesses are uncertain; investors are looking overseas for marginally higher rates of return. Focusing our attention on eliminating oil imports is a vital step in setting our economy aright. If we create conditions on the demand side, including a studious and comprehensive review of the regulatory processes impacting on energy production here, then private investment dollars will flow in quickly to meet the demand.

And all of these efforts—offshore production, conservation, electrification, compressed natural gas, unconventional oil production, and biofuels—are more environmentally friendly and less carbon intensive than the oil they replace. So not only will we be creating jobs, but we will also be advancing the longer-term goal of reducing emissions of greenhouse gases.

There are some who would endorse a tax on carbon or imported oil. And no doubt, that would change the cost calculus for motorists, making many alternatives to imported oil possible. It is a tidy theoretical approach. But so far there is no political consensus to do this, and there is little prospect for such a consensus to emerge.

Instead of making the American people pay more for fuel, what we need to do is get them on our side, in favor of energy independence. And perhaps the best means to achieve this is to label gasoline’s country of origin right on the pump. As a first step, legislation was introduced in the U.S. House of Representatives that would mandate country of origin labeling, telling consumers where they are sending their fuel dollars, whether it be Abu Dhabi, Nigeria, or Venezuela. Many of us believe that if the American public could see, each time they go to the pump, where their hard-earned dollars go, we would soon have strong national support for the policies we need to achieve energy independence. No American politician of either party can defend sending $300 billion per year abroad to pay for imported oil. Not the Tea Party. Not the Republicans. Not Democrats. At a time when the American economy has lost millions of jobs, and when most economists despair of America returning to full employment anytime in the near future, we don’t need to put an American on the moon. But we do need to get past denial and overcome our addiction to foreign oil. It’s not as if we don’t know how.