Wednesday, August 2, 2006

There is a growing consensus America must end its addiction to oil. Yet there is despair we can actually do so, short of draconian cuts in energy use that would leave Americans sweltering — or shivering — in the dark and trudging to work for miles on foot. Such defeatism is unworthy and unwarranted. America can end its addiction. Thanks to technology and the new economics of energy, the time is ripe to launch an energy revolution and shift toward ethanol as a major transportation fuel.

Unlike exotic alternatives such as hydrogen, with ethanol we don’t need new engines, or new fuel distribution and storage. And we don’t need a lot of time or taxpayer money. With the right incentives, a revolutionary transformation could kick off tomorrow. In 25 years, ethanol produced from corn, biomass and other renewable material could be the dominant fuel for cars, SUVs and light trucks.

This is not a utopian scenario. It is rooted in sound technology, science and economics. It is a common view we come to from different perspectives: on the one hand, that of a senator long concerned with national security who believes energy dependence is one of the most serious crises we face; on the other, a Silicon Valley venture capitalist who has invested millions in revolutionary technologies, now including ethanol.

The need to end our oil dependence grows clearer by the day. Oil is a magnet for conflict, a weapon for petrostates and a stimulant for terrorism. The hundreds of billions we spend on imported oil weakens our economy, strengthens unfriendly regimes and hobbles our diplomacy around the world. Petroleum is a source of greenhouse gases that contribute to climate change.

At the same time, the business case for ethanol has never been stronger. With crude oil at $70 a barrel, corn-based ethanol today is cheaper to produce than gasoline before all subsidies and taxes. Ethanol from switchgrass and other biomass using soon-to-be-available cellulosic technology will cost still less, with dramatic greenhouse gas reductions.

New cars can easily be fitted to burn a blend of 85 percent ethanol and 15 percent gasoline, called E85, as well as regular fuel. These flex-fuel vehicles (FFVs), already on the road in limited numbers, use low-cost, well-proven technology.

Moreover, studies have debunked the old anti-ethanol myths. We’ll have enough land for energy crops given the projected strides in ethanol yield per acre, and both corn and cellulosic ethanol, using the latest farm techniques and modern processing facilities, have a high net energy gain. Even if crude dropped to $40 a barrel, ethanol would still be cheaper to make than gasoline.

With economics, consumer interests and national security aligned, how do we launch this ethanol revolution? The key will be large investments from Wall Street. Market forces begin to elicit private funding, but far too slowly.

It is time for government to focus the market’s power through incentives and mandates to give investors minimal assurances needed to plunge into ethanol with truly transformative investments. Three steps — each requiring some political courage but not much money — will help jump-start the flow of private capital to this new energy future:

• Require that most new vehicles sold in America be FFVs by 2016 or sooner, a modification that should play to the strength of U.S. automakers.

• Require all major gasoline companies to have E85 pumps at half of their stations by at least 2016. The tax incentives and mandates for these two steps are in the Harkin-Lugar Biofuels Security Act, introduced into the Senate in May.

• Ensure market certainty for investors so the Organization of Petroleum Exporting Countries (OPEC) or others can’t temporarily push down the price of oil and drive ethanol makers out of business. This could involve a variable ethanol tax credit, or a crude oil price floor, to expire once the industry gains strength.

By assuring investors a permanent market will exist for ethanol and won’t be undercut by the oil nations, these simple, pragmatic moves could turbo-charge the industry transformation. The Energy Department targets 60 billion gallons of ethanol a year by 2030, using conservative assumptions. We say American ingenuity and entrepreneurship could raise that to 150 billion gallons, or roughly 10 million barrels a day, versus current crude oil imports of 12 million barrels day.

This modest government push would provide more jobs for Americans instead of more money for hostile regimes, support farmers instead of terrorism, and promote green fuels over fossil fuels. Let’s start the revolution.

Richard Lugar, Indiana Republican, is chairman of the Senate Foreign Relations Committee. Vinod Khosla is a venture capitalist.

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