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CEOs and Generals on Oil/Security/Energy Independence -- and PHEVs
Dec 23, 2006 (From the CalCars-News archive)
This posting originally appeared at CalCars-News, our newsletter of breaking CalCars and plug-in hybrid news. View the original posting here.
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The "Oil Shockwave" simulations in 2005 and 2006 produced by Securing America's Future Energy drew attention to U.S. vulnerability -- and helped introduce plug-in hybrids to broad corporate, policy and military audiences. In mid-December SAFE released a report by its blue-ribbon Energy Security Leadership Council, with recommendations that surprised many. The group, co-chaired by Fred Smith, FedEx founder and chair, and General P.X. Kelly, former Marine Corps commandant and Joint Chiefs of Staff member, said that energy security was so important that far greater government involvement and regulation was required. And its report endorsed a range of measures including higher mandated Corporate Average Fuel Economy (CAFE) standards and greater incentives for hybrids and plug-in hybrids.

Below we include

  • The List of the Council members
  • An interview with Smith by Business Week's Economics Editor
  • Open Letter to the American People,
  • Three excerpts from the 64-page report endorsing plug-in hybrids.
  • The Energy Security Leadership Council Co-Chairs

  • General P.X. Kelley, USMC (Ret.) 28th Commandant, United States Marine Corps
  • Frederick W. Smith Chairman, President and CEO, FedEx Corporation
  • Council Members

  • Admiral Dennis Blair, USN (Ret.) Former Commander-in-Chief, United States Pacific Command
  • Admiral Vern Clark, USN (Ret.) Former Chief of Naval Operations
  • Michael L. Eskew Chairman and CEO, UPS, Inc.
  • Adam M. Goldstein President, Royal Caribbean International
  • General John A. Gordon, USAF (Ret.) Former Homeland Security Advisor to the President
  • Maurice R. Greenberg Chairman and CEO, C.V. Starr & Company, Inc.
  • Robert D. Hormats Vice Chairman, Goldman Sachs (International)
  • Admiral Gregory G. Johnson, USN (Ret.) Former Commander, United States Naval Forces, Europe
  • Herbert D. Kelleher Executive Chairman, Southwest Airlines Co.
  • John F. Lehman Former Secretary of the United States Navy
  • Andrew N. Liveris Chairman and CEO, The Dow Chemical Company
  • General Michael E. Ryan, USAF (Ret.) 16th Chief of Staff, United States Air Force
  • David P. Steiner CEO, Waste Management, Inc.
  • General Charles F. Wald, USAF (Ret.) Former Deputy Commander, United States European Command

  •­bwdaily/­dnflash/­content/­dec2006/­db20061218_326767.htm Oil, Security, and Energy Independence Fred Smith, FedEx founder and chairman, is a dedicated advocate of free markets-except when it comes to energy, which he believes requires government intervention by Peter Coy, BusinessWeek's Economics Editor.

    The man who built FedEx (FDX) into one of America's most successful companies calls himself a "market liberal," which is more or less the opposite of a political liberal. FedEx Chairman, President, Chief Executive, and founder Frederick Smith wants government to keep its hands off business as much as possible. He even sits on the board of directors of the Cato Institute, which advocates "limited government, individual liberty, free markets, and peace." In a speech last year to Cato benefactors, he said: "It is impossible, from a managerial standpoint, for the federal government to do the things it is trying to do today."

    But on one important issue-energy independence-Smith opposes the Cato line and actually advocates greater government involvement. Smith believes so strongly that more must be done to secure U.S. energy independence that he became co-chairman of the Washington-based Energy Security Leadership Council, along with General P.X. Kelley (Ret.), former Marine Corps commandant and member of the Joint Chiefs of Staff. This month, the council put out a 64-page report detailing what it thinks should be done. Among the proposals: higher, though more flexible, standards for vehicle fuel efficiency; incentives to manufacture hybrid gasoline-electric vehicles in the U.S.; funding for research on alternative fuels; and government permission for energy companies to drill for oil in Alaska and the Outer Continental Shelf.

    To Smith, the danger of energy independence was illustrated on Dec. 14, when OPEC voted for a 2% production cut-its second cut in two months-even though oil is above $60 a barrel (see, 12/14/06, "OPEC Shuts Off the Spigot").

    In the Wrong Hands Smith's divergence from the small-government credo of the Cato Institute has put him at odds with Cato's staff experts on energy. To dig into why Smith favors government intervention in the energy sector, though not elsewhere, BusinessWeek on Dec. 14 interviewed Smith and separately contacted Cato analyst Jerry Taylor, a senior fellow specializing in energy issues.

    Smith told BusinessWeek he doesn't see his position with the Energy Security Leadership Council as a departure from his free-market principles because "the oil market is anything but a free market." Says Smith: "Quite the contrary, it's a cartel, which were it operated in the U.S., would result in a violation of many U.S. laws. About 90% of the world's proven oil reserves today are not owned by private companies. They're owned by national companies, many of which are arms of states that have a great antipathy toward the U.S."

    In Smith's view, taking a free-market approach to dealing with the OPEC cartel is "like going out to play basketball and the other team is ready to play football. It's an enormous economic and national security risk for the U.S."

    Factoring Military into the Equation His main solution is to make the U.S. less dependent on oil, which is primarily used as a transportation fuel. "We need reduced energy intensity," Smith says. "The reason the U.S. has not had a much more severe reaction to the runup of oil prices over the last several years is the relative improvement in energy efficiency. If the country doesn't take steps to do that again in the future, and we continue on the path that we're on, then we will have at some point almost certainly a major national security challenge or a severe economic disruption much, much greater than we've gone through."

    Smith has a bachelor's degree in economics from Yale University, so he knows how to state his case in economics lingo. America is using too much oil, he says, because the producers and consumers of oil aren't taking into account the full cost of oil, which includes military expenditures to secure access to foreign sources of petroleum. In economics jargon, dependence on hostile or unstable oil-producing nations is a "negative externality" of consuming oil. Says Smith: "We spend $50 billion to $60 billion on protecting the oil supply line. Iran has threatened to shut down the Straits of Hormuz. Russia just withheld natural gas supply from Europe."

    Cato's Taylor isn't afraid to disagree with Smith even though Smith sits on the organization's board. "Let's be real here," says Taylor in an interview. "Everybody on our board probably disagrees with us on something. My sense is that Fred agrees with us more than he disagrees with us."

    Textbook Economics Says Taylor: "I don't think energy security is a very real worry right now. You can always have as much oil as you want as long as you're willing to pay for it."

    Taylor says he's not sure whether OPEC is all that effective in keeping the price of oil above where it would be in a completely free market. But in an e-mail, Taylor writes: "To the extent that governments interfere in oil markets, they do so by restraining production which, in turn, produces oil prices that are too high, not too low. This means that we consume less oil than is optimal from a theoretical perspective."

    Taylor's argument is textbook economics: In the absence of price controls, the economy will use a certain amount of oil based on its costs and benefits. The problem with a cartel is that by driving up the price of oil, it causes the economy to use less than the most efficient amount. In short, suppressing oil consumption is inefficient. Taylor continues, "The report in question, however, suggests that the right remedy for governmental action that produces less oil than is optimal is to move away from oil altogether. This makes little sense to me."

    Issue of National Security? That's fine for pure economics, but what about Smith's national security argument? Taylor responded to this question by referring BusinessWeek to a recent blog post about Smith's report, called "Another Blue Ribbon Energy Report Falls Flat."

    In short, Taylor argues that no oil producer can stop oil from reaching the U.S. Even if one nation-let's say Iraq-were to stop selling oil directly to the U.S., it would have to sell it to some other country. That country, in turn, could resell it to the U.S. Writes Taylor: "As long as someone is willing to buy oil from a producing state and then sell it to the U.S., no shut-off is possible absent military force."

    That leaves the possibility that some important producer will shut down its fields deliberately to drive up the price of oil and damage the world economy. Not likely, Taylor writes: "Producers need oil revenues more than consumers need the oil. Even vitriolic anti-American regimes such as revolutionary Iran, Iraq under Saddam Hussein, and Libya prior to our recent rapprochement, have shown no interest in committing the economic and political suicide entailed in shutting down the only significant source of revenue they have."

    In the end, arguments about energy independence aren't based purely on economics. For Smith, who served in the Marines during the Vietnam War, there's an emotional aspect as well. "One big difference is, I've seen up close and personal what the cost of military conflict really is," Smith says. "With two years in Vietnam under my belt, I don't want to see a bunch of American kids fighting 15 years from now over an issue that could have been solved if the U.S. had treated this as a national security issue. A lot of people forget that the triggering event of World War II was the U.S. oil embargo against Japan. I just want the price to go up at a modest, sustainable rate and for oil not to be a source of economic depression in the U.S."

    Letter to the President, Congress and the American People Recommendations to the Nation on Reducing U.S. Oil Dependence December 2006

    In offering these recommendations for reducing American oil dependence, the members of the Energy Security Leadership Council have one central goal: the enactment of public policies to significantly improve the nation's energy security.

    For more than two decades, federal energy policy has been afflicted by paralysis. Although much energy legislation has been passed into law during this period, America's energy security has grown worse with each passing year. This deteriorating condition has created enormous economic and national security vulnerabilities.

    Chief among the nation's formidable energy challenges is its dependence on oil, which fuels 97% of U.S. transportation needs. Since there are few readily available substitutes for oil, even a relatively minor disruption of the global oil supply has the potential to cause economic dislocation for tens of millions of Americans.

    In an age characterized by instability throughout much of the oil-producing world, a supply crisis cannot be reasonably dismissed as a low-probability event. On the contrary, hostile state actors and terrorist organizations clearly intend to use oil as a potent strategic weapon to attack the United States. The threat is made ever more serious by rapidly rising global consumption.

    Even in the absence of an outright supply crisis, oil dependence constrains American foreign policy by strengthening the nation's adversaries and placing enormous burdens on the U.S. military. While difficult to quantify with precision, these constraints and burdens unquestionably render the pursuit of U.S. national interests far more difficult and costly.

    America must address this critical weakness. Continued government inaction presents inexcusable risks.

    Improving America's energy security requires a meaningful reduction in the oil intensity of our economy and prudent expansion of secure oil supplies. By improving the fuel efficiency of the transportation fleet, increasing the availability of alternative fuel sources, and making responsible oil exploration and production more feasible, government policy can place the country in a far better position to endure the next supply crisis.

    In truth, we have already proven that we can dramatically reduce oil intensity. The amount of oil needed to generate a dollar of GDP has essentially been cut in half since 1975. The result is a U.S. economy that still sees steady growth despite high oil prices such as those experienced over the last few years. Unfortunately, progress toward reduced oil intensity has slowed noticeably in the last decade. We must do better.

    Political forces have often portrayed increased supply and decreased demand as mutually exclusive ambitions. In fact, both goals are indispensable components of any comprehensive policy for obtaining genuine energy security.

    The policies we advocate will require many years to implement before benefits are evident. Strong and 05 consistent leadership will be needed-not only to avoid panic during periods of high oil prices, but also to prevent complacency when costs to consumers temporarily recede.

    In bringing together representatives of the business community and retired senior military officers, the Council intends to break the longstanding energy policy stalemate. We recognize that this task will be difficult. Nonetheless, we are firmly committed to seeing our recommendations through to enactment. The following document outlines a new direction for energy policy. The suggested initiatives are aggressive while being balanced and credible. The Council calls for achievable and verifiable targets.

    The false hope of domestic energy independence is replaced by strategies for better managing the reality of global energy interdependence. Where the market has failed to provide solutions, government has been asked to apply workable standards capable of spurring the needed private sector response.

    The Council bears no government imprimatur. We have not been empowered by the Congress or the Administration, and we have received no public funds. The Council has been motivated by a shared belief in the pressing need for a comprehensive and realistic energy policy to reduce oil dependence and improve America's economic and national security.

    During the past five years, the American people have been shocked by the cruel realization of worst case scenarios. Having witnessed the attacks of September 11, 2001, we know all too well the human cost of failing to address national security threats on our own terms, rather than those of our enemies. America's oil dependence threatens the prosperity and safety of the nation. Continued policy paralysis is unacceptable precisely because we can take action to improve our energy security. Many challenges lie ahead, but we have no doubt that the efforts of the American people will meet with success.

    The time for action arrived long ago. We must not waste another moment.

    Full Report (64 pages)­reports/­ESLC_Oil_Report.pdf page 24: Policy Recommendations: Summary i. reduce oil consumption Increasing transportation efficiency is the single most effective step the U.S. can take to improve its oil security. The transportation sector is responsible for nearly 70% of all the oil the country consumes. Within the transportation sector, oil--nearly 13 million barrels per day of it--accounts for 97% of delivered energy. More than 8 mbd are used to fuel the over 220 million light-duty vehicles that provide Americans with the extraordinary mobility that is so central to our way of life.

    For several decades, the majority of these vehicles have been subject to government-mandated Corporate Average Fuel Economy (CAFE) standards enacted in 1975 in the aftermath of the 1973- 1974 Arab oil embargo. CAFE was instrumental in helping Americans lower oil usage by the early 1980s, but its requirements for cars have remained essentially unaltered for twenty years even as the imperatives of energy security have grown more pressing and technological advances have made efficiency improvements increasingly possible. Moreover, the weaker CAFE standards for pickup-trucks and SUVs, although recently marginally raised, have encouraged a market shift toward larger vehicles that get fewer miles per gallon (mpg) than the cars they functionally displace. As a consequence, America's light-duty vehicle fleet has the lowest average fuel "economy" in the developed world.

    Thanks to an array of currently marketed or soon-to-be-available technologies, there is no reason that Americans should not be able to purchase extremely safe and fuel efficient vehicles that also maintain the performance and comfort features that consumers favor. Perhaps best known among these cutting-edge solutions are hybrid power-trains that combine electric motors and gasoline engines to boost mileage, especially in stop-and-go driving conditions. But numerous other technologies, from advanced diesel engines to light-weight, high-strength composite materials, can yield dramatic efficiency gains. With future advances in battery design, plug-in hybrids will permit many daily commutes to be completed with little or no liquid fuel input. Indeed, plug-ins not only share the hybrid's ability to use oil more efficiently, they also promise to fundamentally redefine the boundaries of supply diversity by connecting personal transportation to an electric grid that can make use of a broad spectrum of primary energy sources. In the view of the Council, reformed and strengthened fuel efficiency standards--combined with appropriate government incentives and strict adherence to technology neutrality-are the critical components of any comprehensive plan to reduce U.S. oil dependence

    page 35 A 2002 study by the National Academy of Sciences (NAS) indicates that feasible and emerging improvements in non-hybrid gasoline engine design can enable a 25% increase in fuel efficiency without sacrificing vehicle size, performance, or weight, while still meeting reasonable consumer criteria for cost-effectiveness.29 With advanced hybrid and diesel technologies as well as the advent of plug-in hybrid technologies, fuel efficiency gains of 100% are achievable without undermining vehicle performance or passenger protection. In fact, while the connection between efficiency and safety is complex, there is no clearly agreed upon or established causal relationship indicating that safety must suffer in order to achieve better mileage. What is clear, at least from the record of the last thirty years, is this: without mandates and standards and in the face of market imperfections, the integration of new technologies will proceed slowly and the benefits will be directed toward further improvements in performance, rather than toward increases in mpg ratings

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