New York, N.Y.
DAVID G. VICTOR: Well, thank you all for coming at lunchtime today to talk about our energy future. Let me, before we begin, just two reminders. First, this session—because we're talking about a recently published work, this session is on the record, so take that into account. Please also turn off all your cell phones, BlackBerries, other wireless devices. Not only are they annoying, but they apparently interfere with the navigational equipment in this building. [Laughter]
It's my great pleasure to welcome Amory Lovins, who I think is one of the great visionaries of our energy system. You have his bio in front of you, which is, I think, an exceedingly modest bio. But let me just pull out a couple of key points here. Amory has, first of all, won, I think, every award available to somebody who cares about the environment and about energy. He has a distinguished record in publication. But I think crucial for our discussion today is his track record as a contrarian, [which] I think is a very, very good one, and it's a good reminder that we can think outside the box about our energy future.
Downstairs, somebody had the very good idea to circulate copies of Amory's piece from Foreign Affairs in 1976, which I think really put his thinking and his way of thinking on the map. Because, remember, 1976 was the middle of the energy crisis. Everybody thought the demand for energy was going to go through the roof and we were all in serious trouble. Amory showed in that piece, and in a lot of subsequent work, that that needn't be the case, and I think was largely correct not only in his forecast, but also in his vision.
AMORY LOVINS: Unfortunately, I think the reprint doesn't include the graph, which I now overlay with what actually happened—that's within a few percent.
VICTOR: So you need to go back to the original Foreign Affairs and get the graph as well. Well, let's begin. We're going to follow the format that has now become a norm. We're going to have a conversation here for 20, 25 minutes, and then we're going to open it up to Q&A.
So let me just begin the conversation here with some conventional wisdom, which is: The U.S. consumes 20 million barrels a day of oil, plus or minus, right now. The formation Administration thinks we're going to be consuming 28-or-so-million barrels of oil a day by the year 2025. Lots of folks are worried about that, and especially when oil prices are high—they're coming down right now, but they're still very high by historical standards. Folks are worried about it for the political implications, of course. And a lot of people have tried to tote up all of the costs of our dependence on oil—environmental costs, costs of keeping a military that might be larger than we would need otherwise. And this argument that the economists call an externalities argument suggests the real price of oil is really high, and that's an especially great reason why we need to get off oil. But, Amory, that's not your argument in this new book, "Winning the Oil Endgame," which I recommend to everybody. Your argument is kind of different. Tell us—[laughter]—tell us—
LOVINS: It's free electronically
VICTOR: In addition to selling or not selling some copies of your book, tell us what the central argument is, and let's work through some of that.
LOVINS: We assume that all the externalities are zero; that the forecast price of 26 bucks a barrel, 2002 dollars, in 2025 is everything you need to know about the value of oil and the cost of oil. So we're not counting insecurity, price volatility, geopolitical rivalries with China, and so on, over who gets the oil; moral standing, having to treat countries that have oil differently from countries that don't have oil; giving others in the world reason to think everything we do is about oil; climate impacts—we're not counting any of that stuff. We're just saying it's cheaper to save and substitute all of that oil over the next few decades than to buy it at the market price. Therefore, the transition beyond oil will be led by business for profit.
VICTOR: Let's talk—let's spend half of our time now talking about this—maybe the first half talking about what is the potential for this transition away from oil. And your vision in this book is not 28 million barrels a day of consumption, but eventually zero over the course of a generation. Let's spend the first half of our time talking about what's the potential—
LOVINS: Two generations.
VICTOR: —the technical potential, and then the second half let's talk a little bit about how we're going to do it. Give us a couple of examples of the kinds of things that you think are profitable and the potentials that are not yet being realized for reducing oil consumption.
LOVINS: Well, this is—the first part of the book is an engineering economic study with a lot of industry input, and very empirically grounded. It's all based on measured things and transparent calculations that are all published; all the spreadsheets are on the Web. We found that you can save half the forecast 2025 oil use if it were fully implemented by then—it actually takes a bit longer to turn over vehicle stock. And the cost of saving each barrel was only $12, which is roughly half the forecast price or a quarter of the recent price. So it's quite robustly competitive.
The most important thing to do is in light vehicles, which are responsible for two-fifths of today's oil use in this country and over half the forecast growth—that's cars and light trucks. Three-quarters of their fuel use is related to their weight; less than 1 percent of their fuel energy moves the driver; only 6 percent of their fuel energy accelerates the vehicle; and every unit of energy you save at the wheels saves another seven units that get wasted on their way to the wheels. So—
VICTOR: So you're saying if you put 10 gallons of gasoline in your car, the equivalent of maybe this glass is what's actually moving the driver around, and everything else is waste?
LOVINS: Yeah. So we can do an order of magnitude better than that, and the key is to make it very light out of very strong material, like advance composites. And so there are now emerging methods for making these at competitive cost, and making them into unusual shapes. These are by a little company I work with that does that sort of thing.
VICTOR: And composites are carbon fiber, like what they use in modern aircraft and spacecraft?
LOVINS: Yes. Except that the technology is now migrating from aerospace volume and cost to automotive, which are about a thousand-fold different. And that means you can actually solve the seeming contradiction between efficiency and safety, because these materials can absorb 6 to 12 times the crash energy per pound of steel, and do so more smoothly.
So, as a little example, we built a lot of the analysis around a detailed production cost of manufacturable virtual design done in 2000 by a team of mine with two tier-one companies in Europe. It was for your basic 66-mile-a-gallon—or 114 with a fuel cell—mid-size SUV; uncompromised, five adults in comfort, 69 cubic feet of cargo, hauls a half ton up a 44 percent grade, zero to 60 in 8.2 [seconds], and made of carbon fiber at half normal weight. So you could run it into a wall, say the simulations, at 35 miles an hour with no damage to the passenger compartment.
VICTOR: But what we've always been told—I have a daughter who's just gotten her learner's permit. And what we had always learned, in addition to checking your insurance, is to get the heaviest car imaginable and put her behind that so that at least she is going to be safe.
LOVINS: And everyone else will be correspondingly less safe. The point is, as Henry Ford told us, you don't need weight for strength. Remember October last year, just over a year ago, [racecar driver] Kenny Brack had this horrendous Formula One crash, and his car had a 220-mile-an-hour collision and flew to bits. He had five fractures. He was back to racing less than a year later. Those cars are ultra-light carbon fiber structures. And what you can now do with these materials is make cars that are big, which is protective, but not heavy, which is hostile. And in fact, they can be big, but light, which is efficient, so you end up saving oil, lives and money at the same time. That's quite a breakthrough. As a practical example, if you look in the front of a Mercedes SLR McLaren, you'll find a couple of yea-long cones, each weighing 7.5 pounds, woven out of this magic stuff, and those two cones—15 pounds—can absorb the entire crash energy of an almost two-ton car hitting a wall at 66 miles an hour.
VICTOR: Now, you argue—the book is really extraordinary for its detail, and it also has these warnings to watch out, there's a lot of calculation—
LOVINS: Yeah, [inaudible] calculational ticket.
VICTOR: Lots of calculating coming up, so you can brace yourself. But it's impressive for its detail and its looking not only at light vehicles and trucks, or as you say, the bulk of the story, but also at aircraft, and heavy vehicles, and so on. Tell us a little bit about the potential in the other areas.
LOVINS: Yeah, just one sentence to finish up the cars. If you make them light and hybrid—hybrid electric, like today's Toyota Prius, and so on—you can roughly redouble the efficiency of just the hybrid, but at no extra cost because the fancy materials are paid for by simpler auto-making and three-times smaller propulsion system. Now, you can get similar, what we call tunneling, through the cost barrier, with trucks and planes. When you make the vehicle light and slippery, then the propulsion system gets smaller, a lot of stuff goes away, you simplify the engineering, and you can end up with very large savings—cheaper than small ones. But you can at least triple—possibly quadruple the efficiency of heavy trucks with about a 60 percent internal rate of return. You can double or triple the efficiency of aircraft—and this will all be on the government forecasts, but assuming the same performance. That one costs—I think it's 45 cents a gallon. And the technologies require no further invention; they require normal commercialization that's already under way.
You might wonder, say, in the case of the trucks, why don't these 100 big trucking firms with very sharp pencils capture a 60 percent IRR [internal rate of return] and double their margins? That's what I asked when my MBAs brought me the analysis. And my hypothesis was, "Gee, maybe they don't know they can do this." So I went to the chairs of two of our client companies, household word companies that own some of the biggest trucking fleets in the world, and said, "Did you know you can, say, triple your truck fleet efficiency 25 cents a gallon?" They said, "No. The truck-makers only told us we could save a few percent. How do you do that?" So I told them and showed them the analysis, which is very well-grounded empirically. And they said, "Well, that's really interesting. Let's build one and test it, and if it does what you say, we'll tell the truck-makers that's what we're going to buy." That's the right answer. So those conversations are under way right now, and the first doubled-efficiency Class A truck should be on the road next quarter.
VICTOR: And you also used the example of the new Boeing plane, the Dreamliner, arguing that this is potentially a wholly different way of organizing the airline business around extreme efficiency.
LOVINS: Well, that one is 20 percent more efficient than, say, a [inaudible], and same or slightly lower real price. But Boeing is not just betting that oil prices will rumble around at fairly high levels and be volatile and be a worry for the airlines, they're also betting—I think wisely—on a shift from the hub monopolists who sit on their gates and slots and take you to a city you didn't want to go to, where you act as self-sorting cargo and get in another big airplane going where you wanted to go in the first place, and instead, Boeing is betting there will be smaller aircraft going point to point, like Southwest. Now, Wall Street's already decided who's right about that. Southwest has 10 to 12 times less market share and revenue than the combined Big Six legacy airlines, but almost three times their collective market cap.
VICTOR: Let's talk a little bit about—I mean, the bulk of the book is—
LOVINS: I'm sorry, just one other point on that, if I may. The—
VICTOR: Since everyone's BlackBerries are off, you can't text out to buy shares of what Amory may tell you. [Laughter] Have to wait till the end.
LOVINS: So in contrast, Boeing [inaudible], of course, bet on the super jumbo, which also is inflexible in size. It can't get bigger because of the landing gear limit, and if it gets smaller, it kills economics; whereas the Boeing size is flexible according to how fast the business model changes.
VICTOR: Airbus bet on the super jumbo.
LOVINS: Yeah, I'm sorry, Airbus bet on the super jumbo, yeah. And really, this whole book is built around competitive strategy business cases for the car, truck, plane, and oil industry. It is not built around somebody's ideological preference.
VICTOR: Let's talk about why these strategies—I mean, some of them are being followed. You're talking to the truckers—and I'd like to see that conversation. [Laughter] And you're talking to the airlines. But the back half of the book, which is about implementation, pretty much everybody comes out with a lot of wounds. Households don't seem to be paying attention to the real energy costs of what they're doing. Most businesses don't seem to be having a very good strategy. Government doesn't come out very well. Let's talk some about how you're going to actually put this vision into practice.
LOVINS: Well, we didn't start off actually assuming that anybody's stupid. We assumed that customers have high implicit discount rates, limited time perhaps, a lot of other things on their mind, limited information about how to get efficient. Oh, by the way, we forgot to talk about the supply-side substitution. That's the other—let's get back to that.
And we also assumed that in the large organizations that make the things that use most of the oil, the managers, especially the middle managers, are in classic fashion comfortable with sustaining innovations like another cup holder, and resistant to disruptive innovations. So we asked, how do you overcome those kinds of market failures and make sure that you can expand customer choice, manage risk, shift demand in the direction of very efficient vehicles—and similarly in buildings and industry; get capital to flow to them, and make sure that at least government gets out of the way and, preferably, helps.
VICTOR: It seems like Detroit is a big part of the problem here. And one of the themes—
LOVINS: And the opportunity.
VICTOR: But one of the themes running through your book is that—using the ideas from [economist Joseph] Schumpeter and Clay Christensen at Harvard Business School, that there's a kind of creative destruction that happens periodically in business around usually technological innovation, and that most of the firms end up dead at the end of it. So, isn't what Detroit's doing—which you document as organizing to basically block progress—isn't what they're doing actually kind of rational because most likely, most of those firms are just going to disappear?
LOVINS: Well, if they had a death wish, a lot of what they're doing is rational. But actual, there are very innovative people, especially on the engineering side, but some in upper management who I think are starting to transform those cultures. And it's going to be a race to determine whether this country imports efficient cars to displace foreign oil, or it makes efficient cars and imports neither the oil nor the cars, which would make a lot more sense. About a tenth of our private-sector jobs are at risk in that outcome. And you know, it's no accident that Toyota has more market cap than the Big Three put together.
One should be, however, really terrified about what's coming from China and later India. China has announced in June it's going to be a major exporter of cars by 2010. Three weeks later, [Premier] Wen Jiabao and the same Cabinet passed a visionary energy policy based on radical efficiency and breakthrough technology. You can be pretty sure they're not going to export your uncle's Buick. They're going to export cars that use a lot less oil and ultimately, through fuel cells, no oil. So how long will it take for Wal-Mart to start importing and badging Shanghai Automotive? Many of my friends in Detroit guess less than a decade.
VICTOR: What do you think the government—I mean, you say in the book that government should steer, not row; that they need to stay out of the way. But there also seem to be some crucial roles for government policy in all of this. Tell us a little bit about what the key things are.
LOVINS: Well, we started with the premise that the—that in order to accelerate and support business logic without distorting it, we should not be throwing subsidies at anybody, we should be market-oriented, but without taxation—it turns out you can do that; and innovative-driven without mandates, and not require much, if any, federal legislation.
So we came up with a framework that can be implemented administratively or at a state level alone for accelerating, for example, the uptake of efficient vehicles. The most important way to do that is "feebates." That's a combination of a fee and rebate that is revenue-neutral and size-neutral. Within each size class, the less efficient vehicles attract a fee; the more efficient vehicles get a rebate paid for by the fees. The automakers make more money. The customers get to look at the whole life cycle saving, instead of just the first two or three years. So you're arbitraging the spread and the discount rate. And it greatly expands customer choice.
We have some other, I think, pretty neat ideas to—for people to noodle about. One is solving the problem—really, the last frontier of welfare reform—of affordable access to personal mobility. And we've come up with some financial engineering that, for an incremental cost of zero to three bucks a day, can get a low-income household into a very efficient—therefore affordable to run—new, reliable, warranted car, with price-edged gasoline and bulk-bought insurance attached. It turns out if African-American households had the same car ownership as white households, the employment disparity would be cut about in half. So this is a big deal.
There's a lot of government procurement of vehicles going on. Let's be smart and buy really efficient ones. You get more of them in the market. And then there are well understood techniques, called a golden carrot and a platinum carrot, for bringing innovation in, so that the advanced technology vehicles get up to their roughly 10 percent of stock takeoff point about three years earlier and then the 10 to 90 percent takes the normal roughly 12 to 15 years.
And then there's some other stuff we suggest for—particularly creating the advanced materials industrial cluster. And there we basically suggest the military has very compelling reasons for using some of its science and technology budget that way to reduce logistical costs and risks for fuel. And they should, therefore, basically do what they already did to create the Internet and the microchip industry and the global positioning system.
VICTOR: The book also I'd commend—I'd commend the book to you. And there's some really interesting material in there about use of energy in the military, including this incredible calculation that the costs of fuel delivered by midair refueling, like $18 a gallon—
LOVINS: Not counting the new tankers, yeah.
VICTOR: Yeah. The new tanker deal may be a little higher, but some folks may have some jail time before that happens. You criticize in the book—you criticize pretty severely the existing governmental programs, like the CAFE [Corporate Average Fuel Economy]—the fuel efficiency standards—
LOVINS: I'm not a fan of them, but I think they would just become irrelevant. We do—you know, we suggest some minor reforms. But in a way, I don't care whether CAFE standards exist or not, because feebates will do the job much better.
VICTOR: But one of your criticisms is that these programs become accreted with all kinds of pork and politics and what's also known as life in Washington. And how do you keep the programs that you're advocating, which are these feebates? They're going to require some pretty sophisticated behavior by government—for example, coming up with prizes, so that if somebody invents, you know, a better carbon fiber, that they can get some kind of prize and that will then spill over and produce new innovation. How are you going to keep those programs from becoming all mired in the kind of political issues that have frustrated the existing programs?
LOVINS: Well, you can't wholly prevent earmarks and pork in the budget process. But what we're suggesting relies very little on the budget process and probably not at all on federal legislation of other kinds. But notice that feebates have been bubbling up for a long time at the state level. California passed one, what, 14 years ago, by a 7-to-1 margin. It got bottled up on the governor's desk.
VICTOR: But then the governor then vetoed it. So they don't have any feebates.
LOVINS: The governor pocket-vetoed it because one of the Big Three was agin it, one was neutral. But I think at that time there was no analysis to show how they would make money on it—[would] get more profit and less risk. Now we do have that analysis from Oak Ridge [National Laboratory], Department of Energy, and us. And it's a transparent model, which we've given to the automakers. They're playing with it. So far, I think they feel it's pretty reliable and very instructive. Actually, by administrative action alone, you could open the floodgates on state experimentation with feebates. There are lots in the starting gate waiting to go.
VICTOR: So if you just gave the states more room to come up with different kinds of policies, you think that that would be a hotbed of—
LOVINS: Yeah. And indeed, most of the policies we suggest to accelerate what makes sense and makes money for business should be tried out first at a state or regional level and use those as the labs before you go national with it.
VICTOR: Yeah. I want to make sure there's plenty of time for an open Q&A. But one last question from me, which is, the center of the book is this argument that not only can we get rid of the 28 million barrels a day that we are going to consume in the 2025, but that we can do it at a profit. And that depends, of course, on your vision of the price of oil.
Tell us, is OPEC [Organization of the Petroleum Exporting Countries] actually your ally in this venture? Because so long as oil prices are high, the case for profitability and moving away from oil is really strong. But if the U.S., which is the largest consumer of oil, moves away from oil, isn't it going to make it harder for OPEC to stay afloat and then when the oil price tanks, the economics or some of the economics of your argument start to fall apart?
LOVINS: Let me unpack that in about three layers. First of all, the efficiency at 12 bucks a barrel is robustly competitive, whatever plausibly happens to oil price. Our savings on the vehicles come out at 57 cents a gallon, for example, at the retail pump. And that's all calculated on the short run margin. So I'm not worried about the oil price going down. If it went down so far this became a concern, you could always tax it, but I don't think we're likely to have that problem. Right now the Saudis need at least, most folks say, 32 bucks a barrel just to run their economy in the current manner, and the Venezuelans need 40-odd and so on. What the Saudis need is what largely sets the price, in many respects.
So we didn't do a general equilibrium calculation of the effect of efficiency on oil price, first because we weren't—our results were quite insensitive to oil price, however low it might go. Secondly, it would be opaque, and we promised no opaque models, only spreadsheets and hand calculators. Third, there's no suitable model to do this anyway, because the whole structure of the economy would change.
But we have a half dozen other reasons for thinking this is not a serious problem. For example, the U.S. is only a quarter of the world market. So you'd be implicitly assuming everybody else has to do it, too. Well, that's a problem I'd like to have.
Then there is a little history I want to remind everyone of. The last time we paid attention to oil efficiency was from 1977 to '85. In those eight years, the economy grew 27 percent, oil use fell 17 percent, oil imports fell 50 percent, oil imports from the Persian Gulf fell 87 percent, and would have been gone in another year if we'd kept that up. And because the U.S. and others were so successful in that regard, it broke OPEC's pricing power for a decade. Basically, the U.S. turned out to have more market power than OPEC. But ours was on the demand side. We were and are the Saudi Arabia of [inaudible] barrels. And we could rerun that play again all over much better. We have much better ways to do it now.
But this does not mean—to get your last point—that oil exporters and those depending on oil revenues will necessarily get less money. This was a surprise, I think, to us, when we did the analysis.
Of course exporters—and remember, 94 percent of the reserves are owned by governments, not international oil companies—the exporters may end up selling their oil later instead, or to others, like China and India. But then they end up selling it in different forms. And we have, I think, a pretty persuasive argument that the hydrogen in the oil assets, in those hydrocarbons, is probably worth more without the carbon than with the carbon, even if nobody pays you to keep the carbon out of the air. That is, we'll probably make more money taking hydrogen out of hydrocarbons in a reformer than putting more hydrogen in, in a refinery. The oil companies we work with—and we've done that for 32 years now—find this a very interesting argument and are starting to re-evaluate their asset values through that hydrogen value chain lens.
VICTOR: Thank you very much. I want to open the floor now for questions. Let me just remind everybody, when you're recognized, to please wait for the microphone and speak clearly into it, and stand and state your affiliation. Stan?
QUESTIONER: I'm Stan Heginbotham. You laid out critical elements of safety. The New Yorker, about a year ago, had a piece on what Americans believe give you safety in a car, and it's weight, it's height, it's windows that don't let other people see in, and it's lots of coffee places. And nobody understands why, but these are the things that Americans believe give you safety in a car. How do you see those beliefs evolving toward the rational kinds of notions of safety that you reflect and value?
LOVINS: Well, they had just been exposed to an intensive marketing and lobbying campaign that heavy means safe. If that were true, of course, Kenny Brack would be dead and your bicycle helmet would be made of steel. The reason it's made of carbon fiber and Brack is alive is that advance composites are extraordinarily good energy absorbers. And I think just seeing the Formula One crashes—crash videos over again from the old newsreels—will be pretty persuasive.
But you know, the design I mentioned for that SUV—that could run head-on into a steel SUV twice its weight, each going 30 [miles per hour], and still protect you from serious injury. Now, the rest of the world increasingly understands that the safety issue is not about relative momentum, it's about mainly intrusion; and that weight differences can be way more than overcome by design and materials choices. Even GM's former safety researcher, Leonard Evans, said this very clearly in his SAE [Society of Automotive Engineers] paper this spring.
So, I was just in some interesting discussions at DOT [U.S. Department of Transportation] and the White House a couple of days ago on this very issue. And there is a proposal for the CAFE standards to be interpreted through weight classes, which I think would kill more people but would also kill export prospects for U.S. automakers, because the rest of the world is moving its safety regulation in the opposite direction. The last thing Detroit needs is an archaic regulatory impediment to being able to export global cars to other markets.
VICTOR: But the—
LOVINS: So I think that policy will now be reexamined. But I don't actually think the marketing will be a big problem. As soon as the automakers have cars made of this stuff—BMW may have it as early as next year; Honda and Toyota are in the carbon airplane business, not for amusement but to migrate the technology to cars—they will be marketing the safety of that stuff just as Honda successfully does now. And we have light cars, mainly imports, that are very safe, sell very well, no problem.
VICTOR: Are there other questions about consumer attitudes, this issue of consumer attitudes, before we move to a new topic? OK. New topic. Right here.
QUESTIONER: Douglas Murray, sort of related to various China organizations. It isn't really a new topic because it picks up on the light materials. Is there any significant difference one way or the other in the production costs of the carbon fiber or similar light materials than in the current iron- and steel-based vehicle?
QUESTIONER: That is, is there a margin that you have to take into account in the production side?
LOVINS: The example, the 66-mile-a-gallon SUV I mentioned, which our tier-one partner costed at almost a 500-line item of detail by putting bids out to the supply chain, that turns out to cost two-and-a-half thousand bucks more than today's comparable steel SUVs, and it's a three-year payback at a buck-forty-odd a gallon. But the extra price is because it's a hybrid, not because it's ultralight. The ultralighting costs roughly zero. And by the way, the steel industry says it can do essentially the same thing with the latest steel alloys if the composites turn out not to be ready for primetime, so that's our fallback position. Short answer is yes. You pay more for the fancy materials, but you pay much less for the manufacturing. For example, in that SUV design there are 14 body parts instead of maybe 150. Each has four—has one die set instead of an average of four.
VICTOR: This is because the carbon fibers are easier to mold.
LOVINS: Yeah. You mold complex assemblies in one shot. What you actually do is make a big flat tailored blank, a thing like this, that has the fibers you want, which can be mixtures, going into exactly the positions, orientations and layers you want. Then you put it on a heated die and mold it to whatever net shape you want. Here's a couple of recent examples. And it's thermoplastic; this is carbon and nylon, which is extraordinarily strong, tough stuff. So the automaking gets simpler and then the parts snap together like a kid's toy; no body shop. No paint shop because you lay color in the mold. So you just got rid of the two biggest costs of making a car, and the capital intensity would be at least two-fifths below the leanest plant that the industry now has, which is GM's new one in Lansing [Michigan].
So that's a very different kind of auto-making. That's why I said it was a game-changer. And the optimal scale of production also goes down by at least a factor of three. So it's very well-suited even to countries like, say, Singapore, that don't have a car industry but have all the other high-tech ingredients. It's suited to do market entrance. It's quite a transformation for both incumbents and new entrants.
The other reason that the ultralight car doesn't cost more is that it takes only a third of the power to run it when it's half the weight and lower drag and low rolling resistance. So that SUV design, for example, can cruise at 55 miles an hour on the power to the wheels that a normal SUV uses on a hot day to run the air conditioner, and that means in turn the whole power train gets three times smaller, so you save money there.
VICTOR: Next question. Mark Levinson.
QUESTIONER: I'm Mark Levinson with J.P. Morgan. One of the difficulties in improving vehicle mileage is that old cars don't seem to die anymore, so the fleet—
LOVINS: Old cars what?
QUESTIONER: Don't seem to die anymore. The fleet just gets bigger and you've got older cars. We've seen in pollution control that it's actually fairly efficient in some cases to buy up old cars and crush them. Is that part of a strategy here to—
LOVINS: Yes, it is.
QUESTIONER: —improve vehicle mileage? Is that something—
LOVINS: In two respects it's a very important point. You can't greatly turn over the turnover of the vehicle stock, and we do assume a nominal 14-year life for live vehicles. However, you can on the margin make a significant difference, and we do it in two places. One is at the low-income efficient reliable car program to provide affordable personal mobility. For every car so financed, we're going to scrap almost one clunker, preferably the dirtiest ones. And this turns out to take about three years off the remaining life of those cars, this premature scrappage, which means Detroit gets to sell an extra million cars a year to non-creditworthy customers who were not going to buy a new car before and they're going to make money on every unit. So Detroit rather liked this idea.
Secondly, in the airplane business, if you wanted to do something to help the legacy airlines get out from their cost disadvantage—it's a philosophical choice, whether to just let them be dismembered or not—a third of their disadvantage is fuel, but they can't afford to buy efficient new planes. So how about loan guarantees, offset by equity [inaudible], so it's not net cost to the Treasury, to buy very efficient new planes—77 for example—on condition that for every plane so financed through a trading system, you're going to scrap one of the—one-fifth of the fleet that is parked? That's generally the least efficient ones. And if those parked planes go back in the air as traffic picks up instead of buying efficient new planes, they'll waste a lot of oil, but they'll also block the adoption and then next-generation development of efficient planes. So the inefficient parked planes, in my view, are worth more to society dead than alive, and we ought to put bounty hunters after them.
VICTOR: Next question.
LOVINS: Boeing likes that idea.
VICTOR: I wonder why? [Laughter]
QUESTIONER: Moushumi Khan, law office of Moushumi M. Khan. I know you've been speaking about oil, but I have a question about alternative energy sources; or, in other words, my father, who's a nuclear engineer in Detroit, how long will people like him, you know, have jobs, and how will those jobs change in the future?
LOVINS: Nuclear power has poor prospects in any market system regardless of the technology and regulatory apparatus just because it has a cost disadvantage of a factor of roughly two to 30 against three available, abundant alternatives: end-use efficiency, gas-fired industrial and building coal and trigeneration, and wind power. So sorry; it only takes one fatal competitor and it's got three, and there will be more. We do, however, take seriously two supply side alternatives in our analysis, having looked at the field. Once you've saved half the oil for 12 bucks a barrel, you can competitively substitute for the other half in two ways. One is advanced biofuels. I don't mean corn ethanol, but cellulosic ethanol and a little biodiesel. But cellulosic ethanol has twice the yield, much lower capital costs, much lower energy use than corn ethanol, and it's using the woody part of woody plants rather than the starchy part of corn.
VICTOR: Which you get by growing rapidly growing switchgrass—
VICTOR: —and poplars.
LOVINS: Yeah. So that stuff turns out to be robustly competitive at 26 bucks refinery gate as far as acquisition costs, [inaudible] margin, at almost 4 million barrels a day, plus another million barrels a day of replacement petrochemical feedstocks in the form of biomaterials.
Then the other big substitution, even a bigger one, is saved natural gas. You would think from all the liquefied natural gas discussion that there is no equilibration between supply and demand. Well, one thing we've learned the last 30 years is markets do that, and it turns out you can save half the forecast gas use in this country at under a buck a million BTU [British thermal unit]. The biggest part of the saving is from using electricity efficiently, particularly at peak hours, when almost all of it is made so inefficiently from natural gas in simple-cycle combustion turbines that the elasticity of substitution is about two. Save five percent of the electricity, you save 10 percent of the gas. That knocks the price back to three or four bucks. A lot of folks who would like that, but it kills the LNG [liquefied natural gas] business. That's OK, in my view, for national security reasons.
Then there's another big chunk of gas savings in buildings and industry. Actually, we use five national labs to study numbers on that, but in our own practice throughout a range of buildings and industry we've never got performance that bad, so we think those numbers are conservative. And then you save a little gas in refineries that don't need to make so much liquid fuel anymore because you have more efficient vehicles and a bit more in petrochemical replacement. So it adds up to a saving of 16 TCF [trillion cubic feet] a year, and it's 88 cents a million BTU.
VICTOR: Sixteen—the U.S. consumes about 20 trillion cubic feet, TCF, of gas right now, and—
LOVINS: Well, forecast 24 [TCF], headed for 32 [TCF] roughly. So—
VICTOR: Headed higher, so saving 16 trillion cubic feet is a lot of natural gas.
LOVINS: So without LNG, without Canadian imports, you'd still have [inaudible] TCF, which, it turns out, brings the supply and demand into balance, especially—in fact, if you substituted via hydrogen, which is the most efficient and profitable way to use the gas, you would displace not only the balance needed to make the oil accounts balance; you would also displace all the domestic oil production if you wanted to. And by the way, there's one other option. Dakota's wind power could make enough hydrogen on available land to run every highway vehicle in the country.
VICTOR: The center of—the center of your argument, though, about alternative fuels is biofuels, and there's a big program in Brazil for making bio—alcohol fuels from sugar that is right now, I think, profitable, in fact, ramping up because of the high oil prices.
LOVINS: Yeah. They're—
VICTOR: What are the ecological consequences of biofuels? Why not just take all that land and rather than growing oil, in essence, on it, why not give it back to the buffalo and back to nature?
LOVINS: Well, in fact, that's pretty compatible with the switchgrass approach. You could grow most or all of the required switchgrass on the conservation reserve land where we now pay farmers to put in a standard cover crop and penalize them if they harvest it because those are very erodible soils that need to be held. But the switchgrass is a perennial prairie grass with two- or three-meter roots. It'll hold the soil much better, and you can harvest it.
VICTOR: Next question. Back there.
QUESTIONER: Thank you. Jonathan Chanis. I understand why you're focusing on the automobile because—and transportation fuels because that's the source of the problem, but what is your—you're changing things without changing people's behavior in a lot of ways. What's your vision for mass transit and changes to people's behavior and urban planning?
LOVINS: If you—well, there are a lot of both technical and marketing innovations in those areas as well as, even more importantly, in land use so you can be already where you want to be and not need to go somewhere else. We don't assume any of that, however. We assume the exuberant government forecast where everybody's going to drive and fly a third more than they do now, and somehow the airport and air corridor and road space to do that will miraculously appear at zero cost and so on. I don't think that would be a very pleasant or plausible sort of world, but we assumed it anyway just for consistency with the government forecast base case that we compared everything with. So you know, some of the many options we left out because we were just doing a cost-effective technical fix.
QUESTIONER: Thank you. Reuben Kraiem from Covington and Burling. What comes through from your discussion is that if business leaders had access to good information or perfect information, they would see the advantage in doing this, and that this would all come about, in effect, through relatively straightforward market mechanisms. Is that what you actually believe, or do you think that there are other public policies that need to be put into place in order for that to come about? What do you say to your colleagues in the environmental movement who would say, "Well, no, we need a whole lot of additional command-and-control policies to be adopted in order to bring this about; this just isn't going to happen if we don't do that?"
LOVINS: I respectfully disagree with that view. We've already doubled our oil productivity in this country and nobody noticed. During '77 to '85 we were improving our oil productivity at 5.2 percent a year, which at a given level of GDP [gross domestic product] replaces a Gulf's worth every two-and-a-half years.
QUESTIONER: But is that really fair, because during that period—at the same period we also had the CAFE program, this fuel-efficiency program for automobiles.
LOVINS: That's right.
QUESTIONER: And that program a lot of think—and I think they're probably right—drove a lot of the improvement in efficiency. That was a—that wasn't direct regulation car by car, but that was a pretty intrusive government program.
LOVINS: Yeah, which, as the head of the UAW [International Union, United Automobile, Aerospace and Agricultural Implement Workers of America] later said, probably saved Detroit from even worse destruction by Japanese imports. Yeah, that was an effective program and I agree it was responsible, even more than the second price shock and the gas-guzzler tax, for the seven-mile-a-gallon improvement we had in new domestic cars. However, I think first of all we had better ways to do the same thing that are not—
QUESTIONER: Such as feebates.
LOVINS: Yeah, feebates in particular. If you did just feebates and none of our other public policy suggestions, that would get the job done. It would just take longer.
But ultimately through the market alone, without any further public policy, you would get to the same place, it's just that the cars would be made in other countries or the car business would be owned by companies in other countries; and rather than making a $70 billion a year net profit assuming 26 bucks a barrel and getting a million new jobs, we would lose a huge amount of money and lose a million jobs, roughly. So I think it's equally important to think of this approach as getting the country off oil at a profit and revitalizing the industrial and rural economy. I don't care which order you put them in; they're really the same set of activities and the same outcomes. It's time we integrated those conversations.
VICTOR: Another question?
QUESTIONER: Thank you. Amory, I'd like to come back to Detroit and the question of the automobile companies and try to understand more why the automobile companies haven't already moved in your direction more than they have with their research teams and all of the capability they have to put together the numbers. And what will it take to help them speed up and move in this direction, which just seems so profitable and logical for them to speed up their processes to head this way?
LOVINS: Well, I've been working that industry now for 13 years. And the recent progress in R&D and in policy evolution, strategic evolution, has really been remarkable and gratifying. One of the Big Three, I would say, is pretty far ahead in that area, and others pretty far behind, another in between, but there are very talented people in all three. And understand why they didn't do this stuff already. They are exquisitely good at making cars out of metal, and heavy metal, and they saw no reason to change. Their culture is to base strategy on accounting, not economics; that is, on unamortized assets, not on costs. Very peculiar behavior. It's as if it were better to write off obsolete assets later when you don't have a company than now when you do. They're very large organizations, so they exhibit all the classic organizational behavior. And until the mid-'90s, there were only a few dozen people in all the Big Three put together who thought about advanced composites, not one of whom, as far as I could tell, had any manufacturing experience. We sent the first such person to one of them around '96, I believe, and many things started to change.
About two years ago the automakers started to come to our little spin-off company that does the advanced composites process and say, "Well, now we finally understand why we need to make cars out of carbon, but we don't know how to do it cheaply. If you guys have cracked that code, we want to talk to you. Make us some parts." So we set up a lab a year and a half ago to make them some parts, and now we're selling samples and small pilot runs to automakers, tier ones. That's about 10 years' faster adoption than we were told six months ago we would get. And we're about to exhibit some products in a major show and so on through a tier one. It's a very gratifying progress. When I talked to the head of engineering and strategy for one of the Big Three in January this year about what's happening with lightweight materials manufacturing, that night he sent an e-mail to his whole team saying, "We've got to reexamine our whole product development strategy," and they are.
VICTOR: You need to show them a cupholder; then they'll get it. [Laughter] There's a carbon cupholder.
LOVINS: Well, that's the cup. And this may be the deepest draw ever done in advanced composites that worked right out of the box. We're real pleased with how this is working.
QUESTIONER: I'm Amina Tirana from the U.N. Development Program [UNDP]. And I'm hoping that you could elaborate on something you mentioned before. You mentioned China and India and a little bit on their perspective around some of these technologies and opportunities. So would you either expand on, more from the developing and middle-income countries around the world, around how they see these opportunities, as well as how this country could use these technologies and some of the trends to advance economic growth, environmental stability and just regular security elsewhere in the world?
LOVINS: Well, a great deal of the developing-country debt burden, of course, came from oil, and the present prices are particularly painful, and the most for any developing countries whose currency is tied to ours. In fact, I'm a little surprised OPEC still prices oil in dollars.
Obviously, there are huge development benefits to relieving the balance of trade burden of oil imports. And Brazil is a rather encouraging example because they've already displaced a fifth of their gasoline with that sugar cane ethanol David mentioned, which initially was subsidized, but it hasn't been the last couple of years. And in fact a rapidly growing share of the new car market in Brazil is what's called "Total Flex," which burns anything from pure gasoline to pure ethanol, any blend in between. So there are no captive customers; they really have to compete. And they do. The ethanol's beaten the gasoline per liter or even per kilometer for most of the last two years. And Brazil by now has earned back the initial subsidy to the industry 50 times over and is setting up to export on a large scale to China and Japan. They can't export to the U.S. because of our tariff barrier to protect our corn farmers. But that's a nice example of how a substitution can actually work. And indeed another example in Europe, as part of a long-term strategy to wean farmers off subsidies onto durable revenues, last year the European Union made [inaudible] times as much biodiesel as the U.S. did, and a lot of it was marketed by oil companies as a profitable transitional product under their own brand.
Now meanwhile you have the emergence of very capable manufacturing. Korea's the classic case. This year Korea is exporting cars under the MG Rover badge to the United Kingdom. Who would have—no, I'm sorry, not Korea; India. I misspoke completely. Yeah, India is doing that. In other words, they have come up a Korean speed quality curve, and that is very impressive. And some people think India may ultimately be better placed than China to do that sort of export.
And UNDP has done a lot of leading work in the integration of energy efficiency and renewables with development strategy, and I would like to see this sort of analysis rerun in a developing-country context. We don't have the knowledge and resources to do that, but maybe your outfit could.
VICTOR: Next question.
QUESTIONER: [Inaudible]—Hong Kong. I want to ask you a question just to follow up on the previous question about China and India and Brazil. I was surprised to hear that you say that in the future, maybe 10 years time, China would export good, better cars to the U.S. My recent experience was that in the APEC [Asia-Pacific Economic Cooperation] meeting in Santiago, Chile, I was there seeing all these cars are made by Korean companies, Kia and [inaudible]. They were almost dominating all the markets there on the road. And how can you foresee that China would be able to export good quality cars to the U.S. rather than buying American cars and exporting cars to the Third World countries rather than the first world countries? Thank you.
LOVINS: China is following a classic pattern of learning from Korean, Japanese, American and European companies that are eager to establish manufacturing in China through joint ventures because it's about the only growth market around. Shanghai Automotive is, I believe in the process of buying Ssangyong in Korea, and wants to break into the top tier of automakers and may well do so.
There are some very impressive manufacturing capabilities, of course, in many sectors in China. And if you talk to companies that have been around a long time and worked a lot in China, you'll find they have huge respect, as I do, for the depth of the talent pool there, and the potential of China to compete in any industrial area to which it turns its attention. So I think my Wal-Mart scenario is not at all far-fetched and there are a lot of smart people in Detroit who share that view.
VICTOR: Next question here. I think it's fair to say also that right now today, the Honda facility in Guangzhou and Volkswagen in Shanghai are world class. I don't think there's a problem there.
LOVINS: Just look at the microchip industry.
QUESTIONER: [Inaudible]—Shearman and Sterling. Is the light material technology patented? If so, who owns the patents?
LOVINS: The particular process whose samples I have here, including a ballistic one that stops bullets nicely, is patented. The patent is owned by a firm I chair called Fiberforge. To declare an interest, I am a tiny option and shareholder in it. And my organization, Rocky Mount Institute, owns a fifth of it. It's an early stage private firm.
But if you look in, say, the August Automotive Design and Production Magazine, you will find we're co-featured with, say, BMW, which has 60 people perfecting their own automated fiber placement process. And the rumor in the industry is they may start volume production of an all-carbon, non-handmade car as early as next year.
VICTOR: [Inaudible] cars, which is handmade, I think, is—
LOVINS: Yeah, that's a half-million dollar handmade. There are a number [inaudible].
QUESTIONER: Phil Huyck. When you feature biofuels as a central element in your vision of the future, how much have you factored into that analysis the implications of genetic engineering of bacteria that might facilitate breakdown of the cellulose in switchgrass and other [inaudible]?
LOVINS: We haven't, for the empirical reason that currently the best bacteria and fungi we have for that purpose are selected natural ones rather than genetically modified ones. And there are some fundamental biological reasons why that should be so. These organisms are very good at what they do. They've got 3.8 billion years of design experience behind them in which all the models that didn't work got recalled by the manufacturer, and what we have now is very highly refined. Also, genomics is not a Cartesian linear, you know, one gene does one thing business, and we're not nearly as good at evolution as time is.
VICTOR: Next question here. We have time for just a couple more questions. Next one here.
QUESTIONER: Chuck Weiss from Georgetown. [Inaudible.] What are your present views on that subject?
VICTOR: Could you hear that?
LOVINS: Yeah, views on hydrogen. We bring it in at the end of this book. If you want to know more about my views on it, just go to RMI.org and download "Twenty hydrogen myths," which is under the "Library" section under, I believe, "Energy." Broadly, there are ways to get from here to a hydrogen economy that are profitable at each step, starting now, and can be surprisingly quick. It's still a decades-long process, but as [President of Arete Corporation] Bob Shaw, one of the leading investors in this area, says, those who think the hydrogen economy is impossible should stop interrupting those who are doing it.
Everything is coming along nicely. And the key to it turns out to be in two areas. One is to integrate the deployment of fuel cells in buildings and industry and in mobile—that is, vehicular—uses so that each stream of applications makes the other happen faster. They're not unrelated, and there are some neat ways to relate them that we published five years ago that make everything fit together.
Secondly, the very efficient vehicles that are ready for the hydrogen speed up this process enormously. For example, in the SUV I described, the virtual design—that was originally designed as a 114-mile-a-gallon fuel cell version. The fuel cell gets three times smaller, so you can afford it many years earlier. The tanks get three times smaller, so they package—that is, they fit—with lots of room left for people and cargo. And you don't need a breakthrough in storage, you don't need very high-pressure tanks, and it all works fine with off-the-shelf technology. So it seems to me a lot of the things pushed recently by the Academy, by, I'm ashamed to say, the American Physical Society, of which I'm a member, simply got it wrong by not looking at a recent developments in material science and vehicle technology.
VICTOR: You're constantly reminding us that the potential for innovation is really huge, especially when people don't think about marginal changes but changes in whole systems. Unfortunately, we are out of time. It's 2:00 now. Please join me in thanking Amory Lovins. [Applause]
LOVINS: And as it says on the executive summary, you can download the book free from oilendgame.com.
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