Energy Policy:

Woolsey, McFarlane discuss new fuel diversity initiative

Is fuel diversity one of the answers to the United States' national security challenge? During today's OnPoint, R. James Woolsey, former director of the CIA and chairman of the Foundation for the Defense of Democracies, and Robert McFarlane, former national security adviser and CEO of McFarlane Associates Inc., discuss their work with the United States Energy Security Council, which seeks to bring fuel diversity to the United States. Woolsey and McFarlane explain why they believe TransCanada's Keystone XL pipeline proposal will have little impact on the United States' national security.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today are James Woolsey, former director of the CIA and chairman of the Foundation for the Defense of Democracies and also a partner at Lux Capital, and Robert McFarlane, former national security advisor and a cofounder with Mr. Woolsey of the U.S. Energy Security Council. Thank you both for joining me today.

Robert McFarlane: Good to be with you.

R. James Woolsey: Pleasure.

Monica Trauzzi: You're both involved in a new energy initiative that recently launched here in Washington, the United States Energy Security Council, and it focuses on fuel diversity in the U.S. as a way of getting off of foreign oil. Jim, it's an argument we've heard before, so what fresh new approach is the group bringing to the discussion?

R. James Woolsey: What we want to do is make it easy to switch fuels. A lot of the previous discussion has been let's do research for decades and maybe have hydrogen or whatever. We're talking about having Americans be able to do what Brazilians can now do, which is pull into a filling station and pick your fuel. In Brazil it's ethanol or gasoline and it varies, what they choose, depending on the price of each. We want methanol, made largely from natural gas in the United States, to be part of that, so you can pull into the filling station and decide whether you want to enrich some of our enemies by buying gasoline or whether you'd rather drive on ethanol or methanol and you can look at the price and make up your own mind. We tend to think gasoline is not going to do real well in that environment, but it would be up to the American people to choose, driver by driver.

Monica Trauzzi: Americans are known to be slightly resistant to change however, so how likely are they to pull into the station and choose something other than gas?

R. James Woolsey: Well, they will drive halfway across town to save three or four cents a gallon on their gasoline and once they understand that driving on alcohol fuels is perfectly fine, it works real well. You need more volume because it takes about 2 gallons of methanol to have the energy of a gallon of gasoline and a little under two of ethanol, but you do have-both of them are cheaper per unit of energy today than gasoline. And if we are able to choose, a lot of people I think will pick moving toward one of the alcohol fuels and we will see ourselves a lot better able to deal with OPEC and the other folks who foist oil products on us.

Monica Trauzzi: So, Bud, the Council has met with congressional leadership and Energy Secretary Chu, is there optimism in Washington on energy?

Robert McFarlane: Well, it depends on who you talk to. However, when you explain the logic of how this improves not only our economy and ultimately brings down the cost of transportation fuel, so it was going to provide jobs when you begin to make methanol from natural gas and ethanol from cellulosic material. But I think also people are awakening to the fact that just plain market forces in the international energy market, with the growth in demand in China and in India, and in developing countries, is going to push pressure on demand side, is going to push the price up dramatically. One of our members of the council, John Hofmeister, a former president of Shell, said in his judgment, with China going from today at 9 million barrels a day to 15 million barrels a day in only four more years, that's going to inevitably push the price of a barrel of oil up to about $150 a barrel. Well, we've been there and done that and with gas at five dollars a barrel, to answer your question, that brings people around clearly to see the advantage of $2.50 methanol.

Monica Trauzzi: Bud, we've had this discussion so many times, every time the price goes up there's a discussion about what to do and then nothing happens. So how do you change the dynamic?

Robert McFarlane: Well, that's because in the past the Saudis have seen that happening and as they dominate OPEC pricing, they drop the price, increase production and our zeal to find a better way evaporates. But this time, the demand, which they really cannot meet, the slack capacity right now is only about 2 1/2 million barrels a day and so if China increases by 6 million barrels a day, they're simply not going to be able to meet the demand. And with Nigeria losing capacity and Venezuela being an uncertain future, I think that simply market forces are going to drive this toward the need for alternatives.

R. James Woolsey: I think it will help, but Bud is right, at five dollar a gallon gasoline, which we were very close to in the summer of '08 when oil hit $147 a barrel, we are borrowing from the world about $2 billion a day. Today we're borrowing a little less than 1 billion a day, but with gasoline up where it has been before we're at about 2 billion. And if people have in place the instrumentality to choose as Brazilians do, and as Chinese are soon going to be doing, every car exported from the U.S. to Brazil has to be flexible fuel. Within a year or two every car exported to China is going to have to be flexible fuel. If you can drive on gasoline and ethanol, which is what American flex fuel cars are today, adding methanol to that by a couple of different gaskets in your engine, is virtually nothing. So, we have the capacity to do to oil what our colleague Annie Korin calls turning oil into salt. Salt was a strategic commodity for thousands of years, the only way to preserve food until the 19th century. After that-in the 19th century, the only way to preserve meat, but the coming of the electric grid and refrigeration and freezing gave a way to make meat-to preserve meat both better and cheaper than you can do by soaking it in salt brine. And within a very few years salt was no longer a strategic commodity. Nobody cared where the salt came from. Before that they did, people went to war over salt mines. We can do that same thing with oil. We can make oil boring.

Monica Trauzzi: So, there's been a big focus in Washington this week on the Keystone XL pipeline, which would bring oil from Canada down into the U.S. It's controversial, but would it do anything to displace Mideast oil and sort of get us to a place where we're not importing oil any longer?

Robert McFarlane: Well, I think we ought to do all of the things we can to assure that we're going to have affordable energy available. However, let's be clear, the price of that oil is going to be set by OPEC overseas. And it's that issue, for as long as we only have one choice for an air, sea, land transportation fuel and the price of it is set by OPEC, it doesn't really matter how much we pump here. It's fine with me if we bring that oil down, even drill someplace offshore. However, it isn't going to change the economics of the global oil industry.

R. James Woolsey: Bud is right. The key thing is not whether we buy from Canada, and more from Canada and less from-and let's say less from Saudi Arabia and somebody else will then buy more from Saudi Arabia and less from Canada. It's one worldwide oil market to a first approximation. The only thing we accomplished by drilling more in the U.S. is something we can do in an environmentally sound way, is to improve our balance of payments. That's not negligible, but it's not the central thing. And as far as the Canadian oil is concerned, it is an environmental problem the way it's produced and having Canada sell more exports to the world market is not a bad idea, but it's certainly not going to solve our oil problem.

Monica Trauzzi: So, a recent National Academy of Sciences study said that the cellulosic industry might not meet its targets that are set out in the RFS, because they haven't yet made the product commercially viable. How risky is it that all of these new fuels are never going to actually be viable when compared to oil?

Robert McFarlane: Well, I think it isn't clear that they won't be viable. One or two companies have demonstrated that they can make competitive cellulosic ethanol. A company in the Midwest, POET has done it. I think what we are hearing about ramping up production and making it cost competitive, we hear this from investors and hedge funds, is that, look, we get it. It does work. Cellulosic works, gas to methanol really works. It is competitive, but there are just not enough cars on the road that can burn it. And when you've got 15 or 20 million cars on the road, at that point, you're going to see this competitive price of methanol at 2.50 be very much in demand and the market will change dramatically overnight, well not overnight, but quickly.

R. James Woolsey: There's nothing new and fancy about ethanol and methanol. They're two alcohols that have been made by human beings for hundreds and hundreds, or even back thousands of years. Henry Ford thought all cars ought to run on alcohol fuels. It was General Motors adding a lead to gasoline to get the octane up instead of using the naturally high octane of alcohol fuels that pushed us into the gasoline direction. Then we had to get the lead out in the 70s and now the gasoline manufacturers are producing gasoline with benzene in it, which is very, very toxic. That sweet smell you smell when you're filling your gasoline tank, that's cancer. So we have some serious problems with gasoline and we need to work with some of these traditional fuels, the alcohol fuels, and what is new is being able to make ethanol out of cellulosic biomass instead of let's say corn. And that's a positive step, but even corn-based ethanol, I think, has an awful lot going for it compared to gasoline.

Monica Trauzzi: OK, we're going to end it right there on that note. A lot happening here in this discussion. Thank you both for coming on the show. It's good to see you both.

Robert McFarlane: Thank you.

R. James Woolsey: Always.

Monica Trauzzi: And thanks for watching. We'll see better tomorrow.

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