I am Red Cavaney, President and CEO of the American Petroleum Institute (API) – the national trade association of the U.S. oil and natural gas industry, representing all sectors of the industry, including companies that make, transport, and market gasoline.

 

API very much appreciates this opportunity to discuss the future of transportation fuels. Our industry has met the transportation needs of Americans for more than a century, and we will continue to rely on state-of-the-art technology to do so in the decades to come.

Looking ahead, we believe that advances in technology, consumer preference, and the workings of the competitive market will determine the fuels of the future. We need to rely on these forces to shape our energy future and not attempt to impose fuels on the marketplace. Past efforts by government to interfere with the marketplace have only complicated and delayed solutions to energy problems, particularly in times of tight supplies and constrained operations.

We should also recognize that petroleum-based fuels are likely to continue to be the dominant transportation fuels well into this century. It is critically important that government not attempt to force a transition away from these fuels until affordable, reliable substitutes are available in ample supply. At present, such a transition would involve extremely high costs and a massive commitment of resources – with no assurance of success in meeting the broad-based and growing energy needs of U.S. consumers.

Hydrocarbon Fuels and Technology

It may come as a surprise to some, but gasoline, diesel fuel, and other petroleum products have provided power for well over a century. Why have these hundred-year-old fuels endured for so long?

There are a few basic reasons. First, hydrocarbons have been the choice of consumers worldwide, because they contain more than twice the energy per gallon as many other energy sources. Thanks to advances in technology and market forces, our hydrocarbon-based economy is getting more and more energy efficient. In 1970, the United States used about 1.4 barrels of oil for each thousand dollars of real GDP. By 2000, that had fallen almost in half to about seven-tenths of a barrel of oil for each thousand dollars of GDP. And, by 2025, the U.S. Energy Information Administration projects our nation will consume only about one-half a barrel of oil for each thousand dollars of GDP.

An additional reason why hydrocarbon fuels have endured so long is that technology has reduced dramatically the environmental impact of their use, enabling the production of cleaner, more efficient and environmentally responsible fuels. Seventy million more drivers – 70 percent more -- are on the road today in the U.S. than there were 30 years ago, driving 143 percent more miles. However, despite this enormous increase in drivers and miles, vehicle emissions are down 41 percent.

Gasoline improvements have helped bring about this sharp decline in auto emissions. A major contributor was the phase-out of leaded gasoline, completed in the 1980s, which cut lead emissions by 98 percent. Further, the introduction of reformulated gasoline has led to significant reductions in ozone precursors and toxics emissions.

In addition, the average sulfur content in gasoline has been reduced by more than 90 percent to less than 30 parts per million. A new car today running on the new low-sulfur gasoline and equipped with the most advanced emissions reduction technology has 97 percent less emissions than had a new vehicle in 1970. It takes 33 vehicles running on low-sulfur gasoline today to equal the pollution emissions of just a single 1970 vehicle.

API and the industry worked with biofuels manufacturers during this year’s debate in Congress on the energy bill recently signed by the President. We recognized and agreed to a significant role for biofuels in the transportation fuels market. While there was debate about the extent of the role of biofuels, such as ethanol, at the end of the day, we agreed to support a significant role for these fuels. We assume that continued advances in technology and growing consumer acceptance will reduce the costs of producing biofuels, make them more competitive with conventional fuels, and reduce the need for government subsidies.

U.S. refiners are working hard to keep up with the steadily growing fuel needs of U.S. consumers. Technological advancements have helped refineries produce more from existing facilities than they did in the past. Even though a new U.S. refinery has not been built from the ground up in 30 years, existing refineries are continually being upgraded and reworked to improve efficiency and output. U.S. refinery capacity has expanded from 14.7 million barrels per day in 1994 to 17.1 million barrels a day today, or 2.4 million barrels a day. This expansion is the equivalent of about 12 new 200,000 barrels a day capacity refineries. Based on publicly available data on announced refinery capacity expansion plans, at least 1 million barrels per day of additional refinery capacity projects are either planned or under strong consideration for the four years 2005 to 2009.

Lessons of History

If history has taught us anything, it is that markets work, and free markets – including the free flow of oil, products and technology with legal protections -- work best. When governments have allowed markets to function unhindered, the laws of supply and demand have ensured that supply meets demand at affordable prices over the longer term. Moreover, free markets spur competition – and competition advances technology to the benefit of consumers and society as a whole.

However, when government has interfered with markets, the result has been price volatility, supply shortages, and other disruptions. In the early 1970s, many U.S. energy policymakers were “sure” that the reserves of oil and natural gas would soon be exhausted, and government policy was explicitly aimed at “guiding” the market in a smooth transition away from these fuels to new, more sustainable alternatives. Price controls, allocation schemes, limitations on natural gas, massive subsidies to synthetic fuels, and other measures were funded heavily and implemented.

Unfortunately, the key premises on which these programs were based, namely that oil and natural gas were nearing exhaustion, and that government “guidance” was desirable to safely transition to new energy sources, are now recognized as having been clearly wrong -- and to have resulted in enormously expensive mistakes. For example, Congress created the Synthetic Fuels Corporation in 1980, but, in 1986, it was terminated by legislation signed by President Reagan. In less than six years, billions of dollars had been spent, plants constructed, and, in some cases, fuel produced. But the effort was judged a failure due to noncompetitive economics, project inefficiencies, and delays.

Understanding Energy Realities

We need to understand the energy realities our world faces. Given the current and projected worldwide demand, we need all sources of energy. We do not have the luxury of limiting ourselves to a few sources to the exclusion of others. Nor can we afford to write off our leading source of energy before we have found cost-competitive and readily available alternatives.

There is a misperception by some about the time and costs involved in any transition to the next generation of fuels. Consider what would be involved in replacing the dominant role of oil with a substitute like hydrogen or solar power. Most experts agree that such a transition will require dramatic advances in technology and massive capital investments – and take several decades to accomplish, if at all.

Despite the energy realities we face, we still frequently hear that we are “running out of oil” and that we must find other sources for the transportation fuels of the future. Nothing could be more at odds with reality.

The U.S. Energy Information Administration projects conventional oil alone is sufficient to supply increasing quantities to consumers each year through 2044. Conventional oil is recoverable oil using today’s technology and does not include vast unconventional supplies, such as tar sands and oil shale. Moreover, energy analyst Daniel Yergin and his Cambridge Energy Research Associates recently completed a field-by-field global analysis that forecasts a 20 percent oil production capacity increase between 2004 and 2010, based on projects already planned.

It is interesting to note that forecasts about “running out of oil” have been made many times over the years -- but have been consistently wrong.

Back in 1874, the chief geologist of Pennsylvania predicted we would run out of oil in four years – just using it for kerosene. Thirty years ago, groups, such as the Club of Rome, predicted an end of oil well before the current day. These forecasts were wrong because, nearly every year, industry has found more oil than used, resulting in reserves that have continued to grow.

The key factor here is technology. Advances in exploration and production technology have enabled our industry to find and develop oil and gas reserves that would have been far beyond our reach several decades ago. We can now find more and produce more – and we can increase the yield of our existing reserves.

These changes have been dramatic. Thirty years ago, “deepwater” operations meant those in 500 feet – today it can mean 10,000 feet. 3D seismic technology was still on the drawing board in the 1970s. Today, it is used widely in offshore operations, enabling drillers to better “see” underground oil and natural gas deposits, greatly improving their ability to develop these deposits.

Primarily due to these advances, the U.S. Geological Survey (USGS), in its 2000 World Petroleum Assessment, increased by 20 percent its estimate of undiscovered, technically recoverable oil. USGS estimates there are 649 billion barrels of undiscovered, technically recoverable oil outside the U.S. But, importantly, USGS also estimates that there will be an additional 612 billion barrels from “reserve growth” – nearly equaling the undiscovered resources.

Looking into the distant future, the Age of Oil will end when technology finds a more cost-competitive, more desirable fuel. We can only speculate as to when and how that day will come about. For example, there is an even bigger hydrocarbon resource that can be developed to provide nearly endless amounts of energy – methane hydrates – methane frozen in ice crystals. The deposits of methane hydrates are so vast that when we develop the technology to bring them to market, we will have clean-burning energy for over a thousand years. It is just one of the exciting scenarios we may see in the far-off future. But, we won’t be getting there anytime soon, and, until we do, oil and natural gas will likely remain our leading energy sources.

The United States – and the world - cannot afford to leave the Age of Oil before realistic alternatives are fully in place. It is important to remember that man left the Stone Age not because he ran out of stones. And, we will not leave the Age of Oil because we ran out of oil. Yes, someday oil will be replaced, but clearly not until alternatives are found -- alternatives that are proven more reliable, more versatile, and more cost-competitive than oil. We must rely on the energy marketplace to determine what the most efficient alternatives will be, and technology will be a key determinant in that regard.

Fueling Automobiles of the Future

We expect that the dominant transportation fuels will remain gasoline and diesel for at least two or three decades – the minimum amount of time required to fully retire any existing and still growing fleet of automobiles and trucks powered by these fuels and to deploy any replacement fuel source throughout the U.S. We cannot afford to prematurely retire these century-old champions, without full and complete assurances that worthy successors are in place.

In considering our future energy needs, we need to understand that gasoline-powered automobiles have been the dominant mode of transport for the past century – and the overwhelming preference of hundreds of millions of people throughout the world. Regardless of fuel, the automobile – likely to be configured far differently from today – will remain the consumer’s choice for personal transport for decades to come. The freedom of mobility and the independence it affords consumers is highly valued.

Rather than being phased out, gasoline and diesel are likely to be the leading fuels well into the future – thanks to such advances in technology as advanced internal combustion engines (ICEs) and rapidly evolving “hybrid” vehicles. Those who write off gasoline and diesel fuels fail to recognize how advanced technology is providing new and more efficient ways of using these hundred-year-old products.

For example, significant improvements in internal combustion engine technology have been made, and advancements will continue to provide higher mileage efficiency and lower emissions. Enhanced vehicle emission control technologies, made possible by the introduction of low-sulfur fuels, will be an important component of future conventional systems.

Another advancing technology is the hybrid vehicle – powered partly by gasoline and partly by electricity. Hybrids are already moving aggressively into the market; their rate of growth will depend in large part on their price and performance. Even though hybrids still face technological challenges, such as battery size and life, there is a high probability of hybrids being a significant, though possibly not dominant, part of the U.S. vehicle population in the not too distant future. Additionally, low-sulfur, modern day diesel engines, utilized in hybrid configurations, may hold even greater promise.

Hybrids already provide significant reductions in energy use and greenhouse gas emissions. Commercially available, they use the existing fuel infrastructure. Depending upon the hybrid technology and consumer driving patterns, efficiencies are up to about 1.5 times that of today’s conventional internal combustion engine vehicles. From the standpoint of total useful lifecycle, hybrids are currently the most efficient and among the cleanest commercially available technologies. Moreover, additional cost reductions should make hybrids increasingly competitive.

In addition to hybrids and advanced ICEs, oil companies - working alone or with automakers - have invested millions of dollars researching new fuel cell technologies. Some energy companies have also partnered with the federal government through the Department of Energy’s FreedomCAR & Fuel Partnership, a public/private effort to examine the pre-competitive research required to develop technologies for a full range of affordable vehicles and the fueling infrastructure to support them. These technologies hold the potential for up to double the fuel efficiency of current gasoline-powered autos. Fuel cell vehicles have essentially zero tailpipe emissions. However, maintaining a national fleet of such vehicles would face significant technical, economic, primary energy source availability, and infrastructure challenges.

Present fuel cell costs are at least 10 times greater than for internal combustion engines, based on current fuel cell technology being produced on a large, commercial scale. Long-term fuel cell durability must be improved and demonstrated. Safe, efficient, and cost-effective hydrogen storage solutions are needed to make possible acceptable driving ranges. The current delivered cost of hydrogen fuel to transportation markets is substantially greater than the energy provided by units of gasoline or diesel. And, making hydrogen widely available will require extremely large infrastructure investments. Even hydrogen made from gasoline using an on-board reformer, which would take advantage of the existing refueling infrastructure, faces many challenges. Nonetheless, all options should be thoroughly evaluated, and it is premature to exclude any option at this point.

Our industry takes a balanced view of hydrogen. Like electricity, hydrogen is an energy carrier, not an energy source. To succeed in the market, it must be produced in large volumes at reasonable cost. But, without major breakthroughs, most hydrogen must come from natural gas, which – from the energy security standpoint – is in limited domestic supply. Present circumstances notwithstanding, to provide large amounts of hydrogen, U.S. producers will need to have access to the potentially large natural gas reserves on non-park, government lands in Alaska and the lower-48 states.

We believe consumer preference should and will play the key role in the choice of these new competing vehicle technologies. That preference will be based, in large part, on fuel supply availability, cost affordability, consumer acceptance and environmental compatibility.

We strongly believe that the private sector should continue to play a major role in applied research and that both the government and the private sector should be involved in basic theoretical research. The automobile and oil industries have made tremendous progress over the years, introducing a range of new products and technologies to improve emissions, fuel economy, and performance. We fully expect this trend to continue, both with respect to improvements to today’s technologies and to the introduction of advanced vehicle technologies.

Moreover, whatever role government plays on advanced vehicle and fuel technologies, including fuel cell development, it should be a broad one. Government should not pick winners and losers. It should not focus prematurely on just one approach which may not prove effective, while discouraging others that may ultimately have more potential in the long-term. While technological change can be encouraged by both public and private industry policies, it must not be forced by government mandates. We can learn from the experience in California several years ago where electric vehicles were mandated by the state government. They were not accepted by the driving public for a variety of reasons and, ultimately, the mandate failed and was withdrawn.

Consumers’ acceptance is the key to the success of any vehicular system, and industry competition for their dollars is the fastest means of bringing forward the next generation of transportation options. Societal goals are best attained by setting performance standards. Government mandates, subsidies, preferential taxation, and the premature official selection of one technology over another cannot produce advances as swiftly, or as effectively, as market competition.

Conclusion

The intensive use of the latest, most advanced technology to provide transportation fuels has made the century-old oil and natural gas industry an innovative, visionary, and highly effective new industry. Our industry has been producing, and intends to continue producing, both the fuels and feedstocks that make life simpler and safer, more comfortable and more convenient for society.

The reality is that gasoline, the time-tested champion fuel of motor vehicle transportation, is likely to remain the dominant fuel for many years to come. Its composition may change and its uses may be shaped by evolving technology, but gasoline, in fact, will be the fuel of the future – at least for the near-term. In view of its history of reliability and environmental progress, gasoline’s continued dominant role should be a reassuring prospect for U.S. consumers.