Given the current and projected worldwide energy demand, our nation needs all sources of commercially viable energy, as well as a greater commitment to energy efficiency and energy conservation.

We do not have the luxury of limiting ourselves to only a few sources of energy supply, to the exclusion of others. Nor should our leading sources of energy – oil and natural gas – be written off before we have found cost-competitive and readily available alternatives.

Energy sources must be viewed in their proper perspective. Alternative sources have great potential but, for the near and intermediate-term future, oil and natural gas will provide nearly two-thirds of US energy consumption to the year 2030, including more than 90percent of motor fuel consumption, according to projections by the US Energy Information Administration (EIA).

However, energy efficiency and renewable energy sources, in particular, will be clearly on the march, growing faster than their historical rates.
Companies in our industry are focused primarily on oil and natural gas, but have long been pioneers in developing alternatives and expanding our utilisation of virtually all sources of energy. From 2000–2005 and within North America alone, the US oil and natural gas industry invested an estimated US$98b in emerging energy technologies, including renewables, frontier hydrocarbons such as shale and oil sands, and end-use technologies such as fuel cells. This investment represents 73percent of the total US$135b spent by all of industry and the federal government on emerging energy technologies during this time period, according to a May 2006 study by the Institute for Energy Research.

Other projects more recently announced include:

o One company will spend US$500m over the next 10 years to establish a dedicated biosciences energy research laboratory, the first facility of its kind in the world.

o Another has formed strategic research alliances with Georgia Tech and the University of California at Davis to pursue advanced technology aimed at making cellulosic biofuels and hydrogen-viable transportation fuels, as well as transportation fuels from renewable sources such as forest and agricultural residues and municipal solid waste.

o Yet another has a US$46m partnership with Iogen Corporation for the development and commercialisation of cellulosic ethanol.
Add to this list announcements by several companies of joint ventures to construct and operate a number of biofuels plants, and you get a sense of the high level of interest that exists.

A free market for fuel mixes

Already, it is becoming clear that, going forward, the mix of our fuels will be more diverse.
However, we feel a free market will determine the technologies and the fuels which will work best.
Some industry critics erroneously claim that our industry is ‘opposed to ethanol’ and is doing all it can to discourage its use. Nothing could be further from the truth. Our companies are in the business of producing and supplying transportation fuels, with individual companies following differing strategies and approaches. There is a bright future for the full range of alternative sources.

Ethanol industry

API was a partner in the development of the original Renewable Fuels Standard (RFS), along with the Renewable Fuels Association, the American Farm Bureau Federation, corn growers and others. This initiative was envisioned as expanding ethanol use and helping the ethanol industry gain the critical mass and economies of scale that would allow it to compete in the fuels marketplace.

The RFS is already producing results beyond expectations – given the number of new ethanol plants, the ethanol industry’s production forecasts, and our industry's ethanol use thus far in 2006. Our companies have been working hard to markedly increase the ethanol content of the nation’s gasoline pool. Nearly half – 46percent, to be specific – of all gasoline now consumed in the US includes ethanol. Some 4.6b gallons of ethanol will be used this year – exceeding the RFS-required 4b gallons for 2006. In our view, ethanol is here to stay, and it is a very important part of our nation’s gasoline pool.

Be realistic

It is absolutely essential that ethanol and the entire biofuels industry become strong, vital and self-sufficient. Why? Because these are the characteristics critical for long-term success in the highly volatile motor fuels business.
In the early years of consumer exposure to biofuels, we do not want to be a party to any
‘over-promise and under-perform’ commitment. All of us have to be realistic in our expectations and pronouncements about the relative merits of various alternative energy sources.

However, we are concerned that some ethanol proponents are focused exclusively on E-85 fuel. While the industry does not object to E-85 in a free market, so long as it meets standardised technical specifications and is of reliable quality, a national emphasis on increasing ethanol volumes through E-85 can prove unnecessarily expensive and risky. If we are to encourage more long-term use of ethanol, we need to avoid surprising consumers with unanticipated problems.
Recently, Consumer Reports put a 2007 US manufactured SUV FFV through an array of fuel economy, acceleration, and emissions tests, and interviewed more than 50 experts on ethanol fuel. Their findings were consistent with EPA’s annual reporting of FFVs running on E-85 compared with gasoline. FFVs operating on E-85 incur a 25–30percent fuel mileage penalty. In short, their miles/gallon rating suffers a 25percent reduction. Interested consumers need to be aware of these facts before they make their purchase decisions.

Looking at demand, more than 97percent of cars on the road today are not designed to operate on E-85, without risk of damage.
More than 90percent of the 169000 retail gasoline stations nationwide are owned or operated by independent entrepreneurs – typically small businessmen and women. They will decide whether or not to offer E-85 to consumers, balancing customer demand with per-station investment and conversion costs that can range from US$10000 to as high as US$200000.
Currently, there are almost 900 retail outlets nationwide, located principally in the upper Midwest, that are equipped to distribute E-85. The number appears to be growing rapidly on its own, without any government mandate.

Let the market decide

We believe allowing market forces and consumer preferences to determine where and how ethanol is consumed is the most effective and least costly way to integrate ethanol into the nation's transportation fuels pool.

Already ethanol consumption is above the RFS level by a substantial amount. The ethanol industry is now strong enough to stand on its own and compete in a free market. Isn’t this what many had hoped to achieve through the RFS? There is far less uncertainty in today's ethanol market and an attractive future ahead.
The price of ethanol has exceeded that of regular gasoline on a volume basis for 28 of the past 33 months and significantly exceeded gasoline on an energy-content basis – ethanol has about 70percent of the energy per unit of volume as gasoline.
It seems obvious that ethanol is a better value for most consumers as a gasoline additive than as E-85. As long as ethanol can be added to gasoline up to its legal limit of 10 percent by volume as a gasoline additive, it enhances octane, reduces toxics and is a viable approach.

This approach creates market pressures preventing ethanol prices from falling below those of gasoline until its possible use as an additive is exhausted.
And, with a 140b gallon national gasoline pool currently, there is considerable growth opportunity for ethanol.

Emerging energy technology will be a key driver in facilitating the transition to increased use of ethanol and other biofuels in blends compatible with existing fleets and fuelling infrastructure.

Government has a role to play here, too, but it is important that we not ask it to pick technology winners and losers.
History has often demonstrated that we should not focus prematurely on just one approach, which may or may not prove effective, while discouraging others that may have more potential over the long-term.
To avoid significant degradation of transportation fuel flexibility, individual states should not mandate that gasoline sold in their states contain a prescribed amount of ethanol.

A patchwork of state-by-state laws mandating ethanol use will likely result in fuel and price volatility.
The uniform national RFS enacted last year is a much better alternative. It will integrate more ethanol into the nation’s gasoline pool at concentrations of up to the maximum permissible 10 per cent per gallon. It can also be utilised in the entire US automotive fleet without vehicle modifications or fear of engine damage.

According to the National Biodiesel Board, the production of biodiesel grew from 500000 gallons in 1999 to 75m gallons in 2005 and is expected to double to 150m gallons in 2006. Biodiesel has an attractive future, and that potential will be best realised through a market-driven approach. Cold weather impacts and quality control issues can be more readily resolved through competitive, market forces.
So the path forward on renewable energy will best be determined by technology, consumer preference, and a free marketplace.

If we are wise enough to seize the moment and build on the success as we have already achieved, I have every reason to believe that we will meet the energy challenges our nation faces in the 21st century and that renewable fuels will play a very important role in that regard.

Representing industry

The American Petroleum Institute is the only national trade association that represents all aspects of America’s oil and natural gas industry. Its 400 corporate members, from the largest major oil company to the smallest of independents, come from all segments of the industry. They are producers, refiners, suppliers, pipeline operators and marine transporters, as well as service and supply companies that support all segments of the industry.

Although the API focus is primarily domestic, in recent years its work has expanded to include a growing international dimension.

For more information, visit www.api.org