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Panel II of a Hearing of the Senate Foreign Relations Committee - Energy Security: Historical Perspectives and Modern Challenges

Statement

By:
Date:
Location: Washington, DC

Chaired By: Senator John Kerry (D-MA)

Witnesses: Frederick Smith, Chairman, President and Chief Executive Officer, FedEx Corporation; General Charles Wald (Ret.), Senior Fellow, Bipartisan Policy Center

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SEN. KERRY: The hearing will come back to order. It's a great pleasure to welcome both of our witnesses.

General Wald, as I mentioned, is the -- was the deputy commander of the European Command. He's now a fellow -- a senior fellow at the bipartisan policy center and a pilot of great distinction -- flew over Bosnia; flew in Vietnam; a forward air controller in Vietnam. And we're very, very pleased to welcome you here today, General. Thank you for your work on this.

A great pleasure to welcome a personal friend, Fred Smith, who is the chief executive officer of one of America's remarkable companies, operating in some 220 or so countries with enormous number of aircraft and tens of thousands of workers, a company that he founded in 1971 and that, I might remark, is currently embarking on a new program to significantly switch to 30 percent biofuels by 2030 in order to both deal with efficiency issues as well as reduce the carbon imprint (sic). And I might comment -- obviously, won't go into any details -- but delighted to welcome a college classmate and personal friend of all these years. So we're delighted to have you here.

General, would you lead off, please? And we'll put the full statement in the record, if you want, and be -- if you want to just summarize, we'll put it in as if read in full and we'll have a chance to have a little discussion.

MR. WALD: I'd be glad to. Thank you, Mr. Chairman and Senator Lugar, for all the support you give the United States military today and while I was in the military, to start off with.

But I will provide the testimony for the record. And I'd just like to say that it's a true honor to be sandwiched between two great Americans this afternoon, President Carter and Fred Smith. And I never had the privilege to know President Carter, but I do know Fred Smith. And he's an outstanding American. What he's doing for our security is -- should not go without notice. So he'd be a lot more humble about that, but I've seen him in action for the last couple of years, so I just want to get that on the record as well.

Energy security, to me, has been an important issue for the last at least two decades in my career. And ironically, the first time it really became apparent to me, I think, in a big way, was when I was in war college in 1990 here in Washington, D.C. And at that time, we were talking about strategy, which -- plenty of us thought we knew what it was, but we were learning. And the Carter Doctrine came up. And at that time -- I think even then, 10 years after President Carter declared his doctrine, it was, I think, a surprise to many people that President Carter had been the first one to say that we would use military force to ensure the free flow of oil in the Middle East. That's 38 years ago.

Since then, I personally have spent years in the Persian Gulf, for example, and at least 16 years of my career overseas, much of it defending resources that are important to not only us but the rest of the global economy. And energy is, I think, paramount in that effort today and will continue to be.

Our national security is definitely threatened by the fact that we are dependent upon oil and energy from places that don't like who we are and what we do. Independence is not in the cards, necessarily, but becoming less dependent on places that don't like us is certainly in the cards.

Number two, I think I learned over the years in my career that subtle things are very important in -- (inaudible word) -- part of the world. And our reputation in the world today is hugely important and our actions on both energy security but climate as well and how we react to the global economy is not trivial. Our leadership today is more important than ever on assuring the world finds alternative energy sources, to assure the fact that we cannot be cut from that source and our economy affected, but also our reputation as a leader in the world on climate.

And I think the SAFE -- Securing America's Future Energy plan for legislation to electrify the grid or robust the grid, turn to an alternative electric car as the main source of transportation in the United States, look to alternative energy sources and then work in our foreign policy will bring us to a place in the world that will bring us back to preeminence.

So I thank you for the time, and I'd be glad to take questions when the time is right.

SEN. KERRY: Well, we do look forward to asking you some, for sure.

Fred?

MR. SMITH: Mr. Chairman, good to see you. Senator Lugar, always good to see you as well.

I think it's important to recap just briefly what brought the military officers and the CEOs of the Energy Security Leadership Council together. As General Wald said and as he so ably represents, our military members spend a big part of their careers protecting the oil lanes that allow America's industrial economy to exist. On the commercial side, companies like FedEx, UPS, Southwest Airlines, Royal Caribbean, Waste Management, companies that had a big dependence on petroleum recognized that our continuing importation of over 60 percent of our daily oil needs represents, after nuclear proliferation and weapons of mass destruction and terrorism, the largest security and economic threat that this country deals with.

I'm fond of pointing out to all my friends who are in the financial services business that the logs of the bonfire may have been laid with the credit derivatives and the speculation in the subprime mortgages, but the match that lit off our current economic travails was the run-up in oil prices last July to $147 per barrel. And I personally have been through five of these things now. And every major recession that the United States has had since 1973 has been precipitated by a significant run-up in oil prices, including the ones that President Carter mentioned. In fact, FedEx, which is now almost a $40 billion company that employs 300,000 folks, was almost killed in its cradle by the original oil embargo.

But there is a very significant difference in where we are today than where we have been in the previous episodes. And that is because on the price run-up side, on the demand side -- it has not been, in the main, run up because of producers withholding supply; it has been because of the increase in demand from the so-called BRIC countries.

And on the other side of the house, on the supply side, for the first time that I've been involved with this, it seems to us that there is a very real prospect of coming up with a national policy that makes sense, and that's where the Energy Security Leadership Council recommendations come in. And they are four-fold.

First is, on the foreign policy area, it's important to recognize that about half of our substantial military budget goes, one way or another, to protecting our oil trade. And there's just no doubt about the fact that we're in two shooting wars in the Middle East, in large measure because of our dependence on imported petroleum.

The second recommendation that we have is to maximize U.S. production to the extent that it can be done in an environmentally appropriate way. The reason for that is, quite simply, that oil's a fungible product, and it's a lot better for our balance of payments and for our national security to have it produced in North America than it is to have it imported from half a world away, where it may not be produced in an environmentally efficient way. And while we all want to reduce our dependence on imported petroleum, the facts of the matter are we're going to be using a fair amount of it for many decades to come.

The third recommendation is to develop new generations of advanced biofuels. And you mentioned, Mr. Chairman, our own goal inside FedEx. And we are a significant user of petroleum. In the last year before the recession, to put that in perspective, we used about 1.6 billion gallons of jet fuel and diesel fuel for about 700 aircraft and 85,000 vehicles. U.S. Air Force is the largest single user at about 2.4 billion gallons per year.

And it's very exciting for those of us who are in aviation today that in the recent past have been four demonstrations of advanced biofuels based on algae, jatropha and camelina, which unlike the alcohol-based fuels of ethanol actually have the same molecular structure as oil itself. And in these demonstration flights with commercial aircraft where the advanced biofuel has been mixed with Jet-A, you actually have an improvement in efficiency and a -- between a 50 (percent) and 60 percent reduction in CO2 emissions over the cycle of production.

So it's not as if this is pie in the sky, no pun intended. It's simply a matter of how do you take these biofuels to scale production.

And then last and probably the most important of the recommendations, which is quite different, again, than the preceding periods of time, is that there is a feasible solution for a great deal of our oil dependency in the transportation sector. And bear in mind, transportation burns 70 percent of our petroleum, and it -- 98 percent of all transportation is produced with petroleum. And the breakthrough, of course, is the development of the lithium-ion-type batteries in our laptops and our cell phones. And so for the first time it is feasible to develop plug-in hybrid electric vehicles, either all electric or with a small reciprocating engine that act as a generator, on a single electric charge to get a range of between 40 and a hundred miles between charges. And about 40 -- about 80 percent of all personal automotive travel in this country takes place with a range of less than 40 miles per day.

So the Energy Security Leadership Council has as its centerpiece the electrification of short-haul transportation with the concomitant construction of a smart grid, where the electrical power can be made from many different sources -- from nuclear, from hydroelectric, from coal -- clean coal, from gas, from geothermal, from wind and from solar. And this type of power production is domestic in its origin. There is, with the appropriate government incentives and policies, the prospect, in our opinion, to put 150 million of these vehicles on the road by 2030. And it would have a dramatic effect on our daily oil consumption and our dependency on these foreign powers that President Carter mentioned a moment ago.

And I'd just close with this: You know, the issue of our dependency on imported petroleum being an enormous national security and national economic threat precedes President Carter's tenure in the White House. And in fact, in 1956, President Eisenhower, who knew a thing or two, I would say, about national security, issued a statement after a Cabinet meeting that, in the opinion of his administration, if the United States imported more than 16 percent of its oil, it would be a grave national security threat. So here we are, you know, a half a century later, with 60 percent of our oil being imported, 90 percent of the world's oil reserves owned not by our own integrated oil companies but by the nationalized oil companies of countries around the world, often in inhospitable locations and certainly with inhospitable intentions towards the United States.

So we think that the recommendations we've made, which are thoughtful, which have been done with the best possible scholarship and which have been verified by some outstanding work by the econometric folks at the University of Maryland, form a very good set of recommendations for the Congress to move forward on this issue.

SEN. KERRY: Well, I appreciate those thoughts very much and the effort very much. It is a little startling that so many years later, as President Carter's presence here was so stark testimony in and of itself, we're still struggling with this.

Fred, share with us, if you would -- you just mentioned the 16 percent. Obviously, we're not going to -- I mean, we all know, as much as we'd like to transition rapidly, we're just not going to see that immediately. We're going to -- we're going to do this in a process, I guess.

The question I would ask you is what do you think is the -- what step or what incentive or measure could we put in place that would have the greatest impact, that would take us the farthest the fastest, in your judgment?

MR. SMITH: I think the biggest single elements are the appropriate incentives for the purchase and operation of plug-in hybrids and plug-in hybrid electrics and appropriate legislation to build a smart grid with federal authorities to require time-of-day pricing and the various support accouterments, if you will, to a highly electrified short-haul transportation system. Those would be the two things that would have the biggest effect in terms of reducing our use of petroleum in general.

And of course, we did not come together to address climate change and the environment, per se, although all of us are concerned about it as citizens and the science that's out there. But you get that as a byproduct of the recommendations that we have.

In fact, I would say that there are few recommendations that I've seen that would have a more dramatic effect, short of the power generation issues that you're dealing with with clean coal and things like that, to reduce carbon emissions in the air, to move to a short- haul electrified transportation system and to begin using advanced biofuels in long-haul transportation where the battery technology doesn't offer the same advantages.

SEN. KERRY: Well, I don't disagree with you. I think in terms of impact it would be very dramatic.

But it's striking that Roger Smith, the former CEO of General Motors, built a terrific electric car. I drove in one in California a few years ago and, you know, I was not aware at that time that they just discontinued them -- completely discontinued this car. Frankly, I am told, because of pressure from other interests that, you know, saw their profits and revenue stream threatened as a consequence.

So here was a short-sighted impact, but I'm currently driving a Prius that has one of these lithium batteries in it. The dealers are now -- you can get it actually through the dealer. It's not a retrofit anymore. And you can actually get upwards of 170 miles to the gallon if you drive thoughtfully with a combination of the plugging in and so forth.

So these are things that are available. If more of America was suddenly grabbing onto that, you'd have a huge reduction, obviously, in the import piece.

But speak if you would, for a moment, about the global climate change piece. Do you both share -- and does the coalition share -- a sense of urgency with respect to the global climate change component of this?

General?

GEN. WALD: Well, as Fred said, SAFE didn't come together for that purpose. It was basically national security.

From a personal perspective, speaking for my own self now I was on a study last year with the Center for Naval Analysis on national security and climate change with 14 retired four-star and three-star generals.

I mean, I care about the environment. I always have, but I wasn't a climate-concerned person at that time -- although I thought it was a real issue. After a year of study with top scientists in the United States, and some deniers as well, the panel came to the conclusion that it is a problem.

Now, how much is being exacerbated, I'm not a scientist, but I think we exacerbate it through manmade emissions. At that time -- and I've seen things around the world. Mozambique in 1996 -- two typhoons flooded the entire country. The only people that could respond to that type of disaster were military, because of the size and the number of the equipment and what we had for equipment. I think we'll see more of that.

And Bangladesh comes to mind. One of the areas that we're concerned with -- 17 million people displaced. I think you mentioned that in your opening statement, Senator, about displaced personnel. Huge issues that will continue to grow over time. The Navy will have a big problem with the littoral with their bases potentially being inaccessible if the water rises even a couple two or three feet.

So yes, I think that's an issue. And if there's -- like General Sullivan, the leader of the Center for Analysis Study that we did, said, "In the military we work on risk -- risk litigation. And a 50 percent risk of something happening is something we'd probably address in the military."

So I guess my point would be I'm not a scientist, but my (visceral ?) is there's an issue there. And I think the SAFE recommendations, as Fred mentioned, will elegantly address not only our national security issue, but the climate as well.

SEN. KERRY: Well, I would assume that given your experience you've worked on considerably less than 50 percent. I mean, if you were told by your flight-line mechanic or whatever that there's a 5 percent, 10 percent chance that the fighter you're getting into is going to crash, you'd probably want to have a revision on that maintenance system or on those evaluations.

GEN. WALD: You're right.

You know, we were talking about it earlier today with some other folks. And the issue about the spectrum of threat in the United States today from low end to high end -- low end being peace or peacekeeping and potentially. In the old days, potentially talked about terrorism in the low end. It was a one-off occurrence usually.

Today, that low-end of the spectrum, like Fred said, WMD in the hands of a terrorist is a high-risk issue -- the highest there is. That may be a 1 percent issue, but you've got to address it. So anything that's catastrophic, yes, you have to address it. And I think if there's a catastrophic chance of climate change doing something to our grandchildren, we need to address it today.

SEN. KERRY: I think that's a very important statement and I appreciate you saying that or acknowledging it.

Fred, share with us from a company perspective -- competitiveness perspective. We're going to hear a lot from different companies who are going to say it's all well and good, that this is a security challenge, but I've got a survival challenge. I've got to compete in the marketplace. I've got X amount of capital costs to try and make this transition.

What do you -- are there steps we should also take that are particularly capable of addressing those concerns from fellow CEOs and others who look at this transformation, but they're just holding back, because right now it's easier to compete with the status quo?

MR. SMITH: Well, I think that's a big part of it. I'll give you some examples inside FedEx that will make this, I think, demonstrably clear.

We, along with the Eton Corporation and the Environmental Defense Fund -- which some people might say were strange bedfellows -- but we came together because of our mutual interest in the subject, developed the first walk-in pickup and delivery vans. A walk-in Prius, if you will. And those vehicles have about 43 percent more fuel efficiency versus the conventional diesel-powered unit. And they are over 90 percent more emission efficient and have less emissions to address the climate change that you mentioned.

The problem with the vehicles is because they're not produced at scale, the capital cost to one of those vehicles is about $90,000 versus about $60,000 for the conventional vehicle.

Now, in California, within the next two or three years, our fleet of several thousand vehicles in California will be comprised largely of hybrids, because California regulations will require you to meet certain standards.

So the point you're getting at is while we do this on a demonstration basis and buy a few hundred of them and demonstrate the efficacy -- and by the way, our couriers and our mechanics and all love this equipment. So it's not as if there's any step down in terms of utility. But you can't unilaterally disarm, so to speak.

So the government, as a matter of policy, needs to set goals. And we strongly believe, I might mention, Senator, that the issues about climate change -- which are very important, as you've mentioned here -- and the issues about dependence on petroleum are related, but they are separate issues. I mean, you're going to have to have goals and policies that achieve what you want to do on both sides and they'll clearly connect.

But I think if you try to put something together in a too broad a spectrum here, you have the real risk that meaningful reduction in the national security risk and in the national economic risk of reducing our use of imported petroleum or petroleum in general will be traded off or whatever the case may be.

So that's why I applaud you in this national -- in the Foreign Affairs Committee looking at this issue for what it really is. It's a major national security and foreign affairs risk -- as well as being a climate change risk and a balance of payments issue and so forth.

SEN. KERRY: Besides the obvious question -- this is for both of you -- besides the obvious sort of dilemma of being hamstrung a little bit in what you can do, because somebody's your supplier and you can't necessarily leverage your supplier that if you're completely dependent on it and your economy's dependent on it, you're in trouble.

But besides that, which is sort of upfront and obvious, what other national security implications do you see in this question of our current and dependency on energy?

GEN. WALD: Well, I mean, it's kind of related to that. But I mean, this idea if you look in Afghanistan today, for example, there are lots of issues there -- as you're both well aware of. But one of the major issues is resupplying the troops with fuel, for example.

And it's ironic that in Iraq, we have ready access to readily available fuel out of Saudi Arabia, for example -- even Iraq for that matter. Today there's no fuel whatsoever made in Afghanistan. There's no pipelines that go in there. So our troops have to be resupplied by convoy, which is problematic. You've seen what's happened there. And then we fly in with airplanes that aren't able to refuel and they fly back to Baku. So now we're dependent upon Azerbaijan or other places.

So that in itself is a huge strategic issue for us. So as the military goes down the road of -- we have a report coming out next week from the Center for Naval Analysis again on DOD energy use that I'd commend you read if you have a chance sometime.

But the issue there is what is the Department of Defense going to do to move to an alternative fuel of some sort? And as you do that, I think, as Fred articulated very clearly, there are some alternatives you can go to. It takes time.

But whatever that alternative is, I personally believe it's going to have to be similar to what the commercial world uses because of the availability of the fuels. And what we shouldn't do is go from one dilemma to another. So whenever we go to an alternative, we need to have readily available someplace, preferably in our own country.

So I think the issue -- and Fred mentioned it a minute ago -- is very complex. If I were able to sit here today and say I'm going to make a law that would move America toward the next step, the first thing I would do is solve our energy use problem first, because we can do something about that.

Again, I mean, I personally believe that the second step will be taken care of, and that's the climate. But I think a comprehensive energy bill based on what SAFE said today is the best thing we can do. It's in our own hands, and we can make a difference.

SEN. KERRY: Well, let me just say to you that there is no solution to climate change without energy policy. I mean, it is the fundamental solution. You can decide what your source is going to be, but if your emissions are coming out of transportation or out of buildings, the energy you use and the way you build, et cetera, or your transportation or utilities, those are the keys.

And I think, personally, that the technologies are moving fast enough behind the scenes already, with various university efforts. MIT, Carnegie-Mellon, Caltech, different people, they're deeply involved in this, together with venture capitalists, who are beginning to see the potential future Googles out there or future FedExes, whatever. They're going to be racing to this technology.

And I think once we've sent a signal to the marketplace -- I'm not sure, you know, that the amount is as critical as sending the signal -- I think you're going to see a whole series of changes in behavior that are going to stun people at the rate at which they're going to take over.

And you can see this in the 1990 Clean Air Act experience on sulfur, SOx, which we did for acid rain, where we created a trading scheme, and we, in fact, have traded very effectively now for these 19 years, 18 years, and much more efficiently, incidentally, than anybody ever imagined, and at a much lower price. And the whole transition took place at less competitive down drag and price than people thought.

So I'm very optimistic about it. I really think this is -- there's a brilliant future out there in solar and wind and various alternatives, and even in nuclear, conceivably, in certain places, depending on what the market sends as a signal to those costs.

GEN. WALD: Could I just add one thing?

SEN. KERRY: Yeah, please.

GEN. WALD: I couldn't agree more from the standpoint of the United States is the most entrepreneurial place in the world. I was lucky enough in my years in the service to travel to 135 countries, and the last assignment to 90. And last week we went to California, Robbie Diamond, who's sitting behind me, who's the head of SAFE, and we (met ?) at a place called Applied Materials, a company called Solozon (sp), and another one called Bloom Energy.

And I will guarantee you, I've never seen anything like that in any other country around the world, where people, based on the creative thought, can do some things. The algae -- one was solar and one was a special kind of a generator that, by the way, Google uses now at their headquarters in California.

MR. SMITH: (Off mike.)

GEN. WALD: And FedEx too. Yeah, exactly. So I think incentives for that type of activity is where I think we're really going to make a lot of headway.

SEN. KERRY: Great.

Senator Lugar.

SEN. LUGAR: Thank you, Mr. Chairman.

With the nostalgia today about presidential campaigns of the past, I noted our distinguished senators from Delaware and New Hampshire identified with the Carter campaign. I want to identify with the Howard Baker campaign. I was honored to be his national chairman. Fred Smith was his national treasurer back 30-some years ago. And although that campaign was not successful per se, at least it has led to survival for both of us in the meanwhile, (helping ?) to do meaningful things on most days.

I just am -- my imagination was triggered by your testimony, Fred, to think through two things that you pointed out, one of which is that the current economic dilemma in our country and the world may not have been entirely triggered by the $147 price of oil, but as you say, you've been through five of these situations in the past, survived them, barely on one occasion.

It was not only -- and clearly many analysts believe it was overreaching in the housing market, the subprime loans, then all of the slicing and dicing derivatives, strange instruments, but this is a fascinating thing all by itself, which really hasn't been studied, how oil got to $147. And for that matter, just back in Indiana, corn got to $9 a bushel, soybeans to $15.

Within six months, the oil was down to a third of that, and so was the corn, slightly above $3; the soybeans slightly above $8, say. These were huge changes in a remarkably short period of time. And it's not at all clear to any of us exactly how the world works that way. One can say, "Well, this is supply and demand. These are markets," and so forth.

What also happened really during this same period of time was the wars in Afghanistan and Pakistan not going particularly well. We've had testimony today from Richard Holbrooke. And we sort of got back once again to this thought that you made as point one of your point four.

For the better part of 50 or 60 years, our foreign policy had been deeply entwined with oil in one form or another. In fact, some would say -- this is once again sort of speculative theory, almost like why oil went to $147 -- but that essentially the al Qaeda group were disturbed or people in Saudi Arabia by the fact that after the war in Kuwait, we continued to leave troops in Saudi Arabia. They were a source of disturbance for many persons who did not want us there. And as a matter of fact, a number of people in the Middle East have not wanted our troops in any of the places that they have been recently.

Now, we have made a case for bringing democracy and human rights and education for children and so forth to a number of countries, but some would say this is at best sort of a second or third order of rationalization as to why you were there to begin with and what sort of wars you engendered by your physical presence. And why we were there -- well, in large part because we were attempting, as President Carter expressed today in the Carter doctrine, to make certain we could not be displaced from oil sources that were vital to our economy throughout that period of time.

So we put people in harm's way to make sure that all those vital things occurred; did the best we could to rationalize that we were doing a lot of other good things while we were in the area. And that still is the case, as we heard today testimony with all the complexities of how in the world the government of Pakistan has to rationalize even its own entity and come to some cohesion, quite apart from Afghanistan, after a long history that people are reciting.

We get back once again to the oil problem. And I suppose that this is part of leadership, whether it's business or political, where some of us try to do a better explanation to our constituents of what the stakes are of all of this, because I'm not sure any of us have ever gotten it. We have sort of trundled on, life as usual. But the points you've made today are very stark.

You've also made an interesting point about California and your own equipment, and that is, California has some rules with regard to this. And so, as a result, you're going to have to conform to that. They're not national rules now, but they do make a difference in energy for those vehicles that you have to run in California.

In just thinking hypothetically, as we're in now what seems to be an unfortunate revolution in our whole transportation predicament, whether it's General Motors or Chrysler or whatever may occur to Ford or others, here we're at a point, really, in our history in which we're not selling very many vehicles.

Now, one can say, "Well, the market finally will work." Somebody will find something out there and begin to buy cars again, because some will wear out. But at the same time, you're pointing out, as is Chairman Kerry, that we have all sorts of what really are revolutionary ways of powering vehicles now, and they bring about huge changes in terms of energy efficiency, enough that we finally really might make an impact upon imported oil, for example, a big impact, if we were serious about. And we have to be serious about resurrecting our transportation business and getting our goods and services around the country, quite apart from transporting ourselves.

What we're inclined to do is to say this is a different problem altogether, and we sort of work through the bankruptcy court and we work through supply and demand, or whatever it may be, sort of oblivious, on the other hand, of the energy thing, national security, troops abroad and all the rest. We talk about it in a different forum.

I suppose, you know, what I'm sort of grasping for is people like yourselves, who are visionary, and say, "Now, here is a prescription as to how you try to solve at least two or three things at the same time," and you've tried to solve several in the testimony you've had today.

But, I'm just -- I'm wondering, as the leadership the two of you have given, and it's been exemplary, the fact is it's still a lot of people in the industries that you're involved in don't get it. They're not moving in the same direction, that I can see, that you are. And maybe perhaps California or others demand certain things happen.

As a country, we're not even picking up, say, on the example of Brazil, where the ordinary motorist can drive into a filling station and 75 percent of them offer ethanol from sugar, as opposed petroleum, and you make a consumers' choice -- and Brazil is energy independent. And they are, of course, producing a little oil off-shore, which you suggested as one of your points, that you could at least take advantage of the resources you still have in your country.

But, that example is out there now. It's that whole country. It took 20 years to get there. But, why, for instance, in your own leadership in the group that you head, has there not been more acceptance? Or maybe we haven't seen the acceptance. Maybe you've had, really, a rush of people to follow your lead, and, if so, give us the good news. How do you -- tell about your own influence and who you're influencing.

MR. SMITH: Well, Senator, I think there's reason to be optimistic. And I say that for several reasons. The initial report that the Energy Security Leadership Council put out, based on excellent scholarship, demonstrated in a number of simulations where a number of very noted people -- including Secretary Gates, played one of the roles, Secretary Rubin, I think even Richard Holbrooke may have been in one, I can't remember -- that demonstrated the national security and economic risk of relatively small withdrawals of supply.

Well then, obviously, we saw it last summer, which was far beyond what was in the simulation. But because of that excellent scholarship, and the work of the ESLC, I think we played a very important role in 2007 when the Congress passed the energy legislation late that year that reinstituted for the first time new fuel efficiency standards.

And, of course, I have many very free market friends that accuse me of being an apostate. But, if you look at it just from the market standpoint you miss the issue that General Wald and his colleagues bring to the table -- that this isn't a free market; it's not just an economic issue, it's a national security issue.

So, you had increased regulation. Then at the same time you had technology coming along. And I would submit to my friend Senator Kerry, the big difference between the electric car that Chairman Roger Smith of General Motors pioneered several years ago, and the new generation of electric and plug-in electric cars that have been introduced just since the 2007 legislation, the Chevy Volt, the new Honda hybrid -- which I just saw today in the Financial Times is the number one selling hybrid in Japan, and which is now available in this country. Nissan in 2010 will be offering a new plug-in hybrid. M.I.T. scientists have announced that they think they can take the recharge cycle of these plug-ins down from hours to minutes. You can clearly do it if you have high-power plugs -- you know, 440 or 220.

So, I think you had a convergence of the regulations inherent in the 2007 bill -- which required new fuel efficiency standards, different than the old types, you know, they were category-specific, not averages -- and at the same time you had technology coming together that said there really is a way to get to these points. Senator Kerry mentioned that if you drive your hybrid properly you can get upwards of 150, 170 miles per gallon equivalent. That's what you're looking at, not 35 gallons per hour.

Now, aviation for years has made huge progress. We're reequipping our narrow-body airplanes with equipment that will have a 47 percent unit improvement, in terms of fuel per ton carried. We're beginning the process of refleeting our long-distance airplanes with a new triple-7 200 long-range freighter, which has these fantastic General Electric engines -- some of the components of which are built in (Lynn ?), Massachusetts, and they have about a 20 percent improvement, and about a 30 percent improvement in range.

So, technology is coming along, and regulation -- because of the environmental, national security, economic risks, have been put in place. And there's, of course, excellent (builds ?) out there now with Senator Dorgan, Senator Voinovich's bill. There's another one over on the House that I think recognizes that it's a combination of regulation -- the stick, if you will, and the carrot of incentives and credits, and so forth, that will get us to where we need.

But, as I said in my opening remarks, for the first time since I've watched this, this is a different situation, because 20 years ago there really wasn't any alternative to the internal combustion engine. And the internal combustion engine will be around a long time, and it too will become more efficient the same way diesels will become more efficient.

But, I think the plug-in hybrid electrics and the all-electrics, for the short-haul transportation that makes up the vast majority of our daily utilization of our automobiles, has the real chance to change this equation for the first time. But, to get from there to there it's got to be in light-regulation and appropriate incentives, to get people to produce and buy this equipment and get into scale production.

SEN. LUGAR: Just one further, and this is that -- why, if this is the case, would you approach this as incrementally, say, as the legislation you've suggested, that we passed? In other words, why wouldn't you go to the, say, 50 miles a gallon in three years, or something of this sort?

Now, everybody would say, "well, by golly, we don't have the technology to do that. We can't produce that many cars. We're just getting there." But, isn't the urgency of this assess that a more dramatic push is really in the national interest?

MR. SMITH: Well, I think that you have to be mindful just of the scope of the problem too, Senator. I think I'm correct it takes about 15 years to turn over the automotive fleet. But, in the report which we produced the recommendations we have -- which, again, are largely incorporated in the legislation here, including the Smart Grid (sp), and so forth, it begins to have very dramatic effects on a cumulative basis.

And the reason for that is that oil markets, like any commodity markets, as you demonstrated in your remarks about the huge run-up in fuel prices, and soy beans, and corn, it's always on the margin. That last 1 or 2 percent of demand can make the price go up about two or three times.

So, as you begin to take demand down by improving the efficiency, as these new (quantumly ?) more efficient vehicles come into the fleet, and the lesser efficient vehicles go out, you begin to have a real effect on the total amount of petroleum consumed -- a very big part to petroleum imported, particularly if you develop advanced biofuels and maximize domestic production.

And now you've changed national security equation, the balance of payments equation, and you have a very different situation that we find ourselves in today, or have been for the last 45 or 50 years.

SEN. LUGAR: Thanks.

SEN. KERRY: Thank you, Senator Lugar.

General, if you have 30 seconds to convince a number of fellow Americans of why energy is such a critical national security issue, what would you say to them?

GEN. WALD: First of all, I'd say that if we don't do -- we have a window here of vulnerability in America. And I don't know if it's 10 years, or 15, if we have an epiphany today, and have the leadership -- which I think we potential do, to decide if we're going to go to where we think we should go, it will take us probably a decade.

And I think the biggest threat we face today -- personally, in America, is the Iranian situation. And I think that's a difficult wild-card. And if that situation goes in a direction that we don't want it to be, we are going to be in significant problem here in America from an economic standpoint as well as a security standpoint.

So, I think there is a way for people to articulate this problem. And I think every time we seem to go some place and talk about this, it resonates. So, frankly, I believe it starts right here in Washington, and I don't think we should overly frighten people but they need to be aware of the fact that we are severely threatened today and vulnerable.

SEN. KERRY: Mr. Smith? Thirty seconds, or one minute, whatever --

MR. SMITH: Well, as I said a moment ago, I'm optimistic. I mean, we participated in the debates. In fact, I think I testified before you in 2007 --

SEN. KERRY: So, if somebody doesn't understand it, or didn't yet believe it, what would you say to convince them?

MR. SMITH: Well, I think what I would say is all you have to do is to watch the nightly news and look at the enormous human cost, and the cost in national wealth of prosecuting these wars in the Middle East. And any way you slice it, in large measures, they're related to our dependence on foreign petroleum.

There are other issues, to be sure, but just as Alan Greenspan said in his book, (Neat?), you know, the situation was about oil.

And if we continue along the road we've been on these last 40 years, we're going to get into a major national security confrontation that makes these things that we've been in here the last few years pale in comparison.

So, I don't -- I think every American can understand that issue by just simply relating to what we've been involved in in the last few years; and watching the enormous human cost of these involvements that we have in areas of the world, which we wouldn't necessarily be involved in if we weren't as dependent on foreign petroleum. We have other issues, and other interests, but I think they would not require the level of boots on the ground that we've been forced to get into there in these last two wars.

SEN. KERRY: Well, that's a good way to bring this to a close. We are really appreciative to both of you.

First of all, thank you both for your service to our country, in uniform, and thank you for what you're doing now. We're very appreciative and glad you could be with us today.

Senator Lugar, any -- take care. Thank you very much. We stand adjourned.

(Sounds gavel.)

END.


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