Kevin Rosner, Senior Fellow, Institute for the Analysis of Global Security, USA

I am going to talk about two issues today which are both effectively related to national security. This reflects my work on energy security from this rather unique perspective as opposed to discussing energy from either an industrial or environmental perspective and it is important to understand this.

Another thing that I want to say is having listened to the presentations thus far is that Ukraine is not a victim either by virtue of either its geography or history. Ukraine and its citizens have an opportunity to forge a new energy future not based on theory, not based on unproven technologies, but based on the individual decision of citizens and the resolve of their national government. The responsibility for your future lies with you, not with the international community, not with Russia and not with the European Union and, I think it can be said, not with the United States. Moving the world off the oil in the transportation field is probably the smartest, most meaningful step any oil importing country can take in terms of ensuring its own energy security. The unique strategic importance of oil to the modern economy—beyond that of any other commodity today—stems from the fact that the global economy’s very enabler, the transportation sector, is utterly dependent on it, with 220 million cars and trucks in the United States alone. With 97 percent of the United States’ transportation based on petroleum, oil is the lifeblood of the USA economy. America is poor in oil relative to its need. Although the United States remains the third largest producer of oil in the world it consumes 1 of every four gallons produced and it has only 3 percent of world conventional proven reserve of oil. At an average price of 90 dollars a barrel the United States alone this year has exported well over $400 billion dollars (and by year’s end will probably be closer to $600 billion). In liquidity terms, oil and oil products imports are contributing to the largest transfer of wealth in the world from mature industrialized countries to a handful of geographically unstable states often at odds with EU national security goals and objectives.

When the British Navy made its move from coal to oil Winston Churchill then remarked: “safety and certainty in oil lies in variety and variety alone”. To diminish strategic importance of oil to the international system it is now critical to expand Churchillian doctrine beyond geographical variety, beyond the Russian Federation, to a variety of fuels. Oil’s strategic value derives from its virtual monopoly in the transportation sector. This monopoly expressed by the fact that after 2010 when non-OPEC oil production will peak, 78 percent of Global Oil Reserves will be in the hands of OPEC. Not long ago technology broke the power of another strategic commodity-salt. Until around the end of the nineteenth century salt commanded such a position, because it was the only way of preserving meat and till that time salt mines confirmed national power and wealth. The imposition of a salt tax at the time of the French revolution contributed to it, and during American Civil War Northern Troops sought control of the South’s Salt Mines because of salt contribution to sustaining foodstuffs for the Southern Armies. Today no nation fights because of salt. Salt is a useful commodity for a range of purposes. The US imports some salt therefore it cannot be defined as salt ‘independent’. But to most of us there is no “salt dependence” problem at all — because canning, electricity and refrigeration decisively ended salt’s monopoly of meat preservation, and thus its strategic importance. We can and must do the same thing to oil.

If we are to cut back on our dependence on oil then today’s vehicle fleet must be able to accommodate alternative fuels. For a cost of approximately 100 dollars each car that comes out from the production line in Detroit can be made into a flexible fuel vehicle, which can essentially run on any combination of gasoline or fuel ranging from ethanol, methanol from a variety of its stocks derived from agricultural materials to waste and coal. Flex fuel vehicles provide a platform on which fuels can compete and let consumers in the market choose the willing fuel in this stock based on economics.

Now your agenda here asked a couple of questions. One is about efficiency and fuel saving technologies, another is about food and the third is about examples of investment. In Brazil, for example, where ethanol is widely used, the share of flexible fuel vehicles and new cars grew from 6% to 67 % in 3 years. Today the percentage of flexible fuel vehicles in Brazil is approximately 80 %. These cars are made by the same automakers in Japan, in Germany, in the United States, in Italy and elsewhere. These cars are manufactured by the same automakers that sell to the U.S. market and entail no size, power, or safety compromise by consumers. The proliferation of flex fuel vehicles in Brazil has driven fuel competition at the pump to the point where the Brazilian oil industry has had to keep gasoline prices sufficiently low to compete with ethanol in order not to lose more market share, so low that it actually just received a government subsidy to do so. Competition in Brazil is working so well that a big Brazilian sugar and ethanol firm just bought out the distribution assets of Exxon in Brazil.

China is another example where methane-based fuel is staged to make a major contribution to reducing Chinese imports of oil and oil products. China’s methanol production capacity has grown from 6.16 million tons in 2003 to an expected 20.6 million tons in 2008, with actual anticipated output of 13 million tons. By 2010, China’s methanol production capacity could reach 37.24 million tons. To put this in perspective, total world production capacity excluding China is expected to be roughly 40 million tons this year (about 13.3 billion gallons or 50 billion litres). The US department of energy estimates that ethanol can be produced from coal at a price of 50 cents a gallon. In China it is produced between 33-50 cents a gallon. In addition, coke furnaces in China generate 80 billion cubic meters of waste gas each year, enough to produce 40 million metric tons of methanol, and significantly reduce pollution in the coal-producing regions.

Expanding U.S. fuel choice to include bio-fuels imported from developing countries has significant geopolitical benefits at a time when U.S. global standing is eroding. Sugar, from which ethanol can be cheaply and efficiently produced, is now grown in one hundred countries, many of which are poor and on the receiving end of U.S. development aid. Encouraging these countries to increase their output and become fuel suppliers, opening our fuel market to them by removing a 54 cent a gallon ethanol tariff, could have far-reaching implications for their economic development. By creating economic interdependence with biomass-producing countries in Africa, Asia, and the Western Hemisphere, the United States can strengthen its position in the developing world and provide significant help in reducing poverty.

The IEA has reiterated that bio-fuels are the key to keeping the lid on an overheated transportation fuel market. According to Merrill Lynch, without the increase in bio-fuels production, oil prices would have been 15 percent higher, which at current oil prices translates into a savings of over $80 billion a year to the U.S. economy. The much derided bio-fuels program which has facilitated this $80 billion saving, costs the taxpayer $4 billion a year. By any reasonable standard it is a far better deal to send money to America’s farmers than abroad.

Now about the bio-fuel - food issue. There is the assertion that increased bio-fuel production from corn ethanol is in particular is driving world hunger. A primary driver of price increases for food commodities from fish to rice, neither of which is used for fuel production, it is the role of oil in the cost of transportation, and beyond the massive increase in oil prices lies a rising of cost of distribution, labor and so forth. Commodity speculation turned by weak dollar and increased collateral demand for people in China and India who have the right to have a better subsistence level of nutrition, has also driven global food prices. Further despite corn ethanol production the US corn food and feed product has increased 34% of the last 5 years. And the US food export overall has increased 23% each year. A nation wide deployment of flexible cars, plugging vehicles can take place in two decades. But such a transformation will not occur of itself because the oil market is not a free market. It is a market that is controlled and impacted and manipulated by OPEC. Choosing not to embrace a new fuel standard and legislation in the United States, in Ukraine or in the EU is choosing to preserve oil’s monopoly in the transportation sector and with it OPEC’s stranglehold over the global economy.

There are a couple of closing comments on energy efficiency in cogeneration. On the issue of efficiency most energy produced and consumed in the EU goes into heat and power. The integration of heat and power generation has one of the highest efficiency ratings of any power generating modality. And this is an old technology that has been around since the 19th century. So because of its efficiency, combined heat and power generation contribute to economic growth without necessarily increasing primary fuel consumption. Cogeneration systems predominantly use natural gas, which is something in Ukraine that we don’t want to do. However given this is a fact and a fuel source, the upside of using CHP (combined heat and power) are reduced GHG (greenhouse gases) emissions compared to that of other thermal conventional power generation. However other fuels such from biomass can be used to generate CHP. In the past the main barriers to CHP and decentralized power has been the relative cost of distributed generators. Another consideration has been its relative small scale. Next year however, a project will be put forward entitled the Megacities project - to move cogeneration from a small scale to a large scale. When talking about large scale we mean cities of 5 000 000 or more integrating industrial, agricultural, heat, cooling and power needs. Provided this step is taken, decentralized energy generation can be integrated in cities on a large scale with a hope for mega solution bounce pack in terms of a decrease in primary fuel demand and associated GHG emissions.
In closing, up to 2030 – 60% of all new energy investment will be in electricity. But the cost of investment in transmission and distribution networks exceeds the fundamental cost of generating power itself by some 17%. In the EU alone, new investment in transmission and distribution to 2030 will cost European consumers an estimated $648 billion. Generating electricity, heat and power at the point of usage is one way of cutting back on these network related investments and in securing local power as reliable and safe from grid disruptions. In Europe, where states are increasingly dependent on imported natural gas from the Russian Federation, the nexus between decentralized power & CHP actually decreases the amount of imported gas necessary for an equivalent power output. This in turn improves states’ current account trade balances and allows for these financial resources to be reinvested elsewhere or to be spent in a way that actually employs European workers rather than enriching individuals that reside elsewhere.

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