Transcript: Morning Session - Biofuels For Transportation Conference

Basically, it was a gleam in the eye of a small group of Midwestern corn farmers who saw potential that most others ignored. Thirty years later after spending most of my life on a tractor and a combine, I took a temporary job here in Washington, D.C., and I now have the honor of serving as a member of President Bush’s team at U.S. Department of Agriculture as the undersecretary for rural development as well as the chairman for the USDA’s Energy Policy Council, and in that capacity I must tell you I work with a very dedicated group of people, not only USDA but as well as our counterparts in other agencies particularly DOE to facilitate the acceleration of the development and the commercialization of biofuels.

This is a high priority for this president, for this administration and the country and frankly I’m very proud of the progress that we’re beginning to make, but as I look around the room I see a number of familiar faces. I know that there are many people who have shared this commitment and vision for many, many years. There’s a phrase that’s now making the rounds of which most of us are vaguely familiar. It’s essentially, we were ethanol before ethanol was cool. (Laughter.) You know, the biodiesel boom is more recent, but the same sentiment applies there as well. There are more than a few people here today who are entitled to stencil that on your T-shirts and wear it with pride and I want to thank each of you for what you’re doing to move this biofuels revolution ahead to sustain this agenda.

This is truly an international story and I’m glad our German friends are here. You know, Henry Ford famously told a New York Times reporter back in 1925 that ethanol was the fuel of the future, but you know, Henry Ford was actually a relatively late comer because even earlier Rudolph Diesel had designed his first engines to run on peanut oil. Cheap oil or cheap hydrocarbons, if you may, put that vision on hold for nearly a century, but now we are, in fact, coming back to the future in Germany, in America and indeed around the world. Interest in biofuels is global. In recent years as you saw a few moments ago, Brazil has been the leader in ethanol with the United States a close second at roughly 4 billion gallons last year; China is third and India is fourth; Germany is well back in ethanol production, but is in fact the world leader in biodiesels obviously reflecting the much higher percentage of diesel engines in their automobiles.

The U.S. biodiesel industry is relatively new, but is literally growing like the proverbial weed in the bean field from two million gallons in 2000, 25 million gallons in 2004, 91 million gallons last year; it’s projected that we will double that in 2006. In the broad picture though, these are still in effect niche fields, but exponential growth simply can’t be ignore for long. The energy bills renewable fuels standard at 7.5 billion gallons by 2012 is clearly going to be reached several years early. Ethanol this year is projected to absorb nearly 20 percent of the U.S. corn crop and biodiesel will absorb 2.3 billion pounds of soybean oil and frankly no matter how you cut it, that’s a big number.

A generation from now, assuming commercialization of cellulosic ethanol, the totals are clearly going to be significantly higher and the United States isn’t unique, biofuels are growing rapidly just about everywhere. There are obviously vitally important national security and balance of trade dimensions to this entire question. Most of us I am sure look forward to the day though when we power our cars with ethanol and biodiesel from the Midwest rather than oil from the Mid-East and there are as was alluded to earlier important environmental benefits as well, but from our perspective – our perspective at USDA rural development, the potential for farmers and for the rural economy as a whole, are at the top of the list. I can’t overemphasize that.

Last year, for example, the United States imported almost five billion barrels of crude oil and oil products, about 40 percent of which was from OPEC, and at current prices replacing a fifth or about one billion barrels of this oil equates to what the net average farm income was the last two years – excuse me – the average cash farm income nationally the last two years, spent about $75 billion. The average over the last 10 years has been about $55 to $56 billion. Stop and think about that. The potential to capitalize on $70 to $75 billion or $55 billion worth of crude oil and keep that revenue in rural America is truly astounding. Rest assured though that kind of potential truly does get the attention of USDA and that’s why USDA has supported ethanol for many years. Like you, USDA was ethanol before ethanol was cool and that’s why we’re involved in the entire spectrum of distributed renewable energy resources today: wind, solar, biomass and geothermal as well as the biofuels spectrum that we’re most familiar with.

Since 2001, USDA rural development has invested nearly $360 million in 650 renewable energy and energy-efficiency projects. That is the single largest federal financing of any program in the federal government that I am aware of. Those investments have leveraged well over $1.2 billion in private dollars and we are, in fact, leading in the commercialization of this effort. Today though, thanks to soaring oil prices, the economic markets are, in fact, beginning to catch up and clearly the political markets are as well. To all of those – to all of us who are – excuse me – to all of those who are hopping on the bandwagon now or perhaps I should say who are being chased onto the bandwagon by $70 a barrel of oil, I say, “Welcome aboard.”

There is an enormous opportunity. We need to work together and there is plenty of work for everyone as you all know, but in my view, President Bush has been out in front on this. It is ancient history now, but you know, I believe it’s worth remembering that a comprehensive energy bill was one of the first of his priorities taking – when he took office in 2001. Obviously, there were some political opposition; that’s nothing new on energy. There’s always opposition to anything you wanted to do. In fact, if you wanted to create a controversy in Washington, just say energy and then you can look for cover, but President Bush worked steadily for five years to get an energy bill passed last summer and he then followed up immediately with the advance energy initiative focused on transportation fuels and better ways to power homes and businesses. In my view the president’s strategy is pretty straightforward; it’s simply this: the United States will in the long run deal from a position of strength and not weakness. We do have a costly addiction to imported oil, but we do believe we can kick the addiction if we make up our minds to do so and the president is, in fact, determined to do just that.

We’re here today to discuss biofuels, but it’s important to remember that biofuels are just a part – a very important part albeit – but just a part of a much broader effort. The United States has extensive supplies of clean, safe energy. These include significant reserves of conventional oil, natural gas and coal. We have the technology to recover these resources in an environmentally safe manner and if we’re serious about reducing imports, we in fact, should do so. We have the technology today to build low-emission coal plants as well as safe highly efficient nuclear plants; we should do so. We are developing the technology for near-zero atmospheric emission coal plants and new generation nuclear energy technologies, which all have great potential, and we should do so. We are significantly accelerating research on wind and solar power on hydrogen and fuel cells, on battery technology for hybrid and plug-in hybrid vehicles. All of this does play a major part, but that said ethanol clearly is in the lead – the closest to full commercialization of the leading oil alternatives today. Biodiesel is a few years behind, but at its growth rate and it’s astonishing, it will be a significant player all around the world as well.

To stay on track, the president and Congress have extended the ethanol tax incentive, they’ve doubled the size limitation for the small producer tax credit and they’ve provided a tax credit of up to $30,000 for the installation of clean fuel infrastructure such as storage tanks and pumps. For biodiesel, tax credit is a dollar per gallon. For biodiesel derived from virgin oil, 50 cents a gallon. For oil derived from animal fats and recycled materials, biodiesel now receives the 10-cent per gallon small producer tax credit. Looking a bit further down the road however, President Bush has also proposed a $150 million in 2006 Budget a 65 percent increase in research funding on ways to produce ethanol cost-effectively from cellulosic feedstocks like cornstalks, forestry byproducts and switchgrass.

If we can solve the riddle, we can, in fact, bypass in my view, the acreage limitations of corn-based ethanol and dramatically lower the cost while increasing the supply many times over. So in my view, the future is, in fact, bright. We’re especially excited because there’s so many of these technologies including biofuels are actually rural and agricultural based. There are very significant economic opportunities for investment, job growth and wealth creation in rural America. That, in fact, goes far beyond five or 10 or 20 cents a bushel or more for corn. It’s the potential ownership of the plants, the good jobs they bring to small towns, it’s the businesses and jobs that will be involved in construction and maintenance and it’s the ripple effects that they can provide all across the world economy.

Let me make one other sideboard comment. A year ago now is that the Renewable Energy Finance Forum in New York City, that particular forum, it was pointed out that this the second annual forum had the largest registration – had doubled the size of registration from the prior year. Without going into a great deal of detail, it was also pointed out those attending that conference represented $125 billion of money willing to invest in green energy. Interestingly enough later in the day, a venture capitalist got up and pointed out how he had raised $185 million of tier two (unintelligible) off the Wall Street for the investment in Midwest ethanol facility. I went up to him afterwards and I said, “Is there any possibility that money was in the Persian Gulf? He said, “Clearly, there is; a great deal of it.”

Now, I submit to you that as we talk about how, in fact, we keep the wealth in rural America, we could get hung up on mandates and imposing restrictions on flow of capital on the one hand, or we could actually sit down and seriously reflect on those issues that impact the ability to integrate the distributed models of liquid fuel or electricity or any other distributed energy source into the legacy systems. The distributed systems are, in fact, going to tend to be smaller in scale. They will, in fact, require regulatory tax structure and investment vehicle redesigned of many other things that we do today. This is not a big versus small in my view. If you go out to build $150 million ethanol plant in rural America today and you want to put 40 percent equity in it, where do you go? If you need $60 million, it’s easier to go get one check in New York City than it is to have 3,000 not very cost-effective transactions in rural America. Does that mean that rural America can’t and shouldn’t invest in this? Absolutely not. What it does mean is that the federal government and the state governments have to do everything in their power to facilitate the integration of the regulatory investment and tax structures so that these distributed models can be integrated into legacy systems.

This, in my view, is rural America’s biggest new market that we’ve seen in generations. It is a tremendous opportunity for all of us particularly if we address these pending issues. Biofuels by themselves won’t solve the energy problem, but they very clearly will be a bridge to the new energy economy of the 21st century. So on my part, it really is very exciting to be able to play a bit part in this historic transformation and for those of you who may be in the business, we look forward to working with all of you whenever we can. I thank you for the opportunity to join you and I wish you the very best in this conference.

Thank you. (Applause.)

MR. FLAVIN: Thank you very much. That was a terrific speech, and Iowa really, I think, can be thought of as a leader in North America to the same degree really that Germany is a leader in Europe, and that the fact you are a Iowa farmer originally and I guess probably will return there once you’re desk duties are completed. I think it’s very notable when you see the tremendous growth in the state of Iowa. The 25 by 25 goal almost looks conservative when you look at the fact that Iowa is already producing more ethanol as I understand it than it is consuming gasoline. This is the kind of transformation of the rural agricultural-based parts of America that are beginning to take place, and I think as your comments suggested there is a real political dynamic underway here and if there is a political tipping point in the energy system, I think it comes at the point at which these industries become so important and particularly with their base in heartland America that the politics which of course have been dominated to some extent by the traditional fossil fuels et cetera, begin to shift, and I think we’re in the middle of a transition like that and I think you gave us a very graphic sense of just how quickly this dynamic is unfolding.

Our next speaker, I will now reintroduce: Viktor Elbling is the director of the International Division of the Foreign Office in the country of Germany and he is going to give us a perspective from his deep background in the German foreign service. Thank you very much.

(Applause.)

VIKTOR ELBLING: Well, thank you very much. It’s a big privilege to be here today and talk to you. This is not a German-American conference, I think. On the other hand, it’s important for us, Germans, to be in a country and cooperate in the country which is a leader in questions of biofuel. As very nicely said before, yes, we in Germany have quite some record as far some kind of biofuel is concerned, biodiesel, but here we are really visiting the champions, or one of the two champions of the world, as far as the ethanol is concerned. Speaking of champions of the world, this is the first time in many weeks that I have switched on my TV this morning and didn’t have some news about soccer – the world championship. So this is also a nice break-off. (Laughter.)

I would like – I would like to simply add after all interesting and very passionate pleas that have been for biofuels our German view maybe on the situation. What am I doing here as part of the foreign office? We have a taskforce which has been set up in the foreign office only a short time ago, which somehow will contribute maybe just a very German approach to a comprehensive German strategy as far as energy as a whole is concerned, and we will, of course, include the question of biofuels in these ideas we are defining. We as the foreign office, of course, look very closely to the issues of security of supply, but this is not the only one that is interesting. But of course, in our view, the question of biofuels and their potential is interesting also in the view of the discussions we’ve had only a few months ago. You will remember this as far as question of gas supply, for example, to Eastern Europe was concerned. All Europeans it is a question of the importance.

Interesting to me is to see that only a few years ago in the ‘90s, the question of biofuels and biodiesel, especially in Germany, was always discussed mainly in the framework of discussion, how to improve the income of farmers? This was the main maybe topic of the ‘90s. Then there was a movement to view about more environment-prone situation, which had probably to do with also the Green Party being very prominent to the German government, and now this has changed, as you know, and now we are discussing even taking on board these views we have or these issues we have on these two points that I just mentioned before. We’re talking about biofuels in a much broader context: in the context of energy supply and security of supply and also keeping, as I said, on board the question of environmentally sound energy.

As my ambassador said before, transport is a very important prerequisite for mobility. We are experiencing a very steady rise in global consumption of fossil fuels at the moment. This is partly due to the growing need for energy in developing countries and emerging economies. If we start again from the environmental view, this has led to an important upswing in emissions also. I think this is important to be stressed also. We do not think it is a coincidence that the frequency and severity of extreme weather conditions have increased a lot in the last years. I just left Berlin yesterday and again we had a record for the coldest winter – sorry, the coldest beginning of summer, of calendar summer, in the history of the records of meteorology. So there is a case, I think an important case for a kind of important concentration of extreme weather conditions.

We all remember the images of the disastrous hurricanes of last year you had in 2005, and the capacities of the refinery system had their importance also and a bearing on the oil price. I heard – I hope it’s not true – that for 2006 again bad hurricane season is being previewed. I hope for American friends that this will not be the case – of course, not only for the question of the price of oil.

We are noticing that the price of oil and the rise in the price of oil is beginning also to challenge the question of economic growth. This is maybe less the case in America where you have, for us, fantastic growth rates of nearly 5 percent. In Germany, we have a very good growth rate of 1.5 at the moment, which is a very good record compared to last year’s. Fortunately, inflation is staying subdued, but we are starting to see that the rise of oil prices started to dent into our growth – the growth of our economies. As you know, the European Central Bank is going to react to this. Everybody is expecting this by raising the interest rates this week.

Well, I wouldn’t come from the foreign office if I wouldn’t stress also before this auditorium that of course natural occurrences are probably not the only – maybe not the biggest – reason for the hike of the oil price. What we are currently witnessing in the Middle East, some political events facing us with a situation where supplies from difficult, unstable regions concentrate the supply for the West. So this also is a reason why our foreign policy is focusing more and more on energy questions. So I think there’s a case to say that that energy’s closely tied to foreign policy, and maybe it’s interesting also for you partners who are not, maybe, in the foreign policy communities to think how foreign policy instruments can help safeguard energy supplies.