Iran has a vested interest in maintaining high production levels. Not only is there substantial potential for an incident when stopping and re-starting wells, which can permanently damage its already outdated equipment, but it is still seeking willing buyers. With much of the international community heeding the sanctions, and increasing pressure from the Obama administration on India, China, and Southeast Asia, Iran has resorted to storing the excess product in the National Iranian Tanker Company’s ships. With a current fleet of 39, up to 80 million barrels of oil can be stored, and it is estimated that approximately 40 percent of this capacity is currently taken. That said, Iran is also expanding this capacity, expecting to receive 12 new supertankers from China this month.

Storing the oil in tankers has the additional benefit of making it more accessible to hawk once a willing buyer is found. The Washington Post reported earlier this week that Iranian tankers have been switching off their satellite tracking systems in an attempt to circumvent Western governments. The International Energy Agency (IEA) reports that for at least a month, about a quarter of the tanker fleet has been sailing incognito, seeking open ports and potential transactions. Naturally, it takes more than turning off a GPS to hide a 1,000 foot tanker, but the move is still a violation of maritime law and yet another sign of the country’s increasing desperation.

Producing some 3 million barrels per day, Iran is the second largest OPEC producer after Saudi Arabia, and oil is the backbone of its economy.  There will be talks next week between Iran and U.S. and E.U. officials to discuss the future of sanctions and Iran’s nuclear program.

A bipartisan group of former U.S. ambassadors joined forces today to officially launch the Diplomatic Council on Energy Security (DCES)—a project of Securing America’s Future Energy (SAFE).  The members of the DCES aim to call attention to the diplomatic and foreign policy constraints posed by America’s dependence on oil.  Led by co-chairs Ambassador Alfred Hoffman Jr. and Ambassador Elizabeth Frawley Bagley, members of the group participated in a press conference and moderated roundtable discussion, and took questions from a public audience in Washington, DC.

The DCES also released its inaugural report, Oil and the Trade Deficit.  This report highlights petroleum as a crucial component in the growth of the U.S. trade deficit over the past decade to a potentially unsustainable and damaging level.  It provides yet another important argument for taking critical steps to end American dependence on oil.

Report Summary

Oil is traded globally, and its price is affected by events in oil-producing and oil-consuming nations around the world, in addition to international waterways and events in nations that host important shipping channels or infrastructure.  Much of the world’s oil is produced in unstable regions and nations hostile to the United States, and its price is increasingly high and volatile.  At approximately 19 million barrels per day (mbd), the United States is responsible for more than one-fifth of total global oil consumption, and is thus both greatly exposed and vulnerable to global market volatility.  This poses a serious threat to U.S. national and economic security.

Although the United States is also a major oil producer and prospects for continued growth in domestic production are positive, the nation remains reliant on imports for a large portion of its total oil use.  At an annual cost below $100 billion as recently as 2002, the nation has run an aggregate trade deficit in petroleum of more than $1.5 trillion since 2007—an average yearly deficit in excess of $300 billion.  In fact, progressively higher oil prices have increased the total cost of the U.S. oil import burden in recent years, even as imported volumes have declined.  For example, net petroleum imports declined by approximately 1 mbd between 2010 and 2011 and yet the petroleum-related deficit increased by more than $60 billion.  Despite even lower anticipated import volumes this year, further elevated prices are forecast to increase this deficit further in 2012.

The nation has sustained a trade deficit with the rest of the world for more than a quarter of a century.  However, over the past decade, the size of this deficit has grown significantly. The current size of the trade deficit, totaling more than half a trillion dollars in 2011, cannot be sustained indefinitely.  It creates significant risks and vulnerabilities for the U.S. economy, including an increased dependence on consistent capital inflows from foreigners.  This compounds America’s international debt burden while lowering the prospects for long-term U.S. economic health.  A readjustment of the U.S. trade balance is almost certain to be necessary.  Whether gradual or more sudden, this process is likely to involve higher levels of saving and lower levels of consumption, higher interest rates and prices for imports, and lower prices for exports.  These factors will moderate the trade deficit, but also reduce living standards below what they would be if borrowing continued unabated.  A sudden adjustment would occur if increasing import demands are not matched by foreign willingness to purchase U.S. assets, thereby causing abrupt pressure to lower spending.  If the nation could not reduce its reliance on foreign oil, imports of other goods and services would have to decline, and if capital inflows fell low enough, it is possible that the nation would be unable to afford its oil imports.  This kind of adjustment could be orders of magnitude worse than a more gradual process.

By taking action to decrease its trade deficit sooner rather than later, the United States can reduce the painfulness of an adjustment.  Petroleum represents a crucial component of the U.S. trade deficit on which changes in policy can have a clear, direct, and significant impact.  Any approach must focus on increasing domestic oil production and decreasing oil consumption.  New investments to aid the return of strong and sustained economic growth must also address structural limitations of the economy with respect to oil, most notably in the transportation sector.

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The WSJ puts it this way:

North Dakota has passed Alaska to become the No. 2 oil-producing state in the country, reflecting how the embrace of new drilling technology is redrawing the U.S. energy map.

North Dakota’s daily production of oil rose 3.1% to 575,490 barrels in March, according to preliminary state data, 1.4% more than Alaska’s daily production of 567,480 barrels for the month.

Texas, which pumped 1.7 million barrels a day in February, holds a firm grip on first place.

This is of course good news, especially for North Dakota.  It’s also good news for US energy security.  While it’s true that domestic production in a globally-linked market doesn’t shield us from price increases and even from volatility caused by sudden market disruptions, more domestic production does help our balance of payments and trade deficit.  Dollars flow to American workers and American shareholders rather than hostile petro-states.

What’s surprising is how sudden this North Dakota boom is:

The leap past Alaska came “substantially earlier than we thought. We had graphed this out [to happen] early next year,” said Ron Ness, president of the North Dakota Petroleum Council, which represents more than 350 companies in the state’s oil fields. “I don’t foresee us giving Texas a run right now, but certainly we’ve moved up in the batting lineup.”

In four years, oil output has quadrupled in North Dakota. In March 2008, the state was the No. 8 oil-producing state at 144,000 barrels a day.

 And of course it’s all about hydraulic fracturing and horizontal drilling.  Most of the controversy about fracking has come from the new natural gas plays, where production is happening in areas where it hadn’t before.  For tight oil, however, production is resuming in areas thought to be tapped out.  The fact that there’s no controversy over fracking in ND is a clear indication that it’s not the process but the critics that cause the criticism.  Policy-makers should keep that in mind as they weigh the benefits of our domestic oil and natural gas boom.

CONGRESS IS BATTLING over whether to approve the Keystone XL oil pipeline, proposed for the heart of the country.  The project has clear value to the United States. Yet, with all the amped-up rhetoric, it is important to remember what the project would not do. It would not endow the United States with “energy security” in the sense that most Americans understand the phrase and that many pipeline advocates wield it. It would not significantly lower oil prices. In fact, when it comes to oil, America will be affected by global events for decades, and that’s assuming the right policies are in place.

All true, and well put.  The pipeline does have clear value for the US:  more access to a secure product, continued good relations with our stable ally to the north, good jobs, etc.  And yes, the pipeline will not lead to 100% energy security — nor is it the threat to the environment that opponents fear (or fear-monger about).

The Post has some good prescriptions for reducing our dependence on foreign oil — and thus our exposure to world-wide economy-constraining high prices and economically damaging price volatility:

There are sensible policies to promote this long-range goal. An economy-wide, anti-carbon policy, such as a carbon tax, would fit the bill. Short of that, the best policy would be a higher gasoline tax, which could also fund transportation needs. President Obama’s auto efficiency standards will also help. In contrast, direct subsidies for electric cars are extremely expensive for meager benefits.

Unfortunately, after making those mostly solid points, the WaPo takes a gratuitous shot at incentives for electric vehicle and infrastructure deployment.  They are wrong on that.  Vehicle electrification has long been viewed as the logical next step in reducing our economy’s oil intensity.  As key executives at Shell (hardly an entity one would expect to be pro-electrification) said nearly a decade ago:  use electrons for transportation and reserve molecules (of petroleum) for higher-valued applications.  That’s still the right answer for our economy and our energy security.

The mix of fuels used to generate electricity in the United States is experiencing a seismic shift that is unlike anything that has happened in decades.  Looking across all sectors, U.S. coal-fired generation in 2011 fell to its lowest level since at least 1949, which is the earliest data available from EIA.  Moreover, according to EIA’s latest estimates, this trend will accelerate sharply in 2012, with coal-fired generation falling to just 36.2 percent of the U.S. total—far removed from its decades-long position as the source of more than half of U.S. power generation.

What’s driving this shift?  One look at the graph above tells the story pretty clearly.  The use of natural gas in power generation—which has steadily increased since about 2003—is set to soar in 2012.  While total U.S. power generation will increase by less than 1 percent between 2011 and 2013, gas-fired generation will increase by 23 percent.

In the past, natural gas was viewed as a risky option for baseload power generation, because fuel prices tended to be both high and volatile, making them unable to compete with coal. This fuel price volatility has historically outweighed the distinct advantage held by natural gas generators when it comes to capital cost. The revolution in domestic shale gas production, which has depressed natural gas prices to levels that are highly competitive with coal in numerous U.S. markets, has fundamentally changed the calculus for power generation economics.  Moreover, some recent analysis suggests that the capital cost equation has been moving even farther in favor of natural gas as air quality regulations and the complex construction requirements drive the cost of coal plants higher.

Changes in the fuels used to generate electricity could have important implications for everything from electricity prices to greenhouse gas emissions and air quality.  One area of particular interest to us is the impact a cleaner grid will have on the upstream CO2 emissions associated with plug-in electric vehicles (PEVs).  We sometimes point out that PEVs are the only vehicles that will get “cleaner” as they get older as the grid moves toward lower-carbon forms of electricity.  The experience of the past several years and expectations about the very near term demonstrate this quite well.

As the figure below shows, the amount of upstream CO2 emitted by a PEV in charge-depleting mode has been declining substantially in recent years—even when it is powered by the average U.S. grid mix.  A driver who purchased a PEV in 2005 would have seen his or her upstream emissions fall by 16 percent by 2012.  In other words, the driver’s vehicle would have continuously improved its advantage over the average light-duty vehicle for that year, which achieved an adjusted fuel-economy rating of 19.9 miles per gallon.  In fact, even when taking into account line losses, a PEV purchased in 2005 would just about be on par with the best hybrids on the road today, which tend to register fuel-economy ratings of about 50 miles per gallon. Going forward, as more U.S. electricity is generated by natural gas, nuclear power, and renewables, electric vehicles will only continue to get cleaner.

A final note: Of course, no EV is likely to be powered by the ‘average mix.’  Instead, it will be powered by the marginal power plant serving its load.  To the extent that this is a natural gas turbine, nuclear power plant, or renewable source, EVs are already the cleanest available transportation option.  Analyses like this one from Oak Ridge National Labs suggest that gas turbines are likely to play a key role in powering EVs.

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline. This shift has far-reaching implications for the United States, with positive benefits including substantive reduction of the trade deficit, and potential employment gains driven by petroleum industry growth. The role of policymakers is to ensure these benefits are maximized by making promising tracts of federal land available for development in environmentally responsible ways.

However, while encouraging pursuit of these advantages, the report emphasizes the importance of long-term strategies to reduce our petroleum dependence and the heavy costs associated with it. While current projections show that extractable resources could drive net liquid imports down by 21 percent by 2020, this boon to our energy supply must not be conflated with energy independence. Notably, even oil exporting nations which produce more than they consume (such as Canada and Norway) are part of the global oil market, and remain subject to the same high and volatile oil prices. Rising domestic production will not achieve a long-term domestic price advantage in oil, and a nation’s level of oil production does not necessarily improve its energy security—a goal which can be achieved through significant cuts in consumption. Furthermore, even with rising domestic production, U.S. oil dependence constrains foreign policy and military options due to our commitment to stability in oil-producing regions of the world.

Consequently, policy prescriptions must also focus on long-term abatement of our petroleum consumption. Towards this end, SAFE recommends aggressive pursuit of fuel economy standards to reduce the oil intensity of the economy, and transitions towards alternative fuel sources, such as natural gas for heavy-duty trucks, and electrification of light-duty vehicles. Only by diversifying the transportation sector can real energy security be achieved.

Click here to access The New American Oil Boom.

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We should exorcise the politically convenient notion that high oil prices result from the market maneuvers of greedy “speculators.” It’s convenient because it suggests that a solution to high pump prices — or a partial solution — is to banish the offending speculators from the marketplace. That’s fantasy.

Despite periodic debunking, it returns whenever oil prices surge. In mid-2008, with crude prices approaching $150 a barrel, the Commodities Futures Trading Commission (CFTC) created a task force to study whether speculation caused the run-up. The task force included experts from the Agriculture, Energy and Treasury departments, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission.

Samuelson quotes the conclusion from this task force:

“Current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. . . . The Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”

Despite this clarity, politicians hate to admit they are relatively impotent over an issue like high oil (and gasoline) prices.  So, President Obama has resurrected the idea and has once again pointed an accusing finger at “speculators”:

“We still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil. . . . We can’t afford a situation where speculators artificially manipulate markets.”

Well, the good news is we don’t have to worry about speculators artificially manipulating markets, as Samuelson reminds us with a lesson in Economics 101:

It’s true that outside investors (a.k.a. “speculators”) have dramatically shifted money into commodities — raw materials. “Commodity index funds,” which invest in a basket of commodities (oil, wheat, corn), have attracted hundreds of billions of dollars. It’s easy to imagine all this money chasing prices up in futures markets, just as speculative stock market frenzies push share prices to unrealistic levels. It’s also wrong.

The stock and futures markets operate differently. In the stock market, herd psychology can lead to speculative bubbles or panics. In a bubble, almost everyone seems to win (until the bubble bursts); in a panic, everyone seems to lose (until the panic subsides).

By contrast, futures markets are “zero-sum games.” One investor’s gain is matched by another’s equal loss. Here’s why. Under the standard futures contract, one investor agrees to buy the commodity (say, 1,000 barrels of oil) at a future date for a given price, and another investor agrees to sell for the same price. If the actual price on the settlement date has gone up, the buyer reaps the gain; if it’s gone down, the seller wins. The loser pays the winner; actual commodities are rarely transferred.

There are measures that policy-makers can adopt to help lessen the impact of high oil prices — and ultimately lower prices themselves.  Chief among those would be assisting in the deployment of vehicle electrification infrastructure and advanced biofuels.  Bashing the bogeyman of speculation doesn’t help a bit.

On the demand side, little has changed in recent months.  IEA still expects global demand to reach record highs in Q3 and Q4, hitting 91 million barrels per day (mbd) in the final quarter of 2012.  This would represent an increase of 1.2 mbd over the same period last year.  The entire increase comes from emerging market economies.

On the supply side of the market, IEA has upped its estimate of unplanned non-OPEC outages for Q1 2012.  Between Syria, Yemen, Sudan, Columbia, the North Sea, and Canada, total outages were 1.1 mbd for the January-March period.  In Q2, IEA expects these outages to rise further to 1.3 mbd.  The level of unplanned outages has been a major factor behind rising oil prices this year.

The other primary factor driving oil prices has been geopolitical risk associated with the standoff over Iran’s nuclear program.  The EU is moving closer to full implementation of its import ban and continues to crack down on financial dealings with the Iranian oil sector.  At the same time, a number of key developments in Asia suggest that it will be difficult for Iran to find buyers for displaced European barrels.  The result: IEA now suggests that Iranian oil production could fall by as much as 900,000 b/d by mid-summer 2012 compared to end-2011 levels.  Saudi Arabia and other Gulf Arab states are already pumping at levels that could help compensate for lost Iranian barrels, but the consequence has been a steady erosion of spare capacity, which fell to just 2.5 mbd in March 2012. At that low level, any further unexpected supply-side disruption(s) could be a significant problem.

The IEA report also contained a useful graphic that illustrates just how tight oil markets have been for the past several years.  We have recreated the chart using data from the Department of Energy’s custom table builder, which is somewhat different but very close—and also free.  The chart is below.

The two lines are quarterly global supply and demand of liquid fuels.  As you can see, demand has routinely exceeded supply in recent years, which implies a drawdown in commercial inventories.  The tightest periods occurred between late 2007 and mid-2008 and then again from late 2010 through late 2011.  Both periods were characterized by exceptional increases in global oil prices.  However, in the first quarter of 2012—a period during which Saudi Arabia pumped oil at a 30 year high—the global market appears to have experienced a much needed implied build in inventories.  IEA reports that developed-country stocks may have built by 500,000 b/d, while stockpiling in China and Saudi Arabia could equal as much as 700,000 b/d during the first quarter.  Saudi Arabia now reports that stocks within the Kingdom and elsewhere are now full.  Chinese government stocks may have built at a rate of several hundred thousand barrels per day. And U.S. commercial crude stocks were at the very top of the 5-year range as of Wednesday’s weekly DOE report.

What does it all mean?  As the market enters what promises to be an eventful summer, the tightness that drove the most recent wave of oil price volatility could be abating—a hopeful sign.  A less optimistic view would be that we are seeing the equivalent of a gigantic deep breath by the market—preparation for the plunge into a summer and fall of rising emerging market demand and confrontation with Iran.

Anyone who has taken the time to even skim through a single SAFE report such as our National Strategy for Energy Security or last year’s overview of the tremendous potential of U.S. oil and gas production knows that premise of this attack falls completely flat.  Our work is supported by rigorous research and analysis that clearly lays out the economic and national security dangers of oil dependence and we have aggressively supported numerous efforts to unlock federal territories unavailable to the oil and gas industry, including the entire federal Outer Continental Shelf and the Arctic National Wildlife Refuge.

In a follow-up exchange with Mr. O’Keefe, he stated that it was hard for him to understand how SAFE could “push for all out electrification, go to great lengths to address the negative impacts of reliance on a global commodity and then support all out [oil and gas] production.”  Well, it’s very simple.  Commercialization and market penetration of alternative transportation technologies will take decades.  While the United States can and should move as aggressively as possible toward that goal, there is much we can do in the interim to enhance the resilience of the domestic economy to oil price volatility.  Increases in domestic oil production reduce the trade deficit, support employment growth, and keep additional American capital in the domestic economy.  Our country needs a comprehensive approach to dealing with energy security, and that means tacking oil dependence from both the supply and demand side of the equations and deploying policy strategies that address the issue in the short, medium, and long term.

Mr. O’Keefe’s blog contained several other factual errors.  We address them here:

1.  SAFE is not a part of the “Anti-Oil” movement implied in the headline.

We have a long and well-established track record advocating for maximizing domestic oil and gas production, including expanding access to onshore and offshore areas held off-limits by the federal government.  SAFE was a principle driver behind the Senate Energy Committee’s 2009 bipartisan passage of a bill to open the Eastern Gulf of Mexico to oil and gas drilling.

2.  Bob Lutz is not a founder or a member of Securing America’s Future Energy (SAFE) or its Energy Security Leadership Council. It is true that Mr. Lutz joined with three members of SAFE’s Energy Security Leadership Council to author a Forbes column and participate in an event at the Hudson Institute on April 16, and we look forward to working with Bob in the future to deflate the politicization and mischaracterization of advanced technology vehicles and promote American energy security.

3.  It is patently false that SAFE’s “premise is that the only reason that we have military forces in the Middle East and Iraq is because we import oil.”

SAFE has never said in any format or forum that oil is the only reason we have troops in the Middle East. There are a number of other strategic interests in that region—including our relationship with Israel and Iran’s nuclear program—that give it strategic importance.

From a strict energy perspective, the Persian Gulf region is central to the stability of the global oil market and global oil prices.  SAFE’s position is that the U.S. economy is exposed to global oil price volatility due to the overwhelming reliance of our transportation sector on a single fuel, and that it makes sense to reduce this vulnerability where economically justifiable.

From a foreign policy perspective, we argue that oil dependence reduces the strategic flexibility of the United States and other countries in important ways.  In the case of Iran, we would argue that a more robust and biting sanctions regime would have been implemented far earlier were it not for concerns regarding oil price volatility and its impact on the global and domestic economies.

As proof, during an event at the Hudson Institute on April 16, General James Conway, former Commandant of the Marine Corps discussed how our economy’s reliance on oil constrains potential military action. He said, “And I can assure you, because I’ve been there, when the — the Joint Chiefs of Staff sit around the table and talk about various options in any scenario these days that involves the Middle East, high on the considerations, as you look at courses of action, are impact on our national economic picture. That has never been the case before. Previously, that’s always been sort of a side concern that we would have as military men. Someone else will worry about those factors. But today, it is front and center.”

4.  SAFE has never implied that all oil from the Strait of Hormuz comes to America, and we understand the U.S. military’s role in protecting the global oil market.

The U.S. commitment to global oil security is largely a function of the importance of oil in the global and domestic economies, and the United States is expected to remain the world’s largest oil consumer for decades. The United States has clearly placed a special significance on the security of Persian Gulf oil supplies as far back as the Carter Administration, but this has very little to do with the direct importance of those supplies to the United States. In fact, since 1981, Persian Gulf supplies have never accounted for more than 15 percent of U.S. oil supplies. Instead, the American commitment to the Middle East is based on the importance of that region for the stability of the global market, for which Persian Gulf suppliers accounted for 30 percent of total oil supplies in 2011 and as much as 37 percent in 1974.

Nonetheless, our dependence on oil has led America to accept the burden of being the world’s oil policeman, a function that benefits all oil-consuming nations, but which costs America significant blood and treasure.  A 2009 study by the RAND Corporation placed the ongoing cost of this burden at between $67.5 billion and $83 billion annually, plus an additional $8 billion in military operations.

5.  SAFE does not imply “that our oil exports are predominately from OPEC.” More fundamentally, we do not focus on imports as the core energy security issue facing the United States.

The organization is well aware of the breakdown of net U.S. oil imports by country and region.  To the extent that we highlight OPEC as part of the energy security equation, it is a result of that organization’s special role as a producers’ cartel.  Without question, OPEC’s maintenance of spare production capacity has often provided short-term benefits to the global market, particularly when this buffer has served to offset unexpected changes in supply or demand.

However, we would argue that the existence of an oligopoly is a classic market failure, and has resulted in long-term economic inefficiencies that disproportionately affect large oil-consuming countries.  The political nature of quota determination, the sub-optimal investment strategies of the NOCs within OPEC, and a number of other factors result in inefficient pricing for consumers that has ultimately acted as a drag on economic growth over much of the past 10 years.

More fundamentally, oil imports are just one small part of the energy security issue.  True, imports increase the U.S. trade deficit and weaken the dollar.  But America’s true vulnerability comes from our heavy reliance on oil in transportation, the lack of available substitutes for businesses and consumers, and the volatility in price of petroleum fuels.  Without question, it is better to purchase oil from regional trade partners.  But when consumers pay $4.50 per gallon of gasoline at the pump, the origin of the crude feedstock that produced that gasoline matters very little in terms of its impact on short-term household budgets.

Price volatility is highly damaging for U.S. consumers and businesses, and it creates a great deal of uncertainty about the benefits of investments in efficiency.  U.S. households spent a record average $4,000 on gasoline last year—more than 8 percent of the median household income.  This represented an increase of $2,000 from the level in 2010, and we would argue that the associated erosion of consumer spending power was at the heart of the slowdown in growth during H1 2011.

6.  SAFE fully agrees that with more enlightened energy policy we can further reduce our imports by maximizing production of U.S. oil and gas resources.

The organization has frequently highlighted the benefits of increased production for the current account balance, strength of the dollar, employment, and more. SAFE led the effort in 2009 to open more areas in the Gulf of Mexico to more oil production.

7.  The plug-in vehicle battery price quoted in the blog is simply incorrect and intended to mislead readers.

The blog states that the Chevy Volt has a battery price of $18,000.  In fact, as you can read here, here, and here, the first generation Volt battery cost was closer to $8,000.  In follow-up comments from Mr. O’Keefe, he suggested that his figure was defensible based on figures cited by Ford CEO Allan Mulally at a recent forum.  In those comments, Mr. Mulally suggested that the Ford Focus electric battery cost between $12,000 and $15,000.  But the fact is that the Ford Focus battery is a 23 kWh battery, whereas the Chevy Volt battery is a 16 kWh battery.  Simple arithmetic suggests that Ford’s battery costs between $520 and $650 per kWh.  Applying even the high number to the Volt battery would yield a cost of slightly more than $10,000 for the pack—44 percent less than the un-sourced figure Mr. O’Keefe guesses to be true.

8.  It is correct that SAFE supports policies to advance the commercialization of electrification of transportation.  However, a few points warrant mentioning:

In an ideal world, market forces would drive consumers toward more efficient technologies.  However, consumers do not have the benefit of a transparent price mechanism in petroleum fuels.  Unfortunately, there is no free market for oil. As an anecdotal case in point, we direct you to the following quote from Saudi Prince Alwaleed bin Talal in a May 29, 2011, CNN interview.  In the interview, Alwaleed, a nephew of King Abdullah, said that an oil price of $70 to $80 a barrel is in the best interests of Saudi Arabia because it diminishes urgency in the U.S. and Europe to develop alternatives, stating: “We don’t want the West to go and find alternatives. The higher the price of oil goes, the more they have incentives to go and find alternatives.”

The simple fact is that oil prices are not based on true market dynamics.  But more fundamentally, a price of $70 to $80 per barrel might be considered somewhat reasonable and healthy for the global economy if it were achievable over any period of time.  Global oil supply is subject to numerous inefficiencies as IOCs continue to be squeezed out of the lowest-cost regions, and interruptions in supply coupled with rapid demand growth outside the OECD have made the system highly volatile.  The result has been a boom-bust cycle in oil prices that saw record highs in July-2008, a crash in Q4 2008, a period of modest stability in 2009 and 2010, and another spike in 2011-2012.

It is impossible to know where oil prices will be in 6 months, which is at the heart of why we do support temporary tax credits to drive commercialization of advanced vehicle technologies. Short-term volatility dissuades long-term investments in efficiency by consumers as well as institutional capital. The transition will be incredibly long in any case.  Our belief is that it is appropriate for the government to provide credits for technologies that are clearly in the national interest, but for which private capital alone would take an extended period to move past early barriers.  There are certainly examples of failure in government support for energy technologies, but there are also examples of success.  These include public support for advanced turbine systems, horizontal drilling technology, and hydraulic fracturing. Frederick W. Smith, CEO of FedEx and co-chair of the ESLC often points to early government support of jet airplanes to make them viable in the marketplace. Certainly jet airplanes would’ve happened eventually but the early airmail subsidies for jet aviation brought them to market earlier, which helped contribute to our victory in World War II.

SAFE has been adamant that support for plug-in vehicles should be early, aggressive, and temporary.  The industry should demonstrate important progress by mid-decade, without question.  Yet despite some early challenges, there has also been important progress.  Average nameplate battery prices (total energy, cost to vehicle OEM) for plug-in electric vehicles fell from more than $1,000 per kWh prior to 2008 to approximately $600 in 2009/2010.  This decline in prices was well before current overcapacity dynamics began to depress prices farther.

It is true that GM idled its Volt production facility earlier this year, but it is also true that the company restarted the facility a week ahead of schedule, as March was a record month for sales of both traditional hybrids and plug-in vehicles.  More broadly, it is worth noting that in their first full year of sales (2011), sales of the Chevy Volt and Nissan Leaf were well ahead of first year sales of the Honda Insight and Toyota Prius (2000).  This is by no means a sign of success, but we would argue it indicates that the timeline for judging the success of automotive technologies is surely greater than one year.