Perspectives on Energy Security and TransportationThe Intersection of American Economic and Foreign Policy Challenges

› The U.S. is at a pivotal

moment in energy

policy. Oil prices are

being rapidly driven up

by market dynamics

and geopolitical factors

we do not control.

› Oil price volatility is

having a strong

detrimental impact on

the economy.

Energy Security is Again Front and Center

1

BENCHMARK SPOT CRUDE OIL PRICES (BRENT)

Volatile oil prices and geopolitical instability in oil-producing regions are

moving energy security back to the forefront of the political dialogue.

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1970 1975 1980 1985 1990 1995 2000 2005 2010

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› The oil intensity of the

U.S. economy is about

half of the 1974 level.

› However, while we may

be more resilient to high

oil prices, spikes are

occurring more

frequently at high levels.

The more important data

point is oil spending as a

share of GDP.

› At between 4 and 5

percent of GDP, oil

spending is again

reaching levels typically

associated with recession.

The Economic Recovery is off the Tracks

High oil prices experienced throughout the first half of 2011 have derailed

the recovery. Economic growth is paltry as consumer spending plummets.

2

CRUDE OIL COSTS: SHARE OF U.S. GDP

Source: BP, plc, Statistical Review of World Energy 2010; DOE, EIA; U.S. Bureau of Economic Analysis

2011 DOE Est.

Global Oil Market Dynamics—Demand

The United States is the world’s largest oil consumer, accounting for one-

fifth of global oil demand. The majority—70 percent—is used in transport.

› At 19.1 million barrels

per day, the U.S. was

the world’s largest

consumer of petroleum

in 2010, using about

three times as much as

China. Between 2005

and 2009, U.S. oil

demand averaged 20.1

million barrels per day.

› The U.S. transport

sector alone consumes

more oil than any

national economy in the

world—13.0 mbd.

TOP WORLD OIL CONSUMERS, 2010

3

Iran

Mexico

Canada

South Korea

Germany

Brazil

Saudi Arabia

Russia

India

Japan

China

U.S.

0 5 10 15 20

Million Barrels per DaySource: BP, plc., Statistical Review of World Energy 2011

4

Global Oil Market Dynamics—Demand

WORLD OIL CONSUMPTION (HISTORICAL AND FORECAST)

Oil consumption within the world’s most developed economies has peaked.

Emerging markets account for 100 percent of demand growth going forward.

› World oil demand is

set to grow by about 22

percent over the next

20 years.

› One hundred percent

of that growth is in

China, India, and other

emerging economies.

And 97 percent of it is

in transportation.

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2009 2015 2020 2025 2030 2035

Mil

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pe

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OECD China and india Other Non-OECD Other

Source: International Energy Agency, World Energy Outlook 2010

5

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Mil

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2007 2015 2030

LIGHT-DUTY VEHICLE STOCKVEHICLE PRODUCTION, U.S. AND CHINA (HISTORICAL)

Source: Department of Energy, Office of Energy Efficiency and Renewable Energy Source: International Energy Agency, World Energy Outlook 2009

Emerging markets are expected to account for 100 percent of future oil

demand growth. This is largely driven by the transportation sector .

Global Demand Drivers

› In 2009, China surpassed the United States to become the largest auto market in the world.

› As vehicle sales increase exponentially, the number of cars on the road in China is soaring.

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1980 1984 1988 1992 1996 2000 2004 2008

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U.S. China

Global Oil Market Dynamics—Supply

The United States is the world’s third largest producer of oil. However,

domestic production has fallen sharply since its peak in 1970.

TOP WORLD OIL PRODUCERS, 2010

6

› After decades of decline,

U.S. field production of

crude oil and natural gas

liquids was up from 6.7

mbd in 2008 to 7.2 mbd

in 2009. Production

increased again in 2010

to 7.5 mbd.

› Still, this level marks a

sharp decline from the

1970 level of 11.3 mbd.

Well productivity is also

down from 18.1 barrels

per day per well in 1970

to 10.1 barrels per day in

2009.

Nigeria

Iraq

Venezuela

Kuwait

UAE

Mexico

Canada

China

Iran

U.S.

Saudi Arabia

Russia

- 2 4 6 8 10 12

Million Barrels per DaySource: BP, plc., Statistical Review of World Energy 2011

7

Global Oil Market Dynamics—Supply

CRUDE OIL PRODUCTION (HISTORICAL AND FORECAST)

Conventional oil production outside of OPEC is reaching a plateau.

Increases in regions like North America are being offset elsewhere.

› Going forward, most

mainstream scenarios

rely on increases in

OPEC supplies to meet

rising demand.

› Two key questions

illustrate the downside

risk to growth in future

liquid supplies:

1. Who will have access

to low-cost

conventional reserves?

2. What will reserves

replacement cost for

IOCs?

-10%

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OPEC Non-OPEC OPEC ShareSource: IEA

Global Resource Base

Oil prices are set in an open market, but that does not mean there is a free

market for oil supply.

TOP OIL AND GAS FIRMS BY PROVED RESERVES (2007)

8

Source: International Energy Agency, World Energy Outlook 2008

0 50 100 150 200 250 300

ExxonMobil

Petronas

CNPC

LNOC

Sonatrach

NNPC

KPC

PDVSA

Adnoc

QP

INOC

Gazprom

Saudi Aramco

NIOC

Billion barrels oil equivalent

› More than 90 percent of

global proved oil reserves

are held by national oil

companies (NOCs) that

are either partially or fully

controlled by

governments.

› While a handful of NOCs

operate like private firms,

many function essentially

as a branch of the central

government, depositing

oil revenues in the

treasury from which they

are diverted to social

programs instead of being

reinvested in new projects.

Petroleum fuels account for approximately 40 percent of U.S. primary

energy demand, more than any other fuel.

› Approximately 70 percent of U.S. oil consumption occurs in the transportation sector, with

40 percent in light-duty vehicles.

› Transportation is 94 percent reliant on oil-based fuel for energy, with no scaled substitutes.

9

U.S. PRIMARY ENERGY DEMAND, 2009 PETROLEUM FUEL DEMAND BY SECTOR, 2009

U.S. Oil Dependence

39% Oil

27% Natural Gas

23% Coal

9% Nuclear Energy

3% Hydro electric

Source: BP, plc., Statistical Review of World Energy 2010

20% Autos

24% Light-trucks

28% Other Transport

22% Industrial

2% Commercial

4% Residential

1% Electric Power

10

U.S. Oil Dependence: Economic Costs

U.S. PETROLEUM TRADE DEFICIT (HISTORICAL AND FORECAST)› The portion of the

trade deficit driven by

petroleum imports

generally exceeds the

imbalance we run in

other goods and

services with trade

partners like China,

NAFTA, and the EU.

› A high trade deficit

exerts downward

pressure on the dollar,

which in turn may be

helping to prop up oil

prices, resulting in a

vicious circle.

On a month-to-month basis, petroleum imports have typically accounted for

about half of the total U.S. trade deficit since the end of 2007.

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Deficit in Petroleum Deficit in Goods and Services

Petroleum Share of Total Trade Deficit

Source: U.S. Census Bureau, Office of Foreign Trade Statistics

U.S. Oil Dependence: Economic Costs

The economic costs of U.S. oil dependence reached nearly $500 billion in

2008. Since 1970, total economic damage exceeds $5 trillion (real dollars).

› In addition to staggering wealth transfers, high and volatile oil prices generate significant

uncertainty for households and businesses. The result is lost economic opportunity.

11Source: DOE, EERE; ORNL

ECONOMIC COSTS OF U.S. OIL DEPENDENCE

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Wealth Transfer Transfer Dislocation Losses Losses Loss of Potential GDP

› In 2001, the average

household spent $1,517 on

gasoline. By 2008, rising

oil prices elevated average

gasoline prices to

$3.25/gal, and household

fuel spending averaged

$3,493—an increase of

$1,977 from 2001.

› The cumulative impact of

changes to the tax code

over the same period

increased household

income by $1,900. Thus,

rising fuels prices acted as a

tax increase that fully offset

the benefit of tax cuts.

U.S. Oil Dependence: Household Impact

As gasoline prices soared from 2001 to 2008, the increase in household

fuel spending eclipsed the benefit of tax cuts over the same period.

12

AVG. HOUSEHOLD SPENDING ON GASOLINE (2001-2008)

Source: DOE, EIA, Annual Energy Review 2009; ORNL, Transportation Energy Data Book; SAFE Analysis

$1,977 $1,900

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Avg. Household Spending on Gasoline Avg. Annual Gasoline Price

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Short Term (0–5 Years)Meaningful change infeasible; however, investment and policy choices made today establish a framework for the future

Medium Term (5–20 Years)Meaningful risk mitigation possible if policy choices made in the short-term promote aggressive implementation of proven solutions, including strong fuel-economy standards, increased access to conventional domestic energy resources, and responsible deployment of alternatives; RD&D must be ongoing to establish a technological foundation for the future

Long Term (20+ Years)The tipping point: sustained (short and medium term) investments in infrastructure, technology, and innovation pay off, creating a post-oil transportation sector through widespread electrification

Energy Policy Framework

Energy reform will require long-term investment in alternative technology

and infrastructure. In the meantime, existing systems can be more efficient.

› Electricity is generated from a diverse portfolio of domestic fuels.

› Electricity prices are stable.

› The power sector has substantial spare capacity.

› The network of infrastructure already exists.

Electrification Overview

14

Electrification of transportation is the best solution for sharply reducing

U.S. oil dependence.

49% COAL

22% NUCLEAR

17% NATURAL GAS

11% RENEWABLES

1% PETROLEUM

38% RESIDENTIAL

37% COMMERCIAL/OTHER

24% INDUSTRIAL

1% TRANSPORTATION

Source: EIA, AEO 2010

U.S. ELECTRICITY GENERATION BY FUEL, 2010 U.S. ELECTRICITY DEMAND BY SECTOR, 2010

Electrification Overview: Power Sector

A 2007 DOE study found that existing unused electrical generating capacity

could power 158 million vehicles for up to 33 miles of driving per day.

PJM CAPACITY AND LOAD (7-1, 7-2, 2009) CHANGE IN RETAIL ENERGY PRICES (2000-PRESENT)

› PJM Interconnect: The 61 gWh of excess available capacity in a typical summer week could charge 62 million Nissan Leafs each night.

› Petroleum prices have exhibited significant volatility for the past several years. In contrast, retail electricity prices been generally stable.

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Crude Oil - WTI Gasoline

Diesel Electricity

Index: Jan 2000

Electrification Overview: Challenges

› Batteries and Vehicles

With the advent of lithium-ion battery technology, the largest obstacle to widespread

consumer adoption of these vehicles will be cost, though performance and raw material

supply chains are also important to consider. Need innovative business models,

manufacturing scale in gen-1/2, and R&D for Gen-3.

› Charging Infrastructure

A profitable business model for public charging points has not been reliably demonstrated,

and we do not yet know how much public charging will be needed.

› Electric Power Sector Interface

While “smart” charging will make electric vehicles an asset to the grid, “dumb” charging

will make them a liability.

› Consumer Acceptance

GEVs represent a significant shift in technology. In order to change mainstream consumer

attitudes, GEVs must offer a compelling alternative to conventional IC engines on either

cost or performance grounds.

16

While electrification has promise as an energy strategy, it can only succeed

if GEVs are attractive to the mass market and can integrate into the grid.

› Focusing on targeted regional deployment accomplishes at least three objectives:

1. Demonstrate Proof of Concept for Consumers

2. Facilitate Learning by Doing

3. Maximize Investment Payoff

› Grid-enabled vehicles require a network built on public-private coordination in order to

thrive. Technology promotion has to be about more than throwing money at a problem.

› The deployment community approach recognizes that a widespread national rollout without careful

planning will reduce the likelihood that GEVs can penetrate the mass market, instead being relegated to

niche market status (as has happened with hybrid vehicles, 1.6 million of which have been sold over the

past 11 years out of a light-duty fleet of 250 million vehicles).

Key Policy: Deployment Communities

To overcome these challenges, lawmakers should initiate an ambitious

program to support mass deployment in a limited number of communities.

17

FEATURES AND ADVANTAGES OF DEPLOYMENT COMMUNITY APPROACH

1111 19TH STREET NW

SUITE 406

WASHINGTON, DC 20036

TEL: 202-461-2360

FAX: 202-318-8934

SECUREENERGY.ORG

Securing America’s Future Energy (SAFE) is an action-oriented, nonpartisan

organization founded to deliver an urgent call to action: our nation’s dependence

on oil puts our economy and national security at risk. Since its founding in 2004,

SAFE has enlisted the support of prominent business and retired senior military

leaders and employed innovative strategies addressing business and technology,

politics and advocacy, and public education and media to help reshape the

debate on energy policy.