Winning the Oil Endgame …

                             Winning the Oil Endgame
                            Frequently Asked Questions
                                   www.oilendgame.com


OVERVIEW

Q.       What's the central thesis of your new report, Winning the Oil Endgame?
A.       Over the next few decades, the U.S. can get completely off oil and revitalize the
economy. Since this transition can be profitable, it will be led by business. Our business
strategy for adopting innovative technologies and new business models will increase
national competitiveness and improve national security. Our study does five things for
the first time (to our knowledge): it adds up the modern potential to save and substitute
for oil; shows how to eliminate not just imported but also domestic oil; shows how to do
so at a profit (making sense even for oil companies); shows how to do it through free
enterprise; and shows how to integrate civilian with military needs and opportunities to
eliminate oil dependence.


Q.       How can this be accomplished?
A.       Our strategy for the American transition beyond oil has four interdependent
pillars:
     1. Get off oil. Efficient use can save half the forecast 2025 oil use at an average cost
     below $12 per barrel (in 2000 dollars)--less than half the government's $26/bbl
     forecast price in 2025, and a fourth of the recent price. Domestic biofuels can
     substitute for another fifth of the oil (~3.7 million bbl/d) for under $26/bbl. The rest
     can be provided by domestic oil from currently available areas, or displaced by
     saved natural gas--preferably via hydrogen for the highest efficiency and profit.
     This strategy would save a net $70 billion per year by 2025, compared with simply
     buying oil at $26/bbl, and would also avoid the oil's insecurity, price volatility,
     depletion, and pollution.

    2. Revitalize the economy. This oil-displacing strategy will also renew America's
    car, truck, and airplane industries, all of which are under competitive threat, by
    speeding their adoption of oil-saving technological innovations. Forging these new
    tools for eliminating oil will also make those industries more profitable and globally
    competitive. The same is true for rural economies, where farming fuel is more
    profitable than farming grains. This economic revitalization will not only save one in
    ten U.S. jobs from being wiped out by foreign competition; it will add another
    million new jobs, one-fourth in manufacturing and three-fourths in rural and small-
    town America.

    3. Adopt policies that support, not distort, business logic. Automotive and energy
    industries are global enterprises driven by competitive forces, so market
    transformation can and ultimately will occur even without new policies. However,


                                                                                           1
    we want to accelerate the transition, not only to strengthen national security and the
    economy sooner, but also to ensure that U.S. companies are in leadership positions
    for the 21st century. This can happen more surely with the policy innovations we
    propose--market-oriented without taxes, innovation-driven without quotas, self-
    financing, and not dependent on much if any new federal legislation. Under these
    new policies, not only will automakers make more money, but customers will have
    more and better choices. Your SUV will be peppier and safer, yet use nearly three-
    fourths less fuel. Your plane ticket will cost less, but you'll get there just as fast and
    even more comfortably. The goods you ship by heavy truck will arrive as quickly, at
    lower cost, using less than half the fuel. And all forms of mobility will be freed from
    dependence on insecure oil supplies at volatile prices.

    4. Build real security. The Pentagon can lay the foundation for a secure, post-
    petroleum America by focusing more of its R&D on ultralight structural materials--
    vital to its own as well as to civilian needs--and by requiring, designing, and buying
    superefficient military platforms. A more efficient and effective military can then
    focus on protecting American citizens, not foreign oil supplies, while supporting and
    deploying the innovations that eliminate oil as a source of conflict.


Q.      Doesn't this take major technological breakthroughs that haven't happened?
A.      No. Though this may surprise some who haven't been paying attention to the
latest developments, our analysis relies only on technologies that are already commercial
or being routinely commercialized, not on any inventions yet to be made. Whatever exists
today is possible, and we systematically apply the best 2004 technologies within
profitable business models.
        The most important technological shift is to apply aerospace technology to road
vehicles, and do so at reasonable cost. Because only 12% of fuel used in a typical light
vehicle actually gets to the wheels, if you save 1 unit of energy at the wheels, you save 7­
8 units of fuel in the tank. Three-fourths of the fuel use by cars and light trucks is caused
by their weight. New materials, such as carbon-fiber composites, can cut that weight in
half, yet can also increase safety by absorbing up to twelve times as much crash energy
per pound as steel can do. Making cars and trucks both lighter and safer, regardless of
their size, is the place to start--we need not rely on the fuel cell to achieve oil
independence. (However, an eventual shift to a hydrogen economy would also become
much cheaper, easier, and faster with superefficient vehicles. They'd solve the supposed
hydrogen storage problem not by any new storage technology, but simply by making the
vehicle so efficient that it can travel as far using severalfold less hydrogen.)
        In biofuels, the shift from fermenting starchy plants like corn to producing ethanol
from woody plants like switchgrass and poplar is just now at the commercialization stage,
with the first pilot facilities being developed in Louisiana, Colorado, and Hawai`i. By
using more of the plant material, these new "cellulosic ethanol" processes double the
yield, yet have lower capital cost and far lower energy use per gallon of fuel produced, so
they can displace a fifth of projected 2025 oil use without subsidy. This wouldn't raise
land or water problems, nor interfere with producing food crops.




                                                                                            2
Q.      Who is going to take the lead on this?
A.      All sectors of society--business, government, the military, and consumers--have
important roles to play. Oil has been the source of our society's strength, but oil
dependence is now becoming our greatest weakness. It's everyone's problem, and
everyone can contribute a piece of the solution. Business needs to change its business
models and investment patterns. The military needs to lead the R&D that supports force
transformation and that helps create a new cluster of advanced-materials industry, much
as military R&D gave birth to the modern semiconductor industry. Consumers should be
offered new choices and given the information and responsibility to choose wisely. The
federal government should lead, follow, or get out of the way: state governments have at
least as important a role as Washington, and could even do the whole job if necessary.


Q.      Why should U.S. business do this?
A.      America's core transportation-equipment industries--automaking, truckmaking,
and aircraft--are all struggling against foreign competition. It's clear that their
customers want equipment that's more fuel-efficient but without compromise and at
similar cost. The advanced-technology Class 8 (18-wheeler) trucks described in our
report could double commercial fleets' trucking margins from 3% to 6­7%, with an
Internal Rate of Return around 60%. The advanced cars and light trucks we analyze,
saving on average 69% of the fuel at a cost equivalent to buying gasoline for 57¢ a
gallon, could save each owner $1,000­1,800 per year in fuel bills and repay their extra
cost in three years (or immediately with the "feebates" we suggest). The more efficient
planes that Boeing is now selling could save U.S. airlines billions of dollars per year and
help forestall bankruptcy. So if customers want it, business should provide it. We show
how this can make sense and money for everyone, and how to make it happen faster.
        The new technologies also enable new, more flexible, and cheaper production
methods that can underpin new business models for the automotive sector. This will
have quick paybacks for customers, so will be profitable to implement and can earn better
margins than Detroit earns now. We need to do this right away: other countries are not
going to wait for us. Japan and Europe are eager to eat Detroit's lunch today, and China
intends to follow quickly, becoming a major car exporter by 2010 and probably exporting
breakthrough technologies, not your uncle's Buick.


Q.      How long will it take?
A.      It will take several decades for the U.S. to get completely off oil, but we can be
more than halfway there by 2025, using only 13 million barrels per day, vs. the 28
Mbbl/d forecast by the government. Getting into this oil trap took us several decades, and
the stocks of vehicles turn over slowly. Nonetheless, the end of U.S. oil dependence could
be only about as far in the future as the Arab oil embargo was in the past. And while
buying more oil has already cost the economy more than $2 trillion in imports--currently
running $120 billion a year--buying less oil, ultimately no oil, will save $70 billion a
year more than it costs to achieve.




                                                                                         3
        As a reality check, if every car (not light truck) on the road today were as efficient
as the new hybrids like the Toyota Prius, they'd displace the amount of oil we currently
import from the Gulf (2.5 million bbl/d). If every car and light truck on the road in 2025
were as efficient as the best 2004­05 hybrid cars and SUVs, they'd save two Gulfs'
worth, or one-sixth of the total oil forecast to be used by the United States.
        We know that saving a lot of oil quickly is possible, because we've done it before.
The last time the United States paid attention to oil efficiency, after the 1970s oil shocks,
the equivalent of Gulf oil production was save4d every two and half years (at a given
level of GDP). Specifically, during the eight years 1977­85, GDP grew 27%, but oil use
shrank 17%. Oil imports fell 50%; oil imports from the Persian Gulf fell 87%. The rate of
improvement assumed in our study is about two-fifths slower than that, and our rate of
improving light-vehicle efficiency is also slower than Detroit achieved back then.


Q.       If these technologies are available, why isn't more happening right now?
A.       The efficiency revolution in transportation has already started. Hybrids, like
Toyota's 55-mpg Prius midsize sedan, already account for 1% of the vehicles sold in the
U.S., and this share is expected to double next year--though few of those vehicles will be
U.S.-made. Three percent of Toyota's entire worldwide production next year will be
hybrids, and Toyota plans to open addition hybrid factories in Japan and China. What we
found is that if you use advanced materials to make these hybrids ultralight and even
safer, then you get nearly redoubled efficiency at approximately zero extra cost.
         The industry is already starting to adopt advanced materials. BMW is
manufacturing carbon composite materials for the roofs of its top-of-the-line vehicles to
make them light, stronger, safer, better-handling, and more fuel-efficient. Nor need we
rely on composites: steel companies have shown how new lightweight steels could
double fuel economy and improve safety at no extra cost.
         The same thing is happening in fuels. Biofuels are 2% of U.S. fuels today, but
have already displaced one-fifth of gasoline in Brazil (where they compete well without
subsidy), and are rapidly rising in Europe, which last year made 17 times as much
biodiesel as the U.S. did. The more savvy oil companies like BP and Shell are already
starting to invest in and distribute biofuels as a new product line.
         The real shift is just over the horizon. As industry adopts these innovative
technologies for mainstream products, adoption will adopt the mass-market scale that is
needed to win the oil endgame. We're already seeing Honda and Toyota selling and
announcing hybrids for their most popular sedans--the Civic, Accord, and Camry. Ford
is introducing its Escape hybrid SUV; GM and DaimlerChrysler are introducing "mild
hybrids" in some light trucks. The same thing will soon happen with lightweight
materials and aerodynamic design, for two simple reasons: the public wants it, and it's
profitable.


Q.     Aren't you relying on policies to make this happen, which conflicts with your
market-led approach?
A.     The market is already adopting technologies to provide greater fuel efficiency in
cars and planes--just look at the hybrids offered by the Japanese, and the new 7E7



                                                                                            4
Dreamliner offered by Boeing (one-fifth less fuel, same or lower price). We can just let
the market operate, or we can institute policies to help the transition happen faster and
more surely, for two reasons: to accelerate key security and other national benefits, and to
enable U.S. industries to take a leadership position before their competitors overtake
them irreversibly.
        Our policies rely on neither gasoline taxes nor automotive fuel-efficiency
standards. This is not the usual federal program telling you what to do and then
subsidizing the things you wouldn't want to do otherwise. The policies we propose will
make the transition beyond oil cheaper and faster, and will end up saving the federal
government money, thus reducing the budget deficit.
        The most important policies to accelerate the $150 billion in annual fuel savings
are feebates, and R&D support for advanced materials and biofuels. The most important
policies to enable the industries at the core of our economy to participate fully are loan
guarantees to help convert existing factories, retrain workers, and build new factories,
and smart government procurement of efficient vehicles to cut about three years off the
technological transition time. The most important policy for social equity, especially for
equal employment opportunity, is our scrap-and-replace proposal for giving low-income
families access to affordable personal mobility.


Q.      $180 billion seems incredibly expensive. How practical is this?
A.      Well, $18 billion a year to propel the U.S. into a 21st century leadership position
by retooling America's factories to build more efficient vehicles and developing our
domestic fuels infrastructure is modest by comparison to other national priorities. It's
what we're spending right now on oil imports every eight weeks. If we spent the money it
takes to occupy and rebuild Iraq for one year on rebuilding our auto industry instead,
we'd eliminate forever the need to import oil from the entire Persian Gulf. We spend
$120 billion a year on Gulf imports, $40 billion on homeland security (partly oil-related).
So it's really a matter of national priorities and corporate strategy. We prefer priorities
that put American security and prosperity first, deliver more jobs and superior services to
our fellow-citizens, and are driven by the logic of the marketplace--best buys first.
        Our analysis didn't rely on all the hidden costs of oil--military, economic,
environmental, geopolitical--but valued these all at zero. We found that saving or
substituting for all the oil America uses is cheaper than just buying that oil at the current
or future market price. So what are we waiting for? Let's capture those profits as soon as
possible!


Q.     Is this really feasible?
A.     Yes. The five co-authors have 70 years' combined experience in the energy-
supplying and ­using industries, with which we conferred extensively throughout our
research. The technologies are already on or entering the market. And our proposals can
be accomplished with little or no new federal legislation, thereby avoiding gridlock.




                                                                                           5
STUDY FUNDING

Q.      How did the Pentagon come to fund this study?
A.      The Office of the Secretary of Defense and the Office of Naval Research. along
with the Hewlett Foundation, are the primary funders of this research. (A conservative
private foundation and individual donors also contributed significantly.) All of the
funders are listed in the report. Only the authors, not the funders, are responsible for the
views expressed in our report.
        The Pentagon is interested in two main issues: are there coherent and attractive
strategies for reducing U.S. vulnerability from dependence on foreign oil? Are there
economically viable opportunities for our armed forces to reduce their logistical fuel
burden, thereby increasing force effectiveness? The answer we found to both questions is
yes.


Q.      Who has been briefed on this?
A.      In OSD, Assistant Secretary of Defense Dr. Linton Wells II, and the Director of
Naval Research, Rear Admiral Jay Cohen, have been kept informed during the research
process. Vice Admiral (USN, Ret.) Arthur K. Cebrowski, who leads Military
Transformation for the Secretary of Defense, was briefed in July, along with other federal
agencies. Dr. Wells and other senior civilian military leaders were privately briefed last
week on the final results. At the advent of this launch, we will be holding briefings at the
National Defense University later this week, as well as at the Center for Strategic and
International Studies, a private group of national-security experts.



BUSINESS ADOPTION

Q.      Great ideas, how are they going to be implemented?
A.      Adoption of disruptive new technology typically occurs in three phases. The first
phase involves research and development--in this case, mainly on advanced techniques
for manufacturing ultralight structures, such as carbon-fiber autobodies, and for
producing biofuels from woody plants. We suggest that this R&D be a partnership
between industry and government, including DoD.
        The second phase involves new product introduction and adoption, both to
educate customers and to build experience and scale. Business will lead this phase based
on its own competitive imperatives and profit motives.
        The third phase is mass adoption across society, as in Geoffrey Moore's Crossing
the Chasm. This phase is led by customers and the businesses that serve them. A few
well-chosen policies, such as feebates to speed adoption of advanced-technology
vehicles, loan guarantees for converting Detroit's auto plants to make them, and
technology procurement with special rewards for early market entrants, will help
accelerate implementation, but implementation would eventually occur even without
these policies. The main goals of speeding implementation are to save more oil sooner,
improving national security and the economy, and to ensure that the car, truck, and



                                                                                          6
airplane industries retool before they get outcompeted. The U.S. could import efficient
cars to save imported oil, or could make the efficient cars itself and end up importing
neither cars nor oil. We prefer that outcome.


Q.       This plan sounds so very complex--what needs to happen first, second, third,
to move it towards implementation, and what is RMI doing to ensure that others pick
up your plan and run with it?
A.       Actually, getting started is arrestingly simple. The first step is to redirect our
research and development efforts to the most critical technologies that will go the furthest
to reduce our reducing our nation's dependence on oil. Military leaders will speed their
own forces' transformation by promptly laying its foundation in superefficient platforms
and lean logistics. We recommend the U.S. military fund the R&D needed to create a
new cluster of advanced materials industries, and that these technologies be shared with
the civilian sector, in much the same way that DoD earlier created the modern
semiconductor industry. RMI is briefing the Services regarding the opportunities to
improve fuel efficiency and force effectiveness, and there is gratifying interest.
         At the same time, modest additional funding is needed to consolidate and refine
recent advances in biofuel technologies so they can attain full production without
subsidies. (Recent pilot plants show encouraging results and now need the next stage of
scale-up and maturation.) Both oil and agricultural companies have a business interest in
seeing competitive biofuel prices. RMI is advising the oil industry, where its principals
have long served as consultants, on these and other promising technologies and on how
they can address the industry's strategic concerns.
         The second step is business adoption, particularly by the transportation equipment
sector. Making superefficient cars, trucks, and airplanes--the tools for getting the country
off oil--is also the key to these industries to survive and prosper. (In aerospace, Boeing
has already bet its future on the fuel-efficient new 7E7 Dreamliner.) RMI has been
engaged in technical and strategic conversations in all three of these sectors, most of all
in the auto industry, and is encouraged by the initial response to our proposals in Winning
the Oil Endgame for securing U.S. automakers' competitive advantage, increasing their
profits, and expanding their customers' choices.


Q.       What's the biggest hurdle to realistically setting this plan in motion?
A.      The biggest hurdle is not technological, it's the management challenge. It's our
beliefs that hold us back. Harvard's Clayton Christensen said it best in The Innovator's
Dilemma: "Large corporations focus on incremental sustaining innovations that support
their best existing customers, not the disruptive innovations that create new customers or
entirely new services." SUVs are sustaining innovations; uncompromised, ultralight,
ultrasafe, and ultraefficient vehicles (like the 66-mpg midsize SUV design we analyzed,
saving fuel at a cost equivalent to buying gasoline for 57 cents a gallon) are disruptive.
The choice is simple and stark: either adopt the innovative technologies and business
models to become the leaders in the 21st century, or join the scrap-heap of the 20th
century by importing both foreign oil and efficient foreign cars. Of the 12 original Dow
Jones companies at the beginning of the 20th Century, only General Electric has survived;



                                                                                          7
the rest went to compost. We wouldn't want American automakers, and the million-plus
high-wage jobs they support, to suffer the same fate.


Q. If some of your recommendations are adopted, but not others, is that a true net
gain, or is its strength based on the whole in its entirety?
A.      If any of the elements of the plan are adopted, then we will have taken a step
forward to ending oil dependency. As former Secretary of State George P. Shultz says in
his Foreword to Winning the Oil Endgame, it's a bit like baseball: home runs are
wonderful, but the games are usually won by single and doubles, good pitching, and good
fielding. But our strategy works better as a whole than piecemeal. There are synergies
between technology, business strategy, and government policies that accelerate what the
market will ultimately bring to us, and this acceleration benefits the whole country. Each
time oil prices rise $1, the U.S. sends abroad another $7 billion, most of which never
returns. The sooner we bring those dollars home and invest them in ourselves, the better.
Even at the low oil price that the government forecasts for 2025 ($26 a barrel in 2000
dollars), the prize at stake is our national security, the competitiveness of our core
industries and of our farming and ranching economies, and a $70-billion annual net
saving by 2025. That's a prize well worth striving mightily to win.



INDUSTRY REACTION

Q.      What does the auto industry say?
A.      Advance copies of this report have been sent to the senior management of each of
the Big Three and are currently being reviewed. During the course of this report, we had
extensive technical discussions with these and other firms that make cars and trucks.
Many of the experts we consulted are gratefully acknowledged in our report. Our report
underwent extensive peer review, and was sent in draft, in whole or in part, to 139 peer-
reviewers in industry, government, and the military.
        The initial response has been encouraging. Our report addresses automakers'
strategic concerns and highlights technological approaches they may not have considered
as fully or in the same light. At the time of release, none of the automakers had made
official comments either favoring or disputing the contents of our report. We anticipate
further constructive dialogue with them, as we are already conducting with major oil
companies. Our research is sufficiently extensive and original that it may reasonably take
some time for these firms and industries to form a considered opinion. We will be glad to
work with them to make sure they understand what we've done, to respond to any queries
they might have, and to receive gratefully, as we did during the peer-review phase, any
clarifications or corrections they may offer. From this dialogue will emerge a better
mutual understanding of how best to proceed.


Q.     So much hinges on redesigning the automotive, trucking, shipping
industries..though we know this is already happening (See, for example, The



                                                                                        8
Economist's cover story this week). Have they embraced your plan? Can you provide
names in these sectors who support your findings? Were they consulted during the
writing?
A.      Manufacturing flexibility is a strategic imperative for the automotive sector due to
the fragmentation of consumer demand, and the diseconomies of scale in large, inflexible
factories with high fixed costs. Carbon composites offer more than just halved weight
and superior crash performance; they also offer a breakthrough in the manufacturing
process that dramatically reduces parts count and assembly complexity. The body shop
can virtually disappear; the paint shop can become optional. This materials shift can
reduce the capital needed for an auto plant by at least two-fifths from today's best
practice (from ~$6,100 to ~$3,700 per vehicle/year), and decrease the minimum efficient
size of a plant by at least threefold (from 150,000 to 50,000 vehicles/year). All these
elements make these factories more flexible. Remember, disruptive technologies enable
new business models, which are vital at this critical stage in the transportation equipment
industries' competitive evolution.
        Our communications staff can put you in touch with sectoral experts in the
transportation-equipment and oil industries on request, depending on your needs.


Q.      What about the non-automotive industries? How does this affect general
business?
A.      All businesses directly or indirectly use energy, and all of them have opportunities
to reduce their energy use through cost-effective efficiency, and thereby increase profits
at low risk. For example, in the trucking industry, fuel accounts for 45% of the variable
costs. Replacing the fleet with modern trucks would cut the fuel bill in half, double
trucking companies' profits, and lower costs to all sectors of society. At a national level,
fuel savings are just like a massive $130-billion-a-year tax cut, providing each person, on
average, with at least $1,000 more in annual disposable income.


Q.      Biofuels require extensive subsidies, how can this be good for both farmers and
for energy consumers?
A.      Biofuels made with today's technologies require extensive subsidies, but biofuels
made with tomorrow's technologies will not. When we switch from starch-based
fermenation to cellulose-based enzymatic reduction or gasification, we double the yield
of ethanol for each ton of feedstock. That means that cellulose-based biofuels will be
cheaper than gasoline, producing ethanol at the equivalent of 55¢/gallon of gasoline and
thus benefiting consumers.
        Farming biofuels can earn more money than farming food. Today, farmers earn
around $300 an acre farming corn or soybeans. They could earn $400­600 per acre
farming fuel crops like switchgrass, and that doesn't include the $50­100 per acre from
the associated carbon credits and windfarm royalties. At a national scale, we are routing
$40 billion per year from OPEC, particularly the Mideast, to the Midwest to rebuild our
nation's farming communities.




                                                                                          9
Q.      Who will be your biggest critic?
A.      We expect to get criticism from both those who are entrenched in their own
positions that have led to the policy gridlock we have today. When we do, we'll know
that we have the right approach. We may also be criticized by those who haven't yet had
the opportunity to read our report (it is, after all, 329 pages of detailed and original
research that will naturally take time to digest) and who may make incorrect assumptions
about what it says. We hope in time they will respond less reflexively and more
reflectively. Our report is meant to advance the strategic interests of all the industries
whose business cases it examines--specifically, cars, trucks, trucking, airplanes, airlines,
and oil--as well as the national interest, and we think it does so. We are pleased that
early reactions from industry, government, and military leaders, and from the book's
Foreword authors, Secretary George P. Shultz and Sir Mark Moody-Stuart, confirm this.



POLICIES

Q.     What does Congress say?
A.     We look forward to briefing relevant Hill staffers later this week and beyond.
However, these briefs will be more as a courtesy than to ask for anything, because our
policy suggestions don't actually require major if any federal legislation--they could be
implemented administratively or even at a state level--and our primary audience is
business and military leaders, not legislators or other political leaders.


Q.      Who on the Hill is going to carry the water for you?
A.      Rocky Mountain Institute is nonpartisan, apolitical, nonprofit, and does no
lobbying, so that wouldn't be an appropriate question for an organization like ours even if
we were proposing major federal legislation. We would hope, however, that our effort to
launch a new national conversation about oil, security, and the economy would enjoy
broad bipartisan support. Our approach should appeal to business, since our policies
support not distort business logic; to labor, since our recommendations would create a
million net jobs and 21st-century high-wage manufacturing; to farmers, since our
recommendations could at least triple net farm income; to environmentalists, since we are
reducing greenhouse-gas emissions by 26% at no extra cost; to welfare reform advocates,
because we are addressing low-income transportation; to fiscal conservatives, because
our policies would reduce the federal budget deficit and dramatically cut the trade deficit;
and to everyone who cares about reducing oil dependence and strengthening national
security. So there should be many motivations to grab a bucket.


Q.       You say that this plan requires no government mandates for success, but relies
solely on businesses to lead...but isn't the military part of government, and wouldn't
this in turn subject it to congressional scrutiny and approval, say in the funding of a
military overhaul, for example?




                                                                                         10
A.      Military budgets are indeed subject to Congressional approval and oversight.
What we said was not that no federal action is required, but that our approach doesn't
depend on much if any new federal legislation. We expect that the redirections of
military science and technology investments we propose, which are very modest within
the DoD budget, would be welcomed and routinely approved by Congress as a smart way
to meet military objectives while strengthening the civilian economy. Indeed, laying
some of the technological foundations for getting the country off oil forever seems to us
one of the most fundamental contributions DoD could ever make to its national-security
mission.


Q.      What about feebates? Don't they hinge on government intervention? Are they
essential to the success of the profit claims you make?
A.      Let me respond to your last question first. This strategy can be profitable for
business without changing public policy. All the capital investments earn more--often
much more--than the companies' cost of capital, all strengthen competitiveness, and all
are profitable because they provide real value to customers by replacing fuel cheaper than
buying it at the pump. We found that saving half the oil the country uses would cost an
average of only $12 per barrel. Oil prices are now over $40. It's not a difficult
calculation.
        Second, feebates are a mechanism to accelerate consumer adoption, and increase
the certainty that the mass market will adopt new, more efficient cars without infringing
on customers' freedom of choice. Remember, the feebates we propose are revenue-
neutral and size-neutral. You're welcome to buy and drive an SUV or whatever other sort
and size of vehicle you like. But we want to help the market deliver uncompromised
SUVs that get over 60 mpg, and offer you that choice too. We propose to influence your
choice by giving you a rebate for choosing an efficient vehicle, or charging you a fee on
an inefficient vehicle, compared with other vehicles in that size range, so the least
efficient large vehicles will pay fees while the most efficient vehicles will get rebates.
The resulting shift in how you exercise choice will greatly expand your range of choices
in the showroom while preserving and indeed enhancing the other attributes you also
want, such as comfort, roominess, sportiness, reliability, and above all safety.


Q.      Don't the consumers pay for the extra cost of the technologies?
A.      A typical consumer spends $1,500­2,000 per year on gasoline. The recent run-up
in oil prices has cost every one of us about $500­700 a year. That adds up fast: every
time the oil price goes up $1 a barrel, the nation spends $7 billion a year more on fuel.
The sort of advanced-technology car we propose would save about 73% of the annual
gasoline, or about $1,000­1,800 a year at the pump. We estimate that these cars would
cost about 7% more, or about $2,500 for a midsize luxury SUV. That's a 2­3-year
payback, and well within what nearly every credible study has shown to be the range of
required payback for consumers.
        So, yes, consumers as a group would be paying for the technologies, but as a
group they would save far more from lowered gasoline bills than these technologies cost.
If feebates were introduced to speed up the sales of efficient cars, the buyers of the 15-



                                                                                       11
mpg SUV indeed would pay for the technologies in the 66-mpg SUV--which is why
feebates would work so well, by influencing customer choice at both ends. But the extra
cost of that quadrupled-efficient SUV will pay for itself in three years at gasoline prices
well below today's. The feebate will simply help you choose your next car as if you were
looking at the fuel savings throughout its 14-year life, not just in the first few years.
Moreover, automakers will make more profit under feebates than they do now. And
they'll make more of the very efficient and otherwise superior vehicles that the global
market is increasingly demanding.



POLITICS

Q.      If the conservative establishment has proven itself as an obstacle to efficiency
(I'm thinking of CAFE standards as an example, or drilling in ANWR), why do you
think they will embrace your plan? And, put another way, if this plan puts its faith in
the free market, why then haven't these ideas already taken hold with conservative
businessmen and -women, and why put your faith in people who have historically held
back environmental and even economic progress?
A.      We don't accept that characterization, and are gratified by early private responses
from conservative commentators who find our reasoning attractive. (The Foreword by
George W. Shultz, a staunch Republication who is widely admired across the political
spectrum, merits your attention in this regard.)
        Spending most of our time working with industry, and being well acquainted with
what it can do and how it works, we put our faith in business because we believe that
business can be very efficient and effective in providing products and services to
consumers and adopting new technologies to do so. According the JD Powers and
Associates' 2004 Survey, 80% of U.S. consumers want a large vehicle that is fuel-
efficient and has less impact on the environment. It is business's job to give consumers
what they want. Customers ultimately rule. This explains why Toyota has taken the lead
in incorporating hybrid technology--which will be in 3% of all the vehicles Toyota
makes next year--and why other automakers are following by placing the technology
into their already popular models, such as Honda's Civic and Accord, Ford's Escape
SUV, and several of GM's and DaimlerChrysler's light trucks. Today's best hybrids can
double fuel efficiency at reasonable cost without your giving up any other driver
attribute. Advanced materials are the logical next step that will redouble the fuel
efficiency once again, yet make hybrids even more cost-effective, because the savings go
up but the cost doesn't.
        Our view is that U.S. businesses will embrace our plan because it will be
profitable to do so, because their competitive posture will strengthen, and because they'll
have more and happier customers. That's what business does extremely well, and why we
believe the transition beyond oil, rather than being forced by government, will be led by
business for profit.




                                                                                        12