OCTOBER 5, 1999

Modern transportation vehicles are in most cases powered by fuels refined from crude oil, namely -- gasoline, diesel, and jet fuel. These fuels have generally been readily available at reasonable prices, except for several notable periods in our nation's history. The engines that use them have over time shown significant improvement.

Interest in reducing U.S. dependence on petroleum-based fuels is based on at least three factors -

First, emissions from combustion of fossil fuels have adverse affects on air quality and perhaps on the climate,

Second, the U.S. imports more than half of its oil, and is predicted to increase, and

Third, some observers have asserted the world's supply of oil is becoming more limited.

Many of these problems can be lessened by the application of advanced technologies in exploration and drilling, refining, and engine design. For instance, in Energy Information Administration's current projections, advanced technologies allow oil production to respond to an increase in world demand from 75 million barrels a day currently to 110 million barrels a day in 2020 without a large increase in price. Moreover, engine technologies not widely employed today, such as direct injection and continuously variable transmissions, can allow future vehicles with internal combustion engines to increase performance and reduce emissions at the same time.

Concerns about petroleum dependence and the desire to maintain a variety of options for future fuels continue to drive the development of alternative fuels and advanced technologies. Moreover, even if governments adopt measures to limit the emissions of carbon dioxide, the prospects for technologies to cost-effectively sequester or recycle carbon and allow fossil fuels to be consumed at the present rate appear remote. If current trends continue, motorists will continue to increase miles driven each year and do so in vehicles with increased size and horsepower, greatly increasing the challenge for new technologies.

The available options include --

Compressed Natural Gas. Gas is widely available in North America and is the least polluting of the fossil fuels. EIA forecasts give CNG the largest share of the alternative transportation fuels market in the coming decades. (See Figure 1.) Almost all of this consumption is for fleets. Given the challenge of building an extensive delivery infrastructure, of reducing higher vehicle costs, and the size of fuel tanks, and of increasing vehicle range, it may be difficult for gas to move beyond the fleet market. With most new electric generating plants using gas, its price is expected to rise more quickly than the price of gasoline. Its current price is about the price of gasoline excluding State and Federal taxes.

Gas-to-Liquids. The technology to convert natural gas to liquid fuel is not new, but enhancements of the technology are bringing down costs. Much of the world's natural gas is very distant from potential markets. Conversion to diesel or methanol fuel would make it much easier to transport. Interest in this technology has grown substantially in the past years, but EIA does not project a large market for it through 2020. Because of production and transport costs, these fuels may require higher fuel oil prices or tighter environmental regulations to become economic.

Fuels from Crops. Currently ethanol supplies about 0.4 percent of U.S. transportation fuel. Ethanol is produced from corn and is much more expensive than fuel from petroleum. In the future, new processes for cellulose conversion will allow the use of crops such as switch grass and significantly reduce costs. Substantial acreage is available to grow energy crops. EIA believes that ethanol is one of the most likely beneficiaries if strict limits on carbon emissions are imposed.

Electric and Electric-Hybrid Vehicles. Electric-hybrid cars that obtain power from batteries and small internal combustion engines are beginning to come onto the market. Unlike all-electric cars, currently configured hybrids don't need external recharging and have ranges between fueling that far exceed those of average cars. They can reduce fuel use and provide a high level of performance. Costs will likely be the major obstacle to market penetration as well as consumer acceptance of a new technology with uncertain repair infrastructure.

The success currently projected for advanced technologies and alternative fuels rests primarily on policy initiatives at the state and federal level. Most alternative fuel vehicle sales result from the requirements of the Energy Policy Act of 1992 and state mandates for zero or very low emission vehicles. Ethanol benefits from substantial incentives at the federal and state levels. It is uncertain whether many of the technical advances in engine technology would have penetrated the market without the need to meet Corporate Average Fuel Efficiency standards. As Figure 2 shows, large increases in alternative fuel vehicles occur when new policies go into effect. This suggests it's likely that alternative fuel vehicles will continue to find it difficult to compete on solely economic grounds, and additional policies may be needed to encourage further growth in these technologies.

Neither EIA, nor any other Government agency to my knowledge, produces integrated energy forecasts past the year 2020. What the energy world will look like past that point is highly uncertain. A wide range of options may be necessary to deal with those uncertainties.