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MALE SPEAKER: But I do want to say, I was a tremendous
skeptic of this whole concept, as I notice many of you were
on [? MISC, ?]
until maybe about eight months ago or so, when I talked to
Vinod and actually also to Richard
Branson and other folks.
Richard has the unfortunate issue of buying about $1
billion worth of jet fuel every year.
And he feels bad about it, burning it all, of course.
And as far as he can tell, the best way for them to actually
make up for that fuel usage is to really aggressively go
after production of ethanol.
And I'm sure Vinod will tell you much more than I can on
this subject.
But I'm now much more of a believer in this.
I think it's a very important thing to really deeply
understand.
And we have the world expert on it here today.
[APPLAUSE]
VINOD KHOSLA: Thanks, [? Larry. ?]
Boy, we have a full house here.
I'm going to assume, and those of you who know something
about ethanol will bear with me as I talk through some of
the basics.
But I'll try not to do too much time on basics.
I will tell you upfront, not everything's
ripe for that now.
But on the whole, the trade-offs are overwhelmingly
in favor of that now.
And I hope we can get into it when we do Q and A.
And we'll try and leave enough time for Q and A. I will move
through this very, very quickly.
A larger version of this, this is about 130 slide
presentation, I'm not going to go through all those slides.
But there's enough detail on my website that anybody who's
interested can go through it.
So let me start with some basic assertions.
I don't think of ethanol as an alternative fuel.
I think gasoline should be the alternative fuel that meets
10%, 20% of our needs.
We definitely don't need hydrogen.
We can come back and talk about it in my view.
We don't need new car engines, designs, distribution systems.
And this is the surprising part, hopefully
I'll convince you.
In less than five years, we can, at very little cost, make
an irreversible change in our trajectory.
That's my goal today, with little cost to consumers,
little cost to automakers, and no money from the government.
That sounds fairly implausible.
But hopefully, you'll be convinced soon.
So obviously you know, this is a typical gas pump in Brazil.
So why do I think this implausible thing is actually
at least plausible?
Brazil, in three years, without subsidies, driven
strictly by consumer demand, has gone from 4% percent of
all new cars being flex-fuel cars to 80% last month.
That's in three years.
Detroit here talks about nothing can be done
in less than 15.
It's the same companies.
GM and VW are the big suppliers.
Ford has a big presence there.
They've replaced 40% of their petroleum use already.
We talk about doing something by 2040 or 2050.
All of us in the technology business know how ridiculous
it is to forecast past about three to five years.
But here's the fundamental reason.
Forget taxes.
Forget subsidies.
Just say, what is the cost of production?
The production cost of a gallon of gasoline is about
$1.60 a gallon.
The production cost of a gallon of ethanol is about
$0.7 a gallon.
It's actually probably under $0.70 for the more efficient
producers in Brazil.
There are a lot of older plants.
You add about a 25% adder to that because
you get lower mileage.
On a per-mile-driven basis, ethanol maybe costs $0.90 per
gallon equivalent of gasoline.
It's cheaper.
That's why consumers are demanding it.
They won't buy cars that provide [? both. ?]
In fact, it's gotten to the point where in the 10th
largest car market in the world, VW, one of the largest
makers, is thinking of not making any more
gasoline-only cars.
If that's happening, I think we should be paying attention.
That's caught my attention.
And unlike here, Brazilian ethanol has a dramatic
reduction in greenhouse gases, in fact, a dramatic reduction
in pollutants.
And we can come back to that.
And they've saved over $50 billion in imports for an
economy their size.
Imagine what we can save. We spend $250 billion a year
importing oil.
Hopefully you believe if they can do it, it's at least
plausible, if not possible.
How do I think it's possible?
Here's the surprise.
There's five million of these cars in the USA today.
And that number may not mean much.
But in fact, there's almost as many flex-fuel cars here in
California today on the roads as there's diesel vehicles,
almost as many, about 70% of the number of diesel vehicles.
And we don't have any E85 pumps.
We don't have, for the first time, a
chicken and egg problem.
Do we get the cars?
Do we get the fuel?
The ethanol's there.
The cars are there.
We just don't have any distribution because the oil
companies won't do it.
Even in the US, and this is a conservative number, ethanol
costs about, most of the plans I look at have numbers like
$0.90 a gallon to produce, something like $1.20 a gallon
for an equivalent gallon of gasoline.
And I often speak in terms of gasoline-equivalent gallons
because of the mileage differences.
Compared to any price you can imagine for gasoline, probably
down to $35 a barrel for gasoline, ethanol is cheaper.
This is cost to cost, no subsidies, no taxes.
And I think we should treat them at least equally, if not
give a carbon credit for ethanol.
And we have a four billion gallon a year industry that's
growing about 25% a year already.
So the pump is primed.
And it costs an automaker about $30 more to make a
gasoline car into a flex-fuel car capable of
taking either fuel.
So why ethanol?
Because it's today's cars, today's liquid fuel
infrastructure, the same tankers.
You can use the same tanks, in most cases, that are in the
pumps today.
It leverages the current trends.
You can have flex-fuel cars that are already out there.
You can make it a flex-fuel hybrid.
And we already have the infrastructure.
What else?
No matter what your point of view, and this is what makes
it very plausible, if you only care about a cheaper fuel,
then ethanol is the answer.
If you care about national security, energy security,
geopolitics, then ethanol is the answer.
And ex-director of the CIA Jim Woolsey is one of the most
vocal advocates of this, only from the energy security and
geopolitics point of view.
If you're Tom Daschle and only care about farm incomes, then
in fact this is the right answer.
And they're a very powerful political group in the US.
And if you're the NRDC or the Union of Concerned Scientists,
they are in favor of this, too.
So it's very rarely that you see the automakers and the
environmentalists and the farm guys and the neoconservatives
all agreeing on the same thing.
I've listed everybody except the oil companies.
And I'll get to that.
[LAUGHTER]
VINOD KHOSLA: So this is my way of getting people
a little bit mad.
Do we want to feed Mideast terrorism or Midwest farmers?
I think it's very clear to me which I prefer.
Do we want to import expensive gasoline or cheaper ethanol?
And we don't import ethanol today, even though it's
dramatically cheaper.
So we have an internationally low-priced product, oil,
competing with a domestic, protected market with a high
price, and it's still cheaper.
Imagine if you opened it up.
Do we want to create more farm jobs or Mideast tycoons, or
fossil fuels or green fuels?
And Wendy Schmidt came up with one of the best
slogans I like to use.
Let's put the fossil in fossil fuels.
That's what we need.
And we'll get to.
Do we need ANWR oil rigs or prairie grass fields?
That's the choice we have. I won't spend any time on this.
But it's obvious that flex-fuel cars give you choice
for almost no cost and add a lot.
By the way, a presentation I saw from GM about three weeks
ago said a hybrid--
and I love hybrids too, don't get me wrong--
for about $3,000 dollars of incremental cost may save 50
to 75 gallons of fuel a year.
A flex-fuel car for $30 will save 300 gallons of petroleum,
of gasoline.
Now the answer's pretty obvious.
You will hear a number like $100 extra
for a flex-fuel car.
They include the cost of a sensor that they need to meet
EPA requirements anyway.
But because they're lobbying for extra incentives in
Washington to make flex-fuel cars, they like to jack up
that number.
I've looked at it carefully.
It's $30.
And if they amortize all their one-time testing it adds
another $10 to the cost of a flex-fuel car.
This is a chart I came up.
And again, you pick your issue on the left hand side and say,
I only care about the cost per mile, or I only care about the
environmental costs, and say how does oil compare with
hydrogen compare with biofuels.
And I won't spend too much time but just say, at least,
you can disagree and agree, but no matter how you do this
chart, it's pretty obvious what the answer is, especially
if your goal is to line up all the political interests to
actually make it feasible.
Now what's right is different than what's feasible.
So if you agree with me so far, we went from implausible
to plausible, maybe to possible.
Now the question is, how do we make it probable?
To answer that, just say, what are all the reasons it might
not happen.
Interest groups, land use.
Do we have enough land?
Does it have the right energy balance?
Does it have the right emission profile?
And then the most important thing, in my view, how do you
kickstart this stuff?
So where do the interest groups stack up?
I've already talked about the automakers.
And in fact, GM has now decided, fortunately, that
hybrids got associated with Toyota.
And they need their branding to be flex-fuel.
So I suspect you will see them be very, very aggressive.
In fact, they've shared their 2007 model year plans with me,
and they're far in excess of any regulatory requirements.
Let me just say that much.
They're going to be very aggressive.
That's why they have the livegreengoyellow.com website
that they advertised in the Olympics.
The agricultural interests, it's obvious, more income,
less pressure on subsidies.
They have this WTO pressure on subsidies.
They like this opportunity a lot.
The environmental groups are very supportive of this.
The oil companies are not today.
But the progressive ones are actually being
aggressive about it.
The most advanced research on cellulosic ethanol is being
funded by Shell.
The CEO of BP is completely committed to biofuels.
And he realizes that not only do we have a climate
crisis on our hands.
And for all of you, I've stopped referring to this as a
climate change or global warming.
It's a climate crisis.
But more importantly, the only place a place like BP and
Shell can find oil now is making deals with the
dictators in Nigeria or the despots in Sudan.
And their business risk profile is so high that the
more advanced ones are starting to look
at this very seriously.
And for distribution, it's a new opportunity.
I can't imagine a better opportunity for Walmart than
to put an ethanol pump in every single Walmart.
Not because they want to be green, and they do.
They have a green plan.
But because they want everybody to
drive their car there.
It's in their interests.
It's traffic.
So what do I recommend?
And I'll come back to this.
In fact, I'm going to skip through this and say, there is
something in it for everybody, no matter who you are.
There's something to win.
And so it's time for this grand compromise which I've
been proposing.
So let me go to remedies.
How can we actually get from here to what is clearly a
viable solution?
What does it take?
And I call them page one recommendations and page two.
The page one recommendations, which I think get us most of
the way there and will irreversibly make this
trajectory happen, put us on this path,
don't take any money.
So what are these things?
Require that 70% of new cars be flex-fuel cars.
And I picked 70% for fairly technical reasons.
We can go more into it.
B, and this is something GM is already doing, ship a yellow
gas cap to all the people who do have flex-fuel cars so they
know they have one.
99% of the people who own such a car--
if you own a Ford Taurus, look in the manual.
There's a reasonable chance it's a flex-fuel car.
If you own a Ford F-150, you probably own a flex-fuel car,
at least certain engine models.
And I'm suggesting we actually provide them incentives to
cover more than their $30 cost. And GM likes this idea a
lot, except they don't like to be required.
And I'll tell you why "required" word is important.
Require E85 ethanol distribution at
10% of the gas stations.
That's a pretty small number.
Remember, each gas station has six to eight pumps.
Now I'm saying 10% of the gas stations, which means 2% to 3%
of the pumps offer ethanol.
And I even go further, because politically it's not
acceptable to put pressure on the really small operators.
Just say, if you own more than 25 stations in the country,
you convert 10% of them to have at least one pump.
And the last one is to legislate a "cheap oil" tax
for price stabilization purposes.
What do I mean by that?
I was in Dallas in January, and I gave this pitch.
And the vice chairman of a large, national oil company
came up to me and said if you do this, we'll drop the price
of oil, and all the ethanol producers
will go out of business.
He actually had the gall to threaten me.
So I came up with my next recommendation.
It was easy.
We put a price floor.
If oil drops below $40 a barrel, we charge a tax such
that it stays at $40, whether it's $35 or $40, it's
somewhere in there that we need support against price
manipulation so we don't get manipulated.
And what I propose we do, every time price goes below
that level, you use the money you get collecting as a tax to
build up extra oil reserves or buy futures hedges on oil, so
when price does go back high, we can stabilize the price.
So it's just really a price--
I call it a contingent tax for price stabilization only.
It's not really a tax.
By the way, none of the US Energy Information
Administration forecasts predict oil getting to
anywhere near that level on its own.
So the only reason it would get there is because of price
manipulation.
What does this do?
These three things, none of which take very much money,
except this gas pump idea from the oil companies.
And the number is trivial.
I calculated that you could do California with a few hours of
Exxon profits last year.
You could do all of California for a few
hours' worth of profits.
They make about $100 million a day, every day, 365 days a
year, in profit.
So if you do these, you give investors the confidence that
the cars will be there.
The oil companies won't get in the way of distribution.
And I'm not requiring 90% of the pumps, 10% because that's
all you need to reach criticality.
And that you won't be subject to price manipulation.
That will give Wall Street enough confidence to do the
rest. They will invest in the plants.
Even with the distortions like the import tax, I believe
everything will happen despite those things.
My page two recommendations are things that will help.
If you have a new technology for cellulosic ethanol, and
I'll get into this a little bit more.
Today, most ethanol in this country is produced from corn,
which is not very green.
It's about a 20% reduction in greenhouse
gases, a moderate reduction.
If you want to get to 80%, you want to make it from
agriculture waste or biomass.
Those technologies can't get financed to build plants
because these typical plants are $100 million.
And you can't get Wall Street funding, project funding.
It's funny, you can get the risk equity funding quite
easily for these plants.
But you can't get the traditional project funding.
So you prove out any new technology with a loan
guarantee that you can charge for.
Allow--
I don't know I jumped around.
So I apologize.
Allow imports of foreign ethanol tax-free
above the RFS standard.
Now I would like to allow imports tax-free, period.
But we have mandated a standard, minimum amount of
ethanol used in this country in the last
energy bill last year.
All I'm saying is at least allow ethanol imports above
that minimum standard tax-free, because demand is
expected to be at that standard.
And I think that will make a huge difference.
We have subsidies for all kinds of crops.
There's tremendous WTO pressure to get
rid of those subsidies.
If we are going to have subsidies--
I'm never a fan of subsidies--
at least, let's use it for something that helps with the
transition.
So switch those subsidies to energy crops.
The farmer cares about his income, not which
crop he gets it from.
The other thing, and this is the typical kind of thing that
creates a market distortion, ethanol has a subsidy, but the
farmer doesn't get any of it.
What I heard is well past midnight, when this was being
debated in the conference committee, the oil companies
inserted two words into the language calling this ethanol
subsidy a blender's credit.
So the person who's blending it with gasoline gets it.
All $2 billion of it last year was collected by the oil
refineries, like they needed more money.
It's unfortunate, but that's how the
political system works.
And I talked to one of the senators' aides who was in the
conference room.
They said, now if it gets to 1:00 AM, they're still
negotiating, and oil guys are willing to stay there.
And everybody says, OK, let's agree.
Let's go home.
It's unfortunate.
I've also suggested if we can't get rid of the ethanol
subsidy, which I believe we should, we do not need a
subsidy for these plants to make tons of money today, and
at any expected price for oil in the next 25 years, given
the forecast. But if the farmers are going to insist on
having it, I'd rather it be a subsidy that goes to the
farmer who produced the ethanol or the plant that
produced it, if only to build more ethanol
capacity in this country.
So at least we have expanding capacity if you're
going to do a subsidy.
It's sort of the lesser of two evils.
The other thing today, the automakers have this big issue
with CAFE standards, which I personally happen to like.
The environmentalists think they should be increased.
The automakers think they should be decreased.
What everybody can agree on, even the environmentalists, is
let's switch them to at least call them petroleum mileage,
not mileage.
If the automakers encourage more ethanol or renewable fuel
use, whether it's through hybrids or any other reason,
and the amount of petroleum required to drive the average
mile in the United States goes down, then they
get benefit of that.
So you line up incentives.
I'm not going to go through all of these.
This is my personal forecast of what we can do.
The yellow line is demand in the US as it is growing today,
which is growing about 2% a year.
If we do some conservation measures, demand can come down
to 1% percent growth.
That's the light blue line.
The dark blue line is the month of ethanol I believe we
can produce in this country without any imports, if we
just ramped up capacity at a slower rate than capacity is
ramping up today.
I'm assuming in that a 10% increase in capacity--
oh, I'm sorry, 20% a year increase in capacity.
It's increasing faster than that today and for the last
two or three years.
And then it moderates down to 15% and then to 10% a year.
And the purple line is the gasoline-equivalent gallons.
So we can eliminate most of our petroleum use, and
definitely all of our petroleum imports, for at
least cars and light trucks-- and diesel is a slightly
different issue.
Biodiesel is the way to talk about that--
in less than 25 years.
People find it surprising.
But there's a more detailed model behind this that goes
into how many acres can be put into biomass production, how
many gallons of ethanol can we get per ton.
I've talked to the best plant biologists in the country to
say how many tons can they get per acre.
So there is a sophisticated model behind it.
The spreadsheet for this is on my website, so you can change
your assumptions.
It's in this long presentation, after the end.
So the other issue is land use.
The NRDC has said we need a 114 million acres, with a set
of assumptions.
And I'll give you a reference.
The Jim Woolsey/George Shultz estimate is 60 million acres.
My estimate is about 55 million acres, because I
actually assume technology makes a difference, and we
don't stay still.
And then there's other sources of ethanol, for municipal
waste, from forest thinnings, from animal waste.
I actually know somebody who's taking stuff, hog ***, and
actually trying to make ethanol from it today.
And by the way, 60% of the agricultural land in this
country is not meant for human food.
It's for animal feed, 60%.
There's far more corn in your meat aisle than your corn
aisle, by a lot.
And one other word, the last line is direct synthesis.
There's a number of people, and I don't include this in
any of my forecasts, there's some clever ways to use a new
field called synthetic biology to address the energy
problems. Now these are really, really potent.
I will only give you one example of what that kind of
technology can give.
A professor in Berkeley chose a malaria drug, artemisinin,
that cost about 100 times more than people in
Africa could afford.
He used synthetic biology techniques to design brand new
metabolic pathways that didn't exist in cells.
And he used collaborating with a company we had invested in
that's a synthetic gene synthesis company to produce
this malaria drug.
And they're still in the process.
In fact, this whole project has gotten $42 million dollars
from the Gates Foundation to get malaria at a price.
That exact set of technologies can be applied
to the energy problem.
And I'm not in any forecast you see.
As a technology estimate, I like to at least think about
them, if not include them.
So there's multiple approaches.
I'm sorry I screwed up my presentation sequence.
But there's multiple approaches to address land.
You can take the approach, we can take currently managed
lands and use biomass from that.
You can say there's export lands.
There's well over 130 million acres of land that is used
strictly for food exports that we can use
to reduce oil imports.
And a fraction of that could be sufficient.
There's crop rotation schemes.
Many of these biomass things are in fact recommended as
good agriculture practice because when you grow corn,
you have topsoil loss.
And you don't want that.
So these are great rotation crops that enrich the soil
with carbon.
There's 40 million acres of land in this country that we
pay farmers not to grow any food on today, every single
day for the last few decades.
Then there's dedicated intensive energy crops.
That's the way I think it'll go.
And here's the best one.
I love this one.
If you think about it, the Midwestern prairies were all
about feeding animals hundreds of years ago.
In fact, when you grow things like switchgrass, that's what
the animals fed on hundreds of years ago.
And today, if you make cellulose from switchgrass,
your byproduct should be all that animal protein.
So we can do both, feed all our animals for our food and
produce fuel for our cars from the same land at the same
time, from the same environmentally great crops.
So this is just a set of recommendations.
There's a DOE study on this.
The NRDC, this "Growing Energy" report I'd highly
recommend to anybody who's interested.
I won't go through that.
This is the conclusion of the DOE report.
This is the last paragraph from about 150-page report.
It says that we have enough biomass without any change in
agriculture practices.
That's 130 billion gallons a year.
That's one year of Miscanthus crops.
And while doing that, it does two other things.
It takes all the nutrients, puts them in the
soil, not in the plant.
So you don't have to replenish the essential nutrients.
It also not only puts carbon into the plant, it puts it
into the soil also.
So the soil is richer.
You harvest it by cutting it off, and it
grows again next year.
And today, these are at between 10
to 12 tons per acre.
You get two tons or three tons of corn per acre.
Every plant biologist I've talked to who's serious says
we could probably approach 40 to 50 tons per acre.
At that level, we'd need 30 or 40 million acres to feed our
whole country, even with the demand growth.
There is a reference here that will go into all the details
of this crop, including what yields they have today, and
what would constitute a great energy crop, because you don't
want this monoculture of one plant covering everything,
though the prairie grasses did pretty well.
I won't go through this.
But the economics of this, today we need subsidies
because over a 10-year cost basis, farmers actually net
lose money.
That's why they have subsidies.
This actually generates far more income.
That's the last line.
And it has great field characteristics, nutrient
characteristics.
Switchgrass is another crop, dramatically better,
dramatically more biodiversity, dramatically
richer soils, and again, high potential for co-production of
animal food with the fuel.
I won't go through these, but that's another.
Professor Lee Lynd at Dartmouth has done this study
on producing biomass from currently managed lands.
And I list all these approaches, because different
people like different philosophies.
And I said, pick your favorite one.
You can do it any of these ways.
This is sort of a fun slide.
If we turned the state of South Dakota--
I think of South Dakota as sort of disposable--
[LAUGHTER]
VINOD KHOSLA: It would become the third-largest
oil-equivalent producer in the world by
itself, at very modest--
you notice I use, in fact, this is from a company called
Ceres, which does plant genetics--
at 15 tons an acre.
If you get to 45, it's bigger than Saudi Arabia.
There's plenty of land.
I'm not going to spend any time on it.
The economics work for the farmer.
Biomass generates more income at less invested cost than
either corn or wheat because it has to work for the farmer.
If you had 100 million acres under the same set of
assumptions, you'd be discovering it'd be the
equivalent of discovering one new Exxon, and all their
proven reserves, every 10 years.
OK, so the next question--
let's see how I'm doing for time.
I should speed up a little bit--
energy balance.
Corn ethanol has 1.2 to 1.8 times the energy out compared
to energy in.
And that's not petroleum.
That's fossil energy.
By the way, petroleum is 0.8.
So corn ethanol is about twice as good as petroleum, because
they always forget to mention that petroleum doesn't produce
a unit of energy out for every unit of energy in.
There's transportation.
There's refining.
There's all those costs.
From non-corn ethanol, sugarcane today in Brazil has
8X the energy out.
And this assumes you still make fertilizers the
old-fashioned way, from petroleum, you make pesticides
the old-fashioned way.
You don't change any of that.
And depending on which cellulosic ethanol technique
you use, and this assumes you keep using fossil fuels, not
bio mass, to provide the heat for your refining processing.
This is an Argonne National Lab study.
And since it's hard to read, that's electricity at 0.45
energy balance, petroleum at 0.81, coal at 0.98, corn
ethanol at 1.34 using one set of techniques and 1.78 another
way, and cellulosic ethanol at 10.3.
This is a great study on the energy balance for those of
you interested.
Not only that, the full computer
model is on the website.
You can download it.
You can change the assumptions and run the model for yourself
and say, if assume something different, what happens?
I'm not going to spend any time on that.
This will be on my website.
This is the petroleum and fossil
fuel reduction benefits.
This is fossil energy used in cellulosic
ethanol, in corn ethanol.
This is reduction of petroleum.
So again, let me skip past this.
This is self-explanatory and part of the Argonne model.
But the important thing is the conclusions.
It says this is not even a meaningful thing to measure.
And that's where we should stop.
There is a researcher called Pimentel who spread a reverse,
different notion.
And by the way, he's an entomologist, not an energy
researcher.
Every other study has proven that that research is wrong.
This is the NRDC data.
They have a wonderful report called "Ethanol: Energy Well
Spent." It shows all the studies.
And the one study that goes above the input cost is this
Pimentel study.
But they forget to mention that gasoline is even higher
than that, even above the Pimentel study.
This is the amount of energy in versus out for cellulosic,
again, multiple researchers.
There's a great Science article in January this year
on this also by Professor Kammen at UC-Berkeley.
But here's the NRDC conclusion.
I'll let you read it.
I won't repeat it.
Environmental issues.
Again, the Argonne model, this is greenhouse gas reductions.
I love this model because they actually post the model.
And you can read on it with your own assumptions.
And you can characterize each process differently because
each ethanol plant is different.
By the way, that energy balance goes from 1.5 to 3 if
you burn biomass to distill your ethanol at the end of
your process instead of using natural gas.
That simple step changes it to three times, which I know some
people are actually doing.
So these are greenhouse gas reductions, again for
cellulosic ethanol on the right hand side, and then corn
ethanol using wet mill processes, corn ethanol with
dry mill processes.
I won't go through all of it.
This is actual emission levels of E85 and gasoline for a 2005
Ford Taurus and 2005 Mercedes-Benz.
On almost every metric, and definitely
overall, E85 is as good.
Now why is this confusing?
Ethanol has a characteristic, and I'm happy to go into the
details, that as you add ethanol to gasoline, certain
emissions, specially evaporative emissions, go up.
And so when you have 5% ethanol and gasoline to
replace MTBE, it's actually pretty good.
You get much above 10%, and emissions actually increase.
And Brazil, for regular gasoline, uses 20% ethanol,
and for ethanol, uses 100% ethanol.
So then the people who don't like ethanol always point to
E20, which we've never considered using in this
country, and say it increases emissions.
That's the kind of [UNINTELLIGIBLE] they create,
when E5 is better than gasoline and E85 is much
better than gasoline.
This is actual data from the California
Air Resources Board.
This is a communication I got from the NRDC.
I won't spend any time.
It fundamentally says E85 is great.
And more importantly, all the reasons to not like ethanol,
many of them were probably valid 20 years ago.
And some people still like to use them.
It reminds me of how long the tobacco companies went on
saying that smoking doesn't cause cancer, or at least you
can't prove it.
I see almost exactly the same thing happening here again.
So everything I've said is assuming no significant
progress in technology.
And there's lots of ways technology can improve things.
Sorry, my presentation sequences.
I've spoken to some of it.
In fact, this is one of my favorite quotes from the
editor of Science magazine in 1988.
And I think this is not only about ethanol, but
fundamentally the way we manufacture
chemicals will change.
With all kinds, I gave you the example of this malaria drug,
you will see that repeated over and over again.
Because there is another, better way to manufacture
things, and that's to copy what nature
learned a long time ago.
So today we have corn ethanol.
I think cellulosic ethanol is coming.
During the Second World War, when Hitler couldn't get oil,
he used gasification of coal.
But there's no reason you can't gasify biomass.
In fact, those technologies are almost ready, too.
Then there's algae.
You go to a website called greenfuelsonline.com.
They're actually building algae farms out of MIT,
producing their client 22,000 gallons of fuel per acre.
Now it's a wonderful idea.
I think it's not quite ready.
But every year, with
bioengineering, the algae improve.
Craig Venter, who raced the US government in sequencing the
human genome, is doing a synthetic biorefinery.
And I'm working with some people on some very
interesting synthetic biology techniques that are a little
further out.
And I have to again say, all I'm talking about for the
numbers here is the corn and the cellulosic bioethanol,
none of this other stuff.
And I can't, because people then say you're not credible,
because they look backwards, not forwards.
Lots of companies working on this.
And here's what one company is doing, increasing--
let me skip past that.
They're expanding usable acreage by increasing drought
tolerance, heat tolerance, drought recovery, all salt
tolerance of plants.
This company has the largest library of plant genes.
And they insert them, cross them over from
one plant to another.
They're increasing the tons per acre.
They're reducing the dollars per ton, like the fertilizer
intensiveness of growing these things.
They're increasing the gallons per ton by reducing the lignin
content of the plant and increasing the carbohydrate
content of the plant.
This is all simple engineering.
We've just never had to worry about it, so we haven't
worried about it.
Reducing the cost of enzymes, developing commercial energy
crops, and that's just one company.
Now I can go through a long list of companies.
So where are we?
We have a choice.
Do we import oil or ethanol?
Do we want to add to the real, rural economy, which genuinely
needs help?
And it's just [? supplying ?]
our food economy.
We can add to that some significant portion of our
energy economy.
It would completely change the face of rural America.
Just think of the possibilities.
Because energy is a much bigger part of
[? our energy ?] than the food economy.
And this is a macroeconomic shift that would change the
whole planet, I think.
And it relies on innovation.
It relies on entrepreneurship.
It relies on what I call the power of ideas, fueled by
entrepreneurial energy.
And that's a far more powerful force than anybody in
Washington understands.
Brazil's already done this.
I've talked about this.
This is a good curve.
This is a curve with cumulative volume, what the
production cost of ethanol has done in Brazil.
Because we are at such small numbers compared to gasoline
production costs, I would conjecture that we have a long
way to go down, just out of accumulated experience.
This is a curve on the yield of ethanol per ton of
sugarcane in Brazil.
It's still going up pretty rapidly.
This is just the price ratio since 2001.
What are we doing in the United States?
People like this idea.
When you ask people, do you want a gasoline tax, 87% no.
But you say, do you want a gasoline tax to reduce our
dependence on foreign oil, the number goes from
87% no to 37% no.
You ask them, do you want a gasoline tax to reduce global
warming, the number drops to 34%.
This is from a New York Times poll last month.
People do care.
Washington doesn't realize it, but people do care.
This is the RFS standard.
This is mandated in the last energy bill.
But this is how fast ethanol capacity has been expanding in
the US already.
And much of it happened before the energy bill.
This is the number of--
I won't spend any time on that.
For those of you interested, there's a detailed breakdown
of production costs by item, two different models.
One is this one, and the other is this one.
Again, I won't go through it.
There's one macro message.
There's solar energy in the case of ethanol, crude oil.
Both processes, when you look at them, cost roughly $0.50 a
gallon to produce, other than the feed stock cost. It's
actually pretty amazing.
Because it's a very similar kind of process.
I won't spend any time on this.
Let me stop there and open it up to questions.
There's a bunch of references up there, so
feel free to use them.
So let me open it up to questions.
And we can go from there.
Yes?
AUDIENCE: So your three required steps all involve the
federal government.
And I don't think anybody in this room believes the federal
government is going to jump onto this bandwagon.
So you also made a comment that for a few tens of
millions of dollars, perhaps you could convert all or
enough of the gas stations in California.
So you know some people who can afford a few tens of
millions of dollars.
And I'm wondering if there's anything that we can do
without the federal government to make it happen.
VINOD KHOSLA: Let me answer that
question in multiple ways.
First, it's a few tens of millions of dollars in
California to equip 10% of the pumps if Exxon does it, the
pump owner does it.
That's the catch.
It's a lot more if you set up a whole new system.
And that's where the bottleneck is.
So I'm looking for something the oil industry really wants.
And hopefully in Washington, we can trade them.
The fact is, the price floor on the oil, Senator Lugar, who
introduced a new bill based on these recommendations just
about a week and a half ago, before the senatorial recess,
tested this idea at the Brookings
Institute in a speech.
It got a lot of play.
That's how things work in Washington.
You test it.
You talk about it somewhere.
It gets a lot of play.
See who gets on the bandwagon.
So I can't tell you it will happen.
But I can tell you at least one person, relatively
important, was bold enough to test it.
The flex-fuel car mandate is in about three bills before
the Congress and Senate.
Representative Markey has introduced a bill, Senator
Obama and Lugar have introduced a bill, Lieberman's
talking about introducing a bill.
So there's enough [? cachet. ?]
I haven't yet found anybody gutsy enough to mandate
something for the oil companies.
And I'm going to try it.
And if it doesn't work, I have a backup strategy.
Everybody signs up the RFS standard for ethanol.
We can have an RFS standard for E85.
We can also have an RFS standard
for cellulosic ethanol.
And all those would be alternative, not as good, but
good enough ways to get there.
So there are backup strategies in that.
In fact, I have a white paper called "A Near Term Energy
Solution" that talks about some of these.
Again, that's on my website.
I know there was a question there, back there.
Yes?
AUDIENCE: You mentioned Shell and BP as two companies whose
leaders are very keen on this.
What's stopping them?
[INAUDIBLE] federal government [INAUDIBLE] around?
VINOD KHOSLA: I would say they are much more aggressive about
this in Europe than in the US.
And I would also say, they're waking up to this in the last
year or so.
In fact, I know in February that Chevron appointed
somebody to draw up a business plan for them
in this area, too.
So there's encouraging signs.
But here's the issue.
If you have billions and billions of gallons of
reserves, and the price of oil dropped $20, you have a lot of
disincentive in making that happen.
So I suspect they will be positioned to
participate in this.
They will get ready.
They're reasonably well-equipped to build these
plants, factories.
An ethanol production facility looks like a brewery.
In fact, we learned how to make this ethanol when be made
200 proof moonshine.
And in fact, you can put 200 proof moonshine instead of
ethanol, and it works just fine.
That's exactly what it is.
The only thing the federal government does is make sure
you denature it so that people don't drink it.
Other than that, it does not differ from the moonshine.
So I think the companies will jump in at the right time.
But I don't think they have an interest. Look, Exxon made $36
billion of profit last year.
Do you think they have any interest in this changing?
And the higher the price of oil goes, for free, the value
of their reserves goes up.
Their market cap goes up.
And by the way, they can sell the same oil at a higher
price, and they make more money, too.
I think all their interests are against them.
They don't want it to happen too fast. If it happens, they
will jump in.
Yes.
AUDIENCE: What do you think about--
you talked about a potential renewable fuel standard for
cellulosic ethanol to help that transition to cellulosic.
Before that, what do you think about labeling, either
voluntary or mandatory labeling, to distinguish
between cellulosic and corn-based?
VINOD KHOSLA: I think that's a good idea.
I was at a two-day conference to find a solution.
That was, in fact, one of the solutions that was
recommended.
I'm sorry.
The question is, what about just labeling cellulosic
ethanol and corn ethanol.
I think the first thing we need to do, and I
think it's a good idea.
The first thing we need to do is just offer ethanol in the
marketplace.
Then we can start labeling it.
It's like labeling organic food and non-organic food.
It's very, very similar.
And I think that will happen.
It's just to me, if you go back to my slide on how you go
from possible to probable, the main issue I believe is
kickstarting this.
For that reason, I'm going to take a little interrupt here
and bring up a different presentation.
Since kickstarting, I believe, is the key issue, we have a
ballot initiative I'm co-chairing.
And I won't spend time on all these things, except to say
it'll be run by a fairly independent board.
And a number of Nobel laureates, environmental
groups are supporting us.
I think Larry's finally agreed to support us, as has Wendy
and Eric Schmidt.
We definitely need lots of money for this.
The oil companies are gearing up to spend lots of money.
We have a group of individuals.
The oil companies have much bigger balance sheets.
So anybody who can help raise money or give
money, that's great.
But we also need a large blogging force to go blog this
message for us.
So we will look.
And the [UNINTELLIGIBLE] love this stuff.
So let me stop there and go back to questions.
Yes.
AUDIENCE: So is there any company we can invest in,
[INAUDIBLE], and make [INAUDIBLE] more money?
VINOD KHOSLA: I don't give investment advice.
Yes?
AUDIENCE: I'm all in favor of sustainable South Dakota
switchgrass.
I wonder, though, if you share the concern, some people say
that as soon as you get the right enzyme, people are just
going to throw rainforests and wetlands and anything
they can for it.
VINOD KHOSLA: I think that's a genuine concern.
I think some of it is misplaced.
It always comes up about Brazil.
But if you look at the economics of it, the
rainforest area is not the best area in
Brazil to grow sugarcane.
The pasture lands are.
So my bet is they will convert all the pasture land they
have, and there's lots of land in Brazil that's
appropriate for this.
And remember, these are relatively environmentally
friendly crops.
In fact, the Micanthus is the prairie grass version--
switchgrass used to be the prairie grass in the Midwest.
So it's really returning these lands to their old
environment.
Will we have issues?
If you do a monoculture, I'm sure we'll have issues.
But I suspect that's not how it will turn out, That we will
do different things in different regions and have
more diversity.
We know what to do.
So my optimistic scenario is for the mid-term, we'll have
enough yields so the land area needed will even be smaller
than the 55 million acres I'm talking about, which is
relatively small.
We have 73 million acres of soybeans just for export.
But long term, I think we'll avoid all that, use some of
that fancy synthetic biology stuff.
I just think we need to start down this trajectory.
Yes.
AUDIENCE: [INAUDIBLE] said you're taking into account
rising sugar prices [INAUDIBLE]?
Sugar has been on a tear for the past few years.
VINOD KHOSLA: My fundamental assumption is short term, you
will see those kinds of spikes.
Because Sweden announced that they will use flex-fuel cars
and ethanol to meet their Kyoto compliance requirements.
Japan is going to Brazil for ethanol to meet their Kyoto
compliance.
Price of ethanol goes up, nobody wants to make sugar,
sugar price goes up.
So there is short-term competition.
But long term, I am absolutely convinced the cheapest way to
make it will be from cellulosic.
and people will make it from cellulosic not because it's
greener, but because it's cheaper.
I think the green will be free.
There was a question back there.
Yes?
AUDIENCE: Yeah, do you have any numbers on the yield per
acre by latitude.
You said North Dakota was [INAUDIBLE], and I just wanted
to know if [INAUDIBLE].
VINOD KHOSLA: Yes, there's actually the link if you
follow on Miscanthus was pretty interesting.
But I have my favorite chart which I want to bring up here.
I wasn't planning on talking about it.
It's in my spare charts.
But let me go to it.
I love this chart because if you care about more than the
US, and you care about the planet, the best biomass belt
is where there's the most poverty in this world.
So if we do, in fact, go to this economy, it will be good
for this part of the world, Africa, South America.
It's amazing to see the coincidence between poverty
and the best biomass belt.
I hope that answers your question.
Yes, there was a question here?
AUDIENCE: Yes.
Why stop at cars?
What about electricity, heating
homes, stuff like that.
Does it make sense?
VINOD KHOSLA: You know, people tell me it's ridiculous enough
to go around.
When i first said I think we can replace all our petroleum,
people said that was really crazy.
I actually believe we won't stop there, especially with
some of the gasification techniques and some of the
characteristics related to that.
We will start going deeper.
There's no reason to stop.
AUDIENCE: What about Brazil?
What do they do for electricity?
VINOD KHOSLA: Brazil, they actually take a lot of the gas
after they made the ethanol, burn it, and the mills produce
far excess--
And by way, burning is a
relatively inefficient process.
You get about 20% heat utilization at best, because
you're diluting it with air and burning it.
There are other ways to do it.
You can get to 60%, 70% efficiency.
But the Brazilian ethanol producers sell a lot of
electricity into the grid.
Other questions?
Yes.
AUDIENCE: So one of the ways to get Washington to change,
[INAUDIBLE] the right policies, is to lobby, right?
So you have the oil lobby on one side, but you also
[INAUDIBLE] a number of [INAUDIBLE] positively
impacted by this, the agriculture group, the
environment.
Is there any conservative lobby that you see buying into
[INAUDIBLE]?
VINOD KHOSLA: Well, we're working on it.
It is hard. but we are working on it.
Yes.
AUDIENCE: So what is the greenhouse gas balance on
burning this and then [INAUDIBLE]?
VINOD KHOSLA: Could you repeat your question?
AUDIENCE: What's the greenhouse gas balance on the
plants going, versus the cost of burning it again?
VINOD KHOSLA: So almost all carbon, in fact all of the
carbon in most of these crops, comes from the air.
And so you're really doing a full cycle.
You're not really adding any net greenhouse gases to the
atmosphere.
The plants I like, Miscanthus and switchgrass, actually not
only do that, but in the process going, take carbon
from the air and fix it in the soil.
So there's a net reduction.
Other-- yes.
AUDIENCE: I'm curious what you think about biodiesel now.
VINOD KHOSLA: What do I think about biodiesel?
This question comes up a lot.
Biodiesel is a good fuel.
It's not as land-efficient.
So when I looked at the macro issue, you can produce a few
hundred gallons of biodiesel per acre today using these
low-cost techniques, and they have to be low-cost. You can
produce a few hundred gallons of ethanol today.
I can see how with ethanol, you get to
4,000 gallons per acre.
But I don't know how you get there with biodiesel.
So in terms of land efficiency, over the longer
term, there's a dramatic difference between the two.
There's not as large a short-term difference.
There's question back there.
AUDIENCE: Yeah.
You spoke about how the pumps are [INAUDIBLE].
Aren't there other consumers of gasoline, like the airline
companies, which might have an incentive to [? plug ?] ahead
and get this kind of alternative?
VINOD KHOSLA: Airlines are a funny thing, because
certifying an aircraft to run a new fuel is
a long, long process.
That's why Larry mentioned, and Larry and I had dinner
with Richard Branson in Davos, he wants to offset it by
producing green ethanol.
But he can't directly use--
besides, aviation fuels are only about
7% of the fuel market.
Home heating oil is about the same percentage.
The bulk of it is cars and light trucks.
Yes.
AUDIENCE: So I like the vision.
And a lot of you talk was about how compelling it is
economically for everyone, just about everyone.
And consumer choice favors it.
But I'm a little unconvinced about some of the techniques
to get there.
And so there's really two parts of the unconvincing.
The first part is what's different in Brazil?
You put in such a good [INAUDIBLE] argument.
What if we do nothing?
Won't it just happen anyway?
Or why did it happen so well in Brazil, and what's
different about that from here?
And then the second part is that I'm a computer scientist,
but I like to pretend I'm an economist sometimes.
And in economic circles, it's well known that price
controls, fixed price floors or ceilings or whatever, are
generally not the best ways to accomplish favoring incentives
or whatever.
Why advocate the price floor and the other two things,
instead of things that seem more economically sound?
VINOD KHOSLA: OK.
So let me try and answer both those questions.
They're great questions.
In Brazil, it was the politics.
Brazil is competing for regional influence with
Venezuela, which has a lot of oil, and Brazil doesn't.
So they made a strategic decision.
And for those of you who don't understand how important this
is, in January, Venezuela, with its money, paid off all
the IMF loans of Argentina so Argentina would listen
Venezuela politically on the left, instead of listening to
the IMF, which is a Western influence.
That kind of thing happens all the time.
That happened in January.
Argentina paid off 100% of its IMF loans.
So that was the regional kind of thing.
The Brazilian government decided that this was a good
thing for them to do.
They worked out the economics.
And frankly, it didn't take off because of that.
It was when oil went above about $30, $35 a barrel.
It took off by consumer demand.
And there are no subsidies for ethanol today.
And fundamentally, when I look at production costs, I
eliminate all those extraneous factors.
What's the flaw in the economics argument is
economics always assumes a level playing field.
I can give you 100 examples of why this is not a level
playing field.
I gave you the example of how the oil companies get $2
billion from the ethanol producers, and the refineries
collect it because they changed two words in a law
well past midnight.
Hurricane Katrina happened.
The price of oil shot up.
Guess what happened?
Oil profits, the largest profits ever recorded by any
corporation in world history.
That was Exxon last year.
And guess what they did?
Got an incremental $7 billion of reduction in this
extraction fee that's charged in the Gulf.
They got $7 billion subsidies, despite making the record
profits they'd ever made.
That's the way the game is played, unfortunately, because
they have strong political clout.
So it isn't a level playing field.
I would completely argue with you that this would make sense
if, in fact, it was a level playing field.
And that's why they key word I use we need to kickstart it,
not subsidize it.
AUDIENCE: Fine that's the first part of the question.
But if I grant you the non-level playing field, why a
price fix, rather than a subsidy to the industry, or
one of these other--
VINOD KHOSLA: Let me tell you why, because what the oil
companies, what this gentleman in Dallas said to me was, we
will manipulate the price of oil.
We can drop it for two years, drive the ethanol refineries
out of business, and then raise it again.
So it's only to prevent price manipulation.
If it was true market phenomena, I wouldn't
recommend that.
In fact, I only added that third recommendation after
Dallas, after this guy having the gall to come up to me and
say, we'll screw around with you.
So other questions?
Yes.
AUDIENCE: Is it really possible to actually produce
all of this ethanol from the sun where oil has been for
millions of years, a process that we're consuming
in a very fast pace?
Is it really possible in terms of the energy
coming from the sun?
VINOD KHOSLA: So the question is, is it really possible to
produce this much oil.
And again, I would suggest you read the "Growing Energy"
report by the NRDC, or you read the Jim Woolsey/George
Shultz paper on the web.
I've looked at it many different ways, because you
don't know that any one way is an accurate set of
assumptions.
And the answer comes out to the same.
Yes.
MALE SPEAKER: I have my last question.
First place, let's thank Vinod for coming.
[APPLAUSE]
MALE SPEAKER: Larry, Larry, Larry, Larry, we're giving him
some votes.
A 10?
Is that a 10 out of a 10?
I think he's pretty good, too.
VINOD KHOSLA: We got some French judges here.
MALE SPEAKER: There's one more question, which is, so, it's a
pretty compelling speech.
What do you want people in the audience to do?
VINOD KHOSLA: Well, two things.
You can help us kickstart this in California.
Our goal is, if you get that $4 billion, and the voters in
California pass that, we will have the money to get it
kickstarted, like paying the small operators enough money
so they can install a pump.
So we need money to run an ad campaign.
We estimate we need $35 million.
The oil companies, I expect, will spend over $100 million,
because they have the money.
And it's only a group of individuals.
There's no big interest behind us.
So money is valuable.
And I know Wendy's here somewhere.
She has lots of brochures that anybody wants on this
California initiative.
It's over there.
That's one.
Two, I think we need to have much more effective marketing
and internet marketing, blogging.
I have this dream of 1,000 bloggers
dedicated to a mission.
So anybody who can help construct that, and all of you
understand how to do this better than I do, those two
would be very valuable.
MALE SPEAKER: Thank you again, Vinod.
AUDIENCE: Thanks.
[APPLAUSE]