The Cutting Edge

Wagoner, Nardelli, and Mulally

The CEOs of the Big Three returned to Washington to present their emergency plan in the hope that this time around Congress would replace the batteries on Detroit's life support system. What is far from clear is whether the patient is going to make it, and what, if anything, Americans will get in return for their tax dollars.

Pumping billions into the ailing industry would be a bad idea unless such a bailout provides not only a reasonable chance of recovery but also some assurance that automakers use the money to usher us into an era of global transportation that is no longer exclusively dependent on oil.

While oil prices are currently low in comparison to last summer's peak, a glimpse into the International Energy Agency (IEA) World Energy Outlook published this month confirms that this is merely a respite, and that sooner or later oil prices will rise to much higher levels. The IEA report examined the world's 800 top oilfields and reported an average annual depletion rate of 5.1 percent increasing to 8.6 percent in 2030. It stated that in order to meet future demand for oil, six new producers—each equal to Saudi Arabia—will have to be added to the global oil market between now and 2030. If such a gigantic amount of oil can be produced it would only be due to trillions of dollars of investment in new exploration and recovery, as well as the development of non-conventional sources of oil such as tar sands and oil shale.

But the current credit crunch and falling oil prices hinder such investment. This means that once the world pulls out of its recession and demand for oil returns to its previous level, an oil crisis of much bigger proportions could ensue. Therefore, it would be prudent to require that any bailout require auto manufacturers to prepare for such new era by making cars that run on alternative fuels in addition to petroleum.

It goes without saying that hybrids, plug-in hybrids, and pure electric vehicles are part of the solution, and the industry is genuinely committed to making them in growing numbers. But this is not enough. Much of the battery manufacturing chain essential for mass production of such cars, including 95 percent of the rare earth elements and other battery raw materials, is in Asia and therefore out of Detroit's control no matter how much money is thrown at it.

But there is one technology the industry can deploy that is mature, cheap, and one in which the Big Three enjoy a qualitative edge vis-a-vis their Asian competitors—flex fuel vehicles. For under $200 per car Detroit can enable every new vehicle to run on any combination of gasoline and alcohol.

More than 80 percent of the new cars sold in Brazil in 2008 were flex fuel, many of them made by GM and Ford. As a result of high oil prices, and the fact that cars in Brazil are platforms on which fuels can compete, more sugarcane ethanol was sold than gasoline. As a result of flex fuel vehicle sales, gasoline became an “alternative fuel” in Brazil.

An Open Fuel Standard requiring new cars sold in the U.S. to have flex-fuel capability will not only reward American taxpayers with a fuel choice at the pump the next time gas prices soar, but it will also serve to break oil's monopoly in the global transportation sector, a monopoly that allows corrupt and dictatorial oil exporters to accumulate inordinate power on the world stage. True fuel flexibility should require that cars can run on methanol in addition to ethanol. Unlike ethanol that is only made from agricultural feedstock, methanol can be produced in far larger quantities from a broad array of carbon-containing feedstocks like coal, wood waste, municipal solid waste, natural gas (pay attention, Mr. Pickens), and, in the future, carbon dioxide (pay attention Mr. Gore).

Methanol compliance will also open a large market in China for the Big Three, where methanol is emerging as the alternative fuel of choice. As China has pointed out, a crisis can also be an opportunity. Adding flex-fuel capability to every car made by Detroit would cost the industry roughly $2 billion per year at current production levels.

This is a tiny fraction of the total bailout cost but one that could make a true difference and position the Big Three as leaders among the automakers in alternative fuel technologies. Furthermore, such a requirement would give rise to the creation of a competitive market in alternative fuels, creating incentives for the fuel distribution chain to follow. Through an Open Fuel Standard, 150 years after the discovery of industrial oil in Titusville, Pennsylvania, oil's biggest users could be harbingers of the beginning of the end of its era.

Cutting Edge contributor Robert C. McFarlane served as President Reagan's national security adviser, and Gal Luft is executive director of the Institute for the Analysis of Global Security, an energy policy think tank. They are both founding members of the Set America Free Coalition.