Tuesday, January 23, 2007

The War on Oil

January 23, 2007; Page A18
To win the war on terror, we must first stop enabling terrorism with our oil money. Let's instead use our money to fund a war on oil. Corn ethanol has served us well and has paved the way for our future energy security. It has shown America that we do have alternatives to oil. But corn ethanol can only supply about 10% of our gasoline needs.

We need cellulosic biofuels to win the war on oil. What the best R&D will achieve is a matter of judgment, but my research has convinced me that the benchmark $1.25 per gallon or cheaper cellulosic fuels are less than three years away (though the question of putting plants in place and getting Wall Street to finance debt for such facilities still looms large). I am so convinced this is real that I have invested in a number of companies in this area. We have seen proposals to make ethanol from corn stalks, switchgrass and other grasses, woodchips, waste carbon monoxide from steel mills, municipal sewage, orange peels and other creative ideas from entrepreneurs. We must empower these entrepreneurs, and signal to them that we are serious about winning the war on oil. Some of the optimists in the startup world will surely be wrong, but will dozens of efforts all fail? Could so many companies and investors, each with a different source of technology, all be wrong?

We must encourage research on biomass feedstocks, tomorrow's "energy crops." Switch grass or miscanthus grass are economic for farmers at the yields of six tons per acre today, but we need even higher yields and "grass cocktails" to avoid the problems of monoculture agriculture. We need significantly more research in agronomy practices focused on energy crops. Miscanthus already yields 15 tons per acre in a wide variety of regions, including the U.K., and in Illinois test plantings.

From naysayers we've seen the same kind of "historical extrapolation" thinking in personal computers, in biotech, in telecom, in media and the Internet before. The experts all claimed about 10 years ago that the Internet would never replace traditional telecommunications. Today wireless and Internet telephony are pervasive, long distance calls are virtually free (unthinkable in 1995) and most of what is left of AT&T is a brand. Ten years from now, our scientists and technologists, powered by the entrepreneurial energy of the Silicon Valley mindset, will have transformed the energy world. It will look as different as today's telecom world is different from 1995. We have found scientists working on energy breakthroughs at Dartmouth (Mascoma), in pipe-fitting shops in Denver (Kergy), using platforms developed for malaria drugs in Berkeley (Amyris), in other university labs (Gevo and LS9), in India (Praj), in New Zealand and in Brazil. The conventional wisdom says that we will have to stay dependent on oil. I ask all the experts who pontificate about this to look at the facts, and at the latest developments in our labs, and imagine the future instead of extrapolating from the old energy world using conventional platitudes.

President Bush must set a very aggressive target for biofuels with an enhanced Renewable Fuel Standard (RFS). My analysis shows 39 billion gallons of biofuels production is possible in the U.S., at reasonable cost, by 2017 on 19 million acres; and 139 billion gallons by 2030 on 49 million acres. Soon we will replace all 150 billion gallons of gasoline that we use on a very small fraction of our agricultural lands while improving the environmental quality of our agriculture (through corn/soy and biomass crop rotation schemes) and improve our rural economy. Consumers can be protected by the RFS if prices get too high by including a price "relief valve" that will also protect livestock producers (who depend on reasonable corn prices).

Such a goal will ensure an attractive market for any company that meets its cost target for biofuels. If all the entrepreneurs fail, the relief valve will protect consumers and related agricultural markets. More importantly, Americans, both Democrats and Republicans, care about energy security. Many of the presidential candidates for 2008 will also support such policies.

A political consensus is possible here. President Bush will have a legacy that the world will remember. His 2006 State of the Union was pivotal in turning attention to cellulosic ethanol. His 2007 address can be the pivot on which the world's oil economy turns rapidly to a renewable, sustainable and cheaper transportation fuel future. Consumers will pay less, farmers will be better off, the world will be less dangerously dependent on the Mideast and we will take a giant step in greenhouse gas reductions. Any improvements on efficiency will make the war on oil easier. Maybe the Mideast, being less critical to the world economy, will be less geopolitically stressed and can return to normal life. We will have more energy security and enhanced energy independence -- and will leave a better world for our children. There is little downside to this.

Mr. Khosla, co-founder of Sun Microsystems and a former partner of Kleiner, Perkins, Caufield & Byers, is a partner of Khosla Ventures.

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