Bush pushes for green fuel
State of the Union includes an ethanol plug. Will it matter?
By Adam Lashinsky, FORTUNE senior writer

NEW YORK (FORTUNE) - President Bush -- former oil man, son of an oil man, coached by the former chief executive of Halliburton -- held forth Tuesday night on why America needs to be doing a better job of promoting renewable fuels.

"America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology," Bush said in the State of the Union address.

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This is the Nixon going to China of renewable fuels. Of course, if the price of a barrel of oil was closer to $40 instead of $68, it's unlikely President Bush would even be talking about alternative energy. But oil isn't at $40, and Bush is talking about ways to cut down our use of petroleum, 60 percent of which we import.

As part of an "advanced energy initiative," Bush said the United States should reduce its reliance on foreign oil by using technology to develop alternative energy sources, such as ethanol-blended gasoline and hydrogen fuel cells to run pollution-free vehicles. The president set a goal to replace more than 75 percent of U.S. oil imports from the Middle East by 2025.

Last year's energy bill -- among other things -- mandated the use of 7.5 billion gallons of ethanol by 2012. Last year, Americans consumed about 4 billion gallons of ethanol, nearly all of it added to gasoline in a 90 percent gas/10 percent ethanol blend. In recent interviews, the president has been talking up the virtues of flexible fuel vehicles that can burn a blend of 85 percent ethanol called E85.

These are ordinary cars whose engines include a sensor that allow them to burn the higher ethanol blend. The president could propose tax credits for driving flexible-fuel vehicles or give automakers tax breaks for building them.

Already, there are more than 5 million flex-fuel vehicles on the road in the U.S. The car companies built them primarily to satisfy corporate fuel-efficiency requirements. The problem with promoting flex-fuel cars as well as E85 as the alternative fuel to run them is what former CIA Director James Woolsey calls the classic "Alphonse-Gaston" problem.

Not only do most people who own one not know they already have a car that can burn gasoline or ethanol, there's almost nowhere for them to fill up with ethanol. Fewer than 600 of the 170,000 gasoline stations in the U.S. sell E85. It isn't clear who's going first here, Alphonse or Gaston. (Woolsey is involved with a group called the Set America Free Coalition. Their thoughts on energy security are worth reading.)

To be a success, ethanol will have to be made from agricultural products other than corn. Such cellulosic ethanol could come from prairie grass and wood chips, for example. The Department of Energy has estimated that ethanol derived from such sources could make up 30 percent of overall gasoline consumption in 25 years. (Click here for more about how ethanol could help break the country's dependence on foreign oil. )

Private industry already is working on ways to ramp up ethanol production. But if President Bush is serious about helping that process along, he'll need to suggest ways to make flex-fuel vehicles more than an empty promise. Of course, just by talking about alterative fuels the president sends a signal, especially to the gas-guzzling, anti-conservation crowd he knows well. Look where China is 35 years after President Nixon made it possible for the West to business there. Top of page

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