sinks a tanker or two, the insurance companies will do the rest and we will start this effort of bringing the west to its knees through gas prices in our country, probably in excess of $10 a gallon. so, there are a lot of tools they have that can be used to manipulate us. it's pretty challenging to think about. >> let's open it to the audience for questions and we'll begin with my colleague, director of economic studies here. >> do i need a mike? >> yes, sir. please speak into the microphone and identify yourself. >> you just did. >> i did. >>. >> i've been jousting with conservatives on this question of security.

and not just having meet their reaction to the fact that environmentalists want to get us off fossil fuels. i might say mr. lutz that you were as unkindly treated by cnbc this morning as anything fox might have arranged. so you apparently do have a problem selling this to conservatives. and i agree. here's the problem. and perhaps you can help me. what fred is suggesting is that somebody's going to have to pick a winning technology. and somehow make it happen. that because oil markets are distorted, we can't rely only on the private sector to do that. >> right. >> so, now we're into government subsidizing when it perceives to be winners.

that's a conservative difficulty. second, when we call for an energy policy, that's an actual plan. now, from what i've heard today, is this problem solved since this is a security problem, by having general conway and general kelly suggest that the funding for these technologies come out of the military budget? >> who are you direct iing the question to? >> well, fifrl, i'm sorry. fred, i wonder how you get over this question of picking of winners and second of all, i wonder if military friends would accept the burden of funding these received winners from the military budget since this is a security problem and markets can't seem to handle it. >> well, first of all, everybody in this room that has a, on your

person at the moment, a cell phone, raise your hand. are you telling me there are a large group of people back there that don't have a cell phone? everybody that owns one, raise your hand. everybody in the room, isn't it? if you don't, you're one of the tiny minorities. that issue has been decided. every cell phone regardless of whether you have an android or iphone or whatever the case may be, is powered by lithium ion battery. there's nobody that's arguing over whether l.e.d. acid batteries or whatever the case may be, are going to be a source of power. that issue has been decided. it's more akin to the situation of the early days of aviation when the united states realized that there was a high likelihood that these tiny little airplanes

that had been so important in world war i were likely because of technology, to become self-sustaining in a commercial way themselves. and so, what the government did is to try to help that technology cross the chasm by offering airmail contracts to insent the man factturers to build new, productive airplanes and eventually, douglas did that with the dc 3 and famous c47 end of it, which was a big part of our victory in world war ii. so what the government needs to do today in my opinion, not try to pick winners and losers among general motors or ford or whatever the case may be, but to provide the incentives for the private sector to build vehicles and help drive the cost of the

battery down and increase the range so that forlight duty vehicles, there is an alternative to fossil fuels. it's not going to replace it. plenty of internal combustion engines are going to be built for a long time. so i think that's different than picking a winner and it's certainly not the same as the government putting money into solyndra or putting money into solar or what have you. that is worth an environmental history. we have lots of power generating fuels in the united states. we have coal. we have natural gas. we have geothermal. we have -- we have certainly solar and wind, but they're a tiny traction. we have nuclear and so forth, so we don't have to pick a winner

or loser of the power sector, which is the primary prepulse capability, which i think and bob lutz knows more about this than i'll ever know, pu i think that the trajectory of the battery density and the price and range of the vehicles in a few years are going to be cost competitive on their own. but there is no competitive technology that can fight the lithium ion technology. >> over to general kelly of the question of movement of technology in a battery sector and where it's going. >> well, anyone who's worked with electric vehicles or work ed in the battery industry knows

that there are significant, significant breakthroughs in the wings both at the national level, university and a lot of private start-up companies and the work is concentrated to some extent on the cathodes, by improving the officialsy, you could probably double the efficiency. but also on the horizon is is something called lithium sulphur, which is about four years away and will improve energy density by a factor of five. so today is a 40 mile range battery in a volt becomes a 200 mile battery. a little further on the horizon is is lithium air, which today demonstrates already ten times the energy density of today's lithium ion. one tiny problem.

nobo nobody's figured out how to recharge it cht it's a primary battery. works once and then is disposed. i think the recharging thing will be settled. some historic figures. when we started working on the volt, lithium ion was quoted at $2,000 per kilowatt hour. through negotiation with various man factturer, we got it down to 1,000, then 950 per kilowatt hour. meanwhile, it's come far enough down on the cost curve to the last i checked, it was $350 per kilowatt hour and still dropping. to the point that fred made about it will soon be self-sustaining. i am a board member of a company called via, which takes general motors produced full size pick-up trucks and vans minus the engine and transmission,

installs lithium ion batteries, an electric motor and a very, very small fuel efficient v-6 engine. works just like a volt. 40 miles electric, then the rest of the time, you're on the piston engine replenishing the battery. these things today, there's a heavy, heavy, heavy demand for fleets including federal express. because the combined monthly am mortization of the vehicle plus the fuel costs, monthly fuel costs, the sum is less than the monthly am mortization plus the fuel cost of a conventional pick-up and that's at $3.50 a gallon, plus the equation tips even farther. here's a home vehicle category that already is not dependent on

government incentives and in fact, from a purely private enterprise, which one's the best solution for me, already pays off for fleet use. in a brief time, government tax credits will no longer be necessary for the support of electric vehicles, which one more reminder as i get a chance to present, bill o'reilly has a larger audience than i do, but obama gets blamed for the $7,500 tax credit r for buying an electric vehicle. that tax credit was in fact created under george w. bush to set the record straight. >> not sure that would have many fans here otherwise. let me turn it back to general kelly and ask about or back to

the question about the military assuming some of the costs. >> could i stand up? >> absolutely. >> you probably noticed when i walked in, a problem walking. when i saw the surgeon and bet es ta, he said, what have you been doing, that's the worst back i've ever seen. i said you don't jump out of airplanes a couple of hundred times and come back clean. i said i'm not asking your opinion. what can you do to fix it? and he said well, when my team sees that back, they're going to think it's unfixable. but with that said, let me sit down, and then i'll answer your question. with that said, i said i will get, make a deal with you. i'll make a deal with you. i will let you operate if you can do it up on the eighth

floor, which is the orthopedic ward for the young kids coming home as opposed to the bip suites for all the admirals and generals. so, he said, yes, he could do that. and it was one of the best decisions i think i've made in my 37 years as a marine to see and be with these young kids. one night, i woke up in great pain and looked over and there's a young marine standing there and i said, what are you doing here? he said i'm guarding you. i said, from what? and i looked over and here he is standing there guarding me on one leg. and i mentioned that story i think only because every time i meet a wonderful group like this, i want you to know there's young kids out there doing a

great job for this country in every way. but to answer your question, the answer generally speaking and the answer is no. if you start taking out any more for either people or quipt, you're going to degrade the combat capabilities of the united states of america. as a young two-star, i was sent by the marine corps to the european command and i gave 52 presentations. on the capabilities of the marine corps. operating in that theatre of operations. and one of the things i was more focused on than anything, i know marines can fight, is the question of how you get there and what i saw was that we were having a difficult time in determining how we were going to get there.

as an example, i was up in bud da in in norway and a great big norwegianen air force general got very annoyed with some of the things i was saying. he came over and punched me in the chest and said you can't come to my country and tell me how i'm going to fight my war. well, his boss, who was a three-star, told him to sit down and he reminded him, said anytime, said you've got to have something to fight with before you can fight. i thought that was a great answer for somebody who was getting very antagonistic. the following year, i went to the pacific area and gave about 50 pereiresentations and from t, we built a bidding block of unique and historic capabilities. number one was essential during

the gulf war. the maritime positioning of ships. those ships would be prelocated offshore or in close proximity to the target area. completely loaded with simplied a ands and equipment for 30 days, so transit time cut down to practically nothing. and also, we built 50 more c5 airplanes. we rewinged all of the 141s. we did a lot of things to improve our capability to get there. but now then the issue was once you get there, how are you going to fight? i think the marine corps during that period of time and now has made such a 100% improvement. i don't know how much of you have ever known, we had one who

was happened to be, not telling him what he wanted to hear. it wasn't one of us. and in a meeting one day, i told him what he didn't want to hear. and he did got very antagonistic and what i said essentially was if you do that, we have to sell all 10,000 marines just to pay that bill. and he didn't believe me. until we proved it to him and so with that, then we had to borrow money from peter to pay paul. from what i'm reading now that's coming out of the pentagon is they are really starting to scrape the bottom of the barrel. and so the answer to what your question is, yes, there are probably some items that you can get along without for a period of time. on the other hand, i don't think

there are many. and so if this great country of ours is going to be a global force and have capabilities that are global, then we've got to pay the penalty that it cost us and don't expect it to come from the young troops who can't hardly afford it. i heard a story once and i'm not invading your territory, but when you are commander in the gulf war in the iraqi war, that your column of trucks were some 60 miles long. >> total. >> trucks. 60 miles long. imagine in refuelling capability and i told, stepping on your toes, that because we had inflight refuelers and we're the only service that does, we could

land those on the roads and off load the fuel into our conta containers and that's what we did. so of all of the services, let me be very candid about this. of all of a services, i think we are probably the most care and loving care for the dollar bill and what it costs to go to war. there are no flourishes, nothing that you can say is something you shouldn't have. and so, the point is the answer to the question was the very, very -- make sure we got specific for some things that might be a trade off. but i would doubt it very seriously. >> fred smith. >> first off, let me put this in perspecti perspective. i'm fully in favor of a strong military. i believe in the action based on

my own military service. if you need a platoon, send a batallion. you want to deal with the overwhelming force and we're feeling the best military in the history of the world, but the energy security leadership counsel's recommendation and it's offshoot, the -- has worked on this issue. correct me if i'm wrong, the incentives which were recommended total over a ten-year period, $15 billion? is that close? over ten years. and it is a tiny fraction of the money we spend on the military, which is $550 billion a year or something like that. that doesn't count the cost of combat operation. this country has spent in iraq, in afghanistan, well north of a

trillion dollars. a prominent conservative mentioned to me this morning, well, the original afghanistan war wasn't really about oil. that's as i said earlier, osama bin laden declared war on the united states in 1998 because our troops were in saudi arabia and our troops were this saudi arabia because of the gulf war one. and president george herbert walker bush said the war was about oil. alan greenspan repeated it in his book. president nixon thought about invading saudi arabia after the first arab oil embargo. 10 this is -- you're talking about $15 billion over ten years to try to incent movement towards electrification. we at fed ex have also supported either vehicle mileage taxes or an increase in the fuel tax in

order to fund the appropriate infrastructure in this country. we won't raise the tax. our infrastructure is going to the devil. the cost of congestion, i don't have to tell anybody that lives in the washington, d.c. area about this. we're being penny-wise and pound foolish. so you're not talking about a wholesale cavitation of the american military by providing these incentives which we recommended, and they can be funded in a lot of ways. but what they need to be looked at is part of the overall strategic issues that confront the united states, not a free market issue, not a picking winners and the losers, but in the overall context. >> let me turn it over to other questions from the audience. al a fred moses. a microphone up here? >> thank you, ken.

mr. smith, you should be feeling pretty good. first of all, you didn't mention it, but your company is one of the most efficient users of fuels obviously looking to get vehicle that are more fuel efficient. you're a leader in the industry and you should be commended for it. but if you take your five points greater oil production, we've embarked on that, rather dramatically in the last four years in terms of natural gas. our production has moved up so that the cost of natural gas today is what, $2? >> right around $2 per thousand cubic feet. >> against almost 6 to $7 a few years ago. >> $13 at the turn of the century. >> well, i don't go back that far. looks like you did either, perhaps. overstated. electricity. electric cars, we're moving in that direction. we're not quite there yet. we're certainly moving in that direction. biofuels? yes. not quite there yet. we're moving in that direction.

and lastly, fuel efficiency. if i call correctly, president bush's goal was 35 miles a gallon. president obama's goal is over 50 miles a gallon. so a dramatic improvement. i've even seen figures in newspapers such as the mirror times that we will be fuel neutral in terms of imports by the year 2020 and may even be exporting fossil fuels a decade or so later. so aren't we really marching now to the smith drum in accomplishing many of the things you've been advocating, and probably in a shorter time frame than you foresaw? >> well, i think the answer to that question is yes. i think one of the very best thing that has happened has been this incredible technology that has been deployed for natural gas, and now oil production. and as i mentioned, i believe

that the position of the energy security leadership council on new fuel efficiency standards was a very big part of the bush administration's decision to embrace them in the 2007 energy act. we certainly worked on it hard at the time. so yes, we're moving in the right direction. but i'll tell you one of the reasons that i agree to do these sessions today. and it gets to exactly the point that bob lutz was talking about. our national dialogue today is we take one incident about a lithium-ion battery fire three weeks after a government crash test that was caused because they didn't take the fluid out of the vehicle. yet there are 275,000 internal combustion engines that catch on

fire every year. now when you've got that type of hyperbole and that type of misinformation -- well, i don't know. but i know this much. we're here to try to correct some of these misconceptions. but that is doing a disservice to the american public that doesn't understand the magnitude of the problem, and that these technologies are safe. now listen, we know where lithium-ion battery technology at fed ex very well. we transport them in our airplanes. they can combust under certain circumstances. but they have not in the automotive sector because of the tremendous amount of r&d and manufacturing prowess that bob put into that product, and presumably toyota has put into theirs and so forth. so we are definitely moving in the right direction. we're down 5% year-over-year. but until we get to that point,

and my guess is that people think we'll be a net oil exporter probably a bit overoptimistic based on the depletion rates of the oil that is coming up because of fracking. but until we get to the point where we are much less dependent on foreign petroleum, the foreign policy options that the successors to general conway and general kelley have to deal with are tremendously circumscribed in what we can do. we have to just as the general told you at the joint chiefs of staff, they're talking about the economic implications of whether we do this, that and the other thing. and if we have another oil crisis, it will put the united states back into significant recession. and as i said, based on my experience over these 40 years, given the demand grethe of china and india and the emerging

economies, from this point forward, as long as we have this kind of imbalance, as soon as the united states starts showing any type of significant economic growth, i can almost assure you that that economic growth and wealth will be expropriated by an increase in oil prices because it would not be in the best interests of the people that control the oil markets through a cartel to do anything other than that. >> thank you. thank you so much. mr. smith, you commented on -- and when i look at japan in light of the fukushima accident, the japanese government ordered

all nuclear power play, my question is japanese are confronted with a huge electricity shortage this summer. and b, dealing with iran and eu issues, whenever i look at u, in france 75% of energy mix is coming from nuclear plant and uk is 20%. but in the fukushima accident, a german government, it change its policy in nuclear plan. do you have any views how other eu member states might change their energy? thank you very much. >> well, my view, and the view of the energy security leadership council is that nuclear power play generation is something that the united states should embrace and continue. in the history of human technologies, producing power, i don't think any have the safety record that nuclear does. i mean there have been far more

people lost in coal mining accidents and refinery fires and one thing or other than nuclear. i think the real problem in horrible tragedy in japan and of course we were very heavily involved in that. fed ex served japan. we tried to help in every way we could taking supplies. so i know the extent of the devastation. but the fundamental problem at fukushima was the unfortunate decision to locate the nuclear power plants where there could be a tsunami that kept the power plants from being safely cooled down. so i don't have any doubt about the fact whether the german government has made their decision stick or not, i would doubt to tell you the truth. i think the advantages in nuclear power, particularly for people concerned with