**INTRODUCTION: MR. TOLMAN**

Our next speaker is Mr. Red Cavaney, President and CEO of API. API is
the only National Trade Association that represents all aspects of
America's Oil and Natural Gas Industry. Mr. Cavaney served as a senior
member of the White House Staffs of the U.S. President's Ronald Reagan,
Gerald Ford and Richard Nixon.

In July and September of this year, Mr. Cavaney updated Congress on our
nation\'s current energy situation and the work that's going on to
address solutions to meet our nation\'s growing energy needs.

Please join me in giving a warm welcome to Mr. Red Cavaney.

**TODAY'S DECISIONS/TOMORROW'S NEEDS:**

**ENERGY POLICY FOR THE 21^ST^ CENTURY**

**MR. RED CAVANEY**

Thank you Richard. Good Morning. I'm honored to be a part of this
DOE/USDA Renewable Energy Conference. All of us, who share a commitment
to meeting our nation\'s future energy needs, owe a debt of gratitude to
Secretaries Bodman and Johanns for arranging this sensational event.

It epitomizes the cooperative effort between Government and the private
sector that is so essential to meeting the energy challenges of the
21^st^ Century and ensuring that the transportation fuel needs of U.S.
consumers are addressed in the decades ahead.

Given the current and projected worldwide energy demand that you heard
about earlier today, our nation needs all sources of commercially viable
energy, as well as a greater commitment to energy efficiency and energy
conservation.

We do not have the luxury of limiting ourselves to only a few sources of
energy to the exclusion of others, nor should our leading sources of
energy today, oil and natural gas, be written off before we have found
cost competitive and readily available alternative sources.

Energy sources must be viewed in their proper perspective. Alternative
sources have great potential, but for the near and intermediate term oil
and natural gas will provide nearly two-thirds of U.S. energy
consumption to the year 2030, including 90 percent of motor fuel
consumption, according to projections set forth by the U.S. Energy
Information Administration. However, energy efficiency and renewable
energy sources in particular, will clearly, be on the march gaining much
faster and growing much faster, than their historical circumstances.

Companies in our industry are focused primarily on oil and natural gas,
but have long been pioneers in developing alternatives and expanding our
utilization of virtually all sources of energy.

From 2000 to 2005, and within North American alone, the U.S. Oil and
Natural Gas Industry invested an estimated 98 billion dollars in
emerging energy technologies, including renewables, frontier
hydrocarbons, such as shale and oil fan and end-use technologies such as
fuel cells.

This investment represents 73 percent of the total 135 billion dollars
spent by all of industry in the Federal Government combined, on emerging
energy technologies during this time period, according to a study
completed this past May by the Institute for Energy Research.

I would also like to cite a couple of example projects that have been
more recently announced. One company will spend 500 million dollars over
the next ten years to establish a dedicated Biosciences Energy Research
Laboratory, the first of its kind in the world.

Another formed strategic research alliances with Georgia Tech and the
University of California at Davis, to pursue advanced technology aimed
at making cellulosic biofuels and hydrogen viable transportation fuels,
as well as transportation fuels from renewable sources such as forest
and agricultural residues and municipal solid waste.

And yet, another has a 46 million dollar partnership with Iogen
Corporation for the development and commercialization of cellulosic
ethanol.

Add to this list, announcements by several companies of joint ventures
to construct and operate a number of biofuels plants and you get a sense
of the high level of interest that exists within our industry.

Oil and natural gas companies are also worldwide leaders in almost the
entire range of alternative energy sources. Wind energy, potable take,
solar cells, geothermal energy and hydrogen fuel cell technology. We are
proud of our credentials and proud to be a participant of this
conference.

Our companies are committed to meeting the energy needs of industrial
and transportation consumers well into the future. And their research
and development efforts are continuing in the search for the most
competitive, efficient and economical energy technologies. Already, it
has become clear that going forward the mix of our nation\'s fuels will
be much more diverse. However, we feel a free market will determine the
technologies and fuels that work best.

Some industry critics erroneously claim that our industry is opposed to
ethanol and is doing all it can to discourage its use. Nothing could be
farther for the truth. Our companies are in the business of producing
and supplying transportation fuels, with individual companies following
differing strategies and approaches. Certainly there is a bright future
ahead for the entire full range of alternative sources.

In fact, API was a partner in the development of the original Renewable
Fuel Standard or RFS, along with the Renewable Fuels Association, the
American Farm Bureau Federation, corn growers and others. This
initiative was envisioned as expanding ethanol use and helping the
ethanol industry to gain critical mass and economies of scale that would
allow it to compete in the fuels marketplace.

The RFS is already producing results beyond expectations, given the
number of new ethanol plants, the ethanol industry's production
forecasts and our industry's ethanol use thus far in 2006.

Our companies have been working hard to markedly increase the ethanol
content of our nation\'s gasoline pool. Nearly half, 46 percent to be
exact, of all gasoline now consumed in the United States, includes
ethanol. So 4.6 billion gallons of ethanol will be used this year,
exceeding the RFS required 4 billion gallons for 2006. In our view
ethanol is here to stay and it's going to be a very important part of
our nation\'s gasoline pool.

It is absolutely essential that ethanol and the entire biofuels industry
become strong, vital and self-sufficient. Why? Because these are the
characteristics critical for long term success in the highly volatile
motor fuels business. We know, because we have nearly 100 years of
experience and infrastructure developed in order to reliably serve U.S.
consumers with the fuel they need when and where they need it.
Reliability is key. Just ask those who sat in gasoline lines during the
1970's oil embargo days or those trapped when the supply of their
boutique fuel could not be readily replaced. A reliable fuels partner is
essential to the future success of both the oil and the biofuels
industries.

In the early years of consumer experience with biofuels we don't want to
be a party to any over-promised and under-performed commitment. All of
us have to be realistic in our expectations and our pronouncement about
the relative merits of various energy sources. One only need look at the
auto industry's experience in over-promising performance to the U.S.
consumer in introducing diesel in automobiles in the late 1970(s) and
early '80(s), to see that wishful thinking, absent merit, can end up
hurting everyone.

For a generation, U.S. automakers have experienced great difficulty in
promoting diesel engines for the U.S. passenger car market. Why? Because
the confidence of U.S. consumers was eroded by their long memory of a
1980's passenger car, diesel product that was neither reliable, nor
performing as advertised. We want consumer\'s early experience with
biofuels to be a positive one. This is a common goal, I believe we all
embrace.

We are concerned, however, that some ethanol proponents are focused
exclusively on E85. The industry does not object to E85 in a free
market, so long as it meets standardized technical specifications and is
of reliable quality. However, a national emphasis on increasing ethanol
volumes through E85 can prove unnecessarily expensive and risky,
particularly in the earlier years. If we are to encourage more long-term
use of ethanol, we need to avoid surprising consumers with unanticipated
problems.

Recently Consumer Reports put a 2007 U.S. manufactured SUV, flexible
fuel vehicle, through an array of fuel economy, acceleration and
emission tests and interviewed more than fifty experts on ethanol fuel.
Their findings were consistent with EPA's annual reporting of FFV(s)
running on E85 compared with gasoline. FFV(s) operating on E85, incurred
25 to 30 percent fuel mileage penalty. In other words, their miles per
gallon rating suffers a 25 percent reduction. Interested consumers need
to be aware of these facts before they make a purchase decision, not
after.

Looking at demand, more than 97 percent of the cars on the road today
are not designed to operate on E85 without risk of damage. We appreciate
automaker\'s efforts to produce more flex fuel vehicles however, given
that the current useful life of new cars is in excess of fifteen years,
it will take decades for significant market presentation of these new
flex fuel vehicles to occur. In fact, EIA projects that FFV(s) will
comprise 6.5 percent of the U.S. light duty vehicle fleet in 2025,
compared with 2.6 percent today.

More than 90 percent of the 169 thousand retail gasoline stations
nationwide are owned or operated by independent entrepreneurs,
typically, small businessmen and women. They will decide whether or not
to offer E85 to consumers, balancing customer demand with per station
investment and conversion costs that can range from \$10,000.00 to as
much as \$200,000.00.

This investment hurdle is a major concern to many, since most service
station owners will insist on seeing strong demand of plenty before
making this level of investment commitment. Currently there are almost
900 retail outlets nationwide located principally in the upper Midwest,
that are equipped to distribute E85, the number appears to be growing
rapidly on its own, absent any Government mandate.

We believe allowing market forces and consumer preferences to determine
where and how ethanol is consumed, is the most effective and least
costly way to integrate ethanol into our nation\'s transportation fuels
pool. Already, ethanol consumption is well above the predicted RFS level
for this year.

The ethanol industry in now strong and capable of standing on its own
and compete in a free market. Isn't this what many had in mind and had
hoped to be achieved through the RFS? There is far less uncertainty in
today's ethanol market and a very attractive future lies ahead.

The price of ethanol has exceeded that of regular gasoline on a volume
basis for twenty-eight of the past thirty-three months and significantly
exceeded gasoline on an energy content basis. Ethanol has about 70
percent of the energy per unit of volume as gasoline. It seems obvious
that ethanol is a better value for most consumers as a gasoline additive
than E85 at this stage. As long as ethanol can be added to gasoline up
to its legal limit of 10 percent by volume, as a gasoline additive, it
enhances octane, reduces toxic and certainly is a viable approach. This
approach also creates market pressures, preventing ethanol prices from
falling below those of gasoline, until the possible use as an additive
has been fully exhausted.

And with a 140 billion gallon national gasoline pool currently, there is
considerable growth opportunity ahead for ethanol in this area. Emerging
energy technology will be a key driver, in facilitating the transition
of increased use of ethanol and other biofuels and blends compatible
with existing fleet and fueling infrastructure.

Government has a role to play here too, but it's important that we not
ask Government to pick technology winners and losers. History has often
demonstrated that we should not focus prematurely on just one approach,
which may or may not prove to be effective, while discouraging others
that may have more potential over the longer run.

Like other fuels already approved by the EPA, a thorough evaluation of
ethanol's potential environmental and related effects over its full life
cycle, should be undertaken as recommended by EPA's 1999 Blue Ribbon
Panel on oxygenates in gasoline. To avoid significant degradation of
transportation fuel flexibility, individual states should not mandate
gasoline sold in their states contain a prescribe amount of ethanol. A
patchwork of state-by-state laws mandating ethanol use, will likely
result in fuel and price volatility similar to that experienced with the
so-called boutique fuels, a problem much despised by consumers, and many
of their elected officials, discouraging the use and spread of boutique
type fuels in pro-consumer not anti-ethanol. Just as a patchwork
approach to boutique fuels has made it much more difficult to deal with
tight supplies and get fuel to where it is most needed, state ethanol
mandates have the same effect on both our respective industries.

As you know, ethanol cannot be moved by pipeline and requires its own
supply chain to serve consumers. This means a longer reaction time
between when supply problems arise and when relief fuels can be sourced
into the market under pressure. State ethanol mandates will
significantly add to this reaction time. This development is bad for the
oil industry, bad for the biofuels and ethanol industries and
particularly bad for U.S. consumers.

The uniform National RFS enacted last year is a much better alternative.
It will integrate more ethanol into the nation\'s gasoline pool at
concentrations of up to the maximum permissible 10 percent per gallon.
It can also be utilized in the entire U.S. automotive fleet without
vehicle modifications or fear of engine damage. An E85 can grow and
prosper in those locales and in those instances where it meets
regulatory and marketplace demands.

Biodiesel, renewable diesel and blends with conventional diesel, will
likely grow as companies look for flexible in complying with the Energy
Policy Act requirements and with ultra low sulfur diesel regulations.
According to the National Biodiesel Board the production of biodiesel
grew from 500 thousand gallons in 1999 to 75 million gallons in 2005,
and is expected to double to 150 million gallons in 2006. Biodiesel
certainly has a very attractive future and that potential will be best
realized through a market-driven approach. Cold weather impacts and
quality control issues can be more readily resolved through the
competitive market forces that exist.

In closing, the path forward on renewable energy will best be determined
by technology and consumer preference in the free marketplace. If we are
wise enough to seize the moment, and build on the success we have
already achieved, I have every reason to believe that we will meet the
energy challenges our nation faces in the 21^st^ Century and that
renewable fuels will play a very important role in that regard. Thank
you very much for your attention.

**CONCLUSION: MR. TOLMAN**

Thank you very much, Mr. Cavaney. Thank you for being here and for those
enlightening comments, we appreciate that.