A Marine’s New Mission

Frederick W. Smith is not one to shy away from a difficult fight. A former Marine and a Vietnam War veteran, he founded Federal Express in 1971 and built it into the world's largest express-transport company. In recent years he's taken on a new battle by joining the Energy Security Leadership Council, a group of transportation executives and retired military officers advocating greater American energy independence. NEWSWEEK's Fareed Zakaria asked him why the CEO of a company with almost 700 planes and 80,000 trucks would push for stricter energy policies. Excerpts:

Zakaria: What made you get involved with the issue of energy security?
Smith:
The country's continued and increasing dependence on imported petroleum has created an enormous economic and national-security risk probably second only to terrorism and the proliferation of weapons of mass destruction. Our country has not developed any cogent energy policy for a number of years.

Second to terrorism? Is it that prominent a security challenge?
We ran simulations that showed quite dramatically that very small reductions in supply end up having enormous implications for the U.S. economy and our international security situation. The one we did last spring showed that oil could easily run up to $150 a barrel.

And could that, in turn, lead to military confrontation?
It shouldn't be forgotten that the proximate cause of World War II was the U.S. oil embargo against Japan, when we were an oil-exporting nation. And World War II was largely won in Europe by the United States' attack on the fuel supplies of Germany. In fact, they were making more Messerschmitt fighter planes in late 1944 and early 1945 than anywhere else in the world—they simply didn't have the fuel to train the pilots to fly them. The first gulf war was caused totally by oil—it was Saddam Hussein's insistence that he own certain oilfields that led to his invasion of Kuwait and our ouster of his forces there. The subsequent presence of the United States in the Middle East was in large measure driven by the protection of the oil trade. And a lot of analysts think that as much as 40 percent of the entire U.S. military budget can be attributed to protecting the oil trade.

Is this any different than the situation in the 1970s, during the last oil crisis?
When the first Arab oil embargo took place, imports were about 30 percent of our total petroleum use. Last year they were about 60 percent. The [Organization for Economic Cooperation and Development] countries since 2002 have sent about $2 trillion into the coffers of OPEC and the oil-producing nations. It's reinvigorated Russia, which is now using energy supplies as a political weapon. Everybody has their hair on fire about China, which is producing good products and improving the standard of living of the United States and buying more and more of our goods, but at the same time we've hardly said anything to the people who've run up the price of fuel.

Congress recently passed tougher fuel standards for automobiles, something that your group lobbied for.
The basic fuel efficiency of automotive engines has increased at about 1.5 percent per annum for the past 20 years. The problem is we have not had any overall fleet fuel-efficiency improvements because those fundamental improvements have been offset by the increasingly large and heavy vehicles that have been purchased in the marketplace.

What do tighter fuel standards mean for FedEx? Your company must be one of the largest consumers of petroleum in the United States.
We burn a lot of it, let's put it that way. But we got out of fuel hedging a long time ago. If prices rise beyond levels we set out explicitly, we simply pass along the surcharge to the consumers. A much bigger issue to us is the same issue that confronts the entire U.S. economy: what will [high oil prices] do to the overall growth and economic demand for business services? But if we don't act, the costs to our economy and prosperity are much greater. Look at the rising costs of commodities and food, much of which relates to the spike in energy prices.

You also want to tackle the supply of oil?
Unfortunately, we couldn't get the Congress to be bolder in opening up the outer continental shelf in Alaska to offshore oil drilling. There just wasn't much appetite to have one of these bruising fights over that issue. People's concerns are really unjustified. With today's technology, we could produce oil there away from anybody's daily visibility except a few sport fishermen.

With new energy-extraction techniques, you can access a lot more oil these days. Won't that increase supply without having to drill in Alaska?
I don't think there's any question about that. The real problem about some of this technology—for getting oil out of shale and so forth—is, you go and make these fantastic investments, and then the new field that Brazil found off its coast comes online, or OPEC decides it's not in their best interest to have a competitor making oil from shale, and they increase supply. It's very important to try to produce conventional petroleum from places like the outer continental shelf in Alaska, which doesn't have those incredibly high production costs.

Are you optimistic that the United States can reduce its dependence on foreign oil any time soon?
I am optimistic in the long and intermediate term for the very simple reason that I believe in the ingenuity of the free market. Silicon Valley is showering money on alternative fuel concepts of every stripe. People are talking about nuclear being a realistic option again. Battery technology is moving very rapidly. The oil markets have overshot, and this run-up in oil prices is creating a market-based reaction. But that shouldn't take the [spotlight] off the proposals that we made because they go to fundamental security issues.

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