Robert Bryce

The contempt motion puts the spotlight on Bush’s sworn affidavit, filed on Aug. 5, in which he said that he has “had no conversations with SCI officials, agents or representatives” about the state’s investigation. The affidavit was filed by Texas Attorney General John Cornyn along with a motion to quash a subpoena issued to Bush by May’s attorneys.

Since the affidavit was filed, Bush’s flat denial has been contradicted several times, even by Bush himself. According to reporters who were with Bush in Iowa last week, when Bush was asked if he talked to Waltrip about the investigation, Bush responded, “I did not. I had only a brief exchange with him that lasted only a few seconds.” Bush’s press secretary, Linda Edwards, has also described their meeting as an “exchange.”

The American Heritage Dictionary defines the word “conversation” thusly: “an informal spoken exchange.”

In their 16-page motion, May’s attorneys point out that in the Aug. 16 Newsweek, Johnnie B. Rogers, Waltrip’s attorney, discusses an April 15, 1998, meeting in the office of Joe Allbaugh, Bush’s chief of staff. According to Rogers, while he and Waltrip were in Allbaugh’s office, Bush stuck his head into the room. “Hey, Bobby, are those people still messing with you?” Bush asked Waltrip. When Waltrip indicated that they were, Bush asked Rogers, “Hey, Johnnie B. Are you taking care of him?” Rogers replied, “I’m doing my best, governor.”

May’s attorneys are claiming that Rogers’ statement, combined with statements made by Edwards, and a sworn interrogatory issued on June 11 by Waltrip’s attorneys, show that “the governor had what was undeniably a conversation about the dispute arising from the Texas Funeral Service Commission investigation of SCI.” They add that Bush gave “testimony that was deliberately misleading and deceptive.”

In a prepared statement Wednesday, Bush spokeswoman Edwards
called the motion for contempt “nothing more than a publicity stunt and an example of
the frivolous misuse of the civil justice system. This is clearly
an attempt to draw Gov. Bush into something he has not been involved
in. Gov. Bush stands by what he said in his affidavit, which is what he
has said all along — that he was not involved in the case and has no personal
knowledge of the facts of the case.”

The court filing is the latest development in the influence-buying scandal whirling around SCI that is now being referred to as “Formaldegate.” On Monday, the Texas comptroller of public accounts, Carole Keeton Rylander, a Republican, announced that her agency was taking over the day-to-day operations of the TFSC, which has been foundering ever since May was dismissed from the agency on Feb. 8. Rylander was asked by Bush to intervene at the tiny agency, which is supposed to have 10 employees. Just four employees are currently working at the TFSC, which regulates 1,200 funeral homes in Texas. Three employees from the comptroller’s office are expected to stay at the TFSC for several weeks.

The comptroller’s move was applauded by SCI spokesman Bill Miller, who said the company is eager to resolve the fines that have been levied against it. “All we’ve ever said is we want our case processed,” Miller said.

In her lawsuit against the state, May blames her dismissal on SCI, which has given tens of thousands of dollars to various state politicians who allegedly intervened on the company’s behalf. Since 1996, Bush’s gubernatorial campaign has received $35,000 from SCI’s political action committee. In 1994, when Bush was running for governor, Waltrip gave him $10,000. In addition, Waltrip is a close friend of Bush’s father, former President George Bush.

In their motion seeking a contempt sanction, May’s lawyers claim Bush made false statements in his affidavit to avoid being deposed. “Plainly, such egregiously improper conduct subverts the judicial process and undermines our system of justice,” says the motion, which asks the court to find Bush in contempt, order him to appear for deposition within 21 days and impose a fine against him.

A hearing on the motion to quash the subpoena is scheduled in Travis County District Court on Aug. 30.

It’s well known that the U.S. supplies the Israelis with much of their military hardware. Over the past few decades, the U.S. has provided about $53 billion in military aid to Israel. What’s not well known is that since 2004, U.S. taxpayers have paid to supply over 500 million gallons of refined oil products — worth about $1.1 billion –- to the Israeli military. While a handful of countries get motor fuel from the U.S., they receive only a fraction of the fuel that Israel does — fuel now being used by Israeli fighter jets, helicopters and tanks to battle Hamas.

According to documents obtained under the Freedom of Information Act, between 2004 and 2007 the U.S. Defense Department gave $818 million worth of fuel to the Israeli military. The total amount was 479 million gallons, the equivalent of about 66 gallons per Israeli citizen. In 2008, an additional $280 million in fuel was given to the Israeli military, again at U.S. taxpayers’ expense. The U.S. has even paid the cost of shipping the fuel from U.S. refineries to ports in Israel.

In 2008, the fuel shipped to Israel from U.S. refineries accounted for 2 percent of Israel’s $13.3 billion defense budget. Publicly available data shows that about 2 percent of the U.S. Defense Department’s budget is also spent on oil. A senior analyst at the Pentagon, who requested anonymity because he is not authorized to speak to the press, says the Israel Defense Force’s fuel use is most likely similar to that of the U.S. Defense Department. In other words, the Israeli military is spending about the same percentage of its defense budget on oil as the U.S. is. Therefore it’s possible that the U.S. is providing most, or perhaps even all, of the Israeli military’s fuel needs.

What’s more, Israel does not need the U.S. handout. Its own recently privatized refineries, located at Haifa and Ashdod, could supply all of the fuel needed by the Israeli military. Those same refineries are now producing and selling jet fuel and other refined products on the open market. But rather than purchase lower-cost jet fuel from its own refineries, the Israeli military is using U.S. taxpayer money to buy and ship large quantities of fuel from U.S. refineries.

The Israeli government obtains the fuel through the Defense Department’s Foreign Military Sales (FMS) program, and pays for the fuel and the shipping with funds granted to it through Foreign Military Financing (FMF), another Defense Department program. (In 2008, Congress earmarked $2.4 billion in FMF money for Israel, and $2.5 billion for 2009.) The dimensions of the FMS fuel program are virtually unknown among America’s top experts on Middle East policy. For his part, the Pentagon analyst was surprised to learn that FMS money was even being used to supply fuel to Israel. “That’s not the purpose of the program,” he says. “FMS was designed to allow U.S. weapons makers to sell their goods to foreign countries. The idea that fuel is being bought under FMS is very, very odd.”

The fuel program, in fact, raises a number of pressing questions. The shipments have occurred during times of record-high oil prices, when American consumers have been angered by motor fuel prices that in 2008 exceeded $4 per gallon. Given those high prices, it appears to make little sense for the U.S. government to be promoting policies that reduce the volume of — and potentially raise the price of — motor fuel available for sale to U.S. motorists.

The U.S. fuel shipments are part of a sustained policy that has widened the energy gap between Israel and its neighbors. Over the past few years, the Israel Defense Force has cut off fuel supplies and destroyed electricity infrastructure in the Gaza Strip and Lebanon. Those embargoes and attacks on power plants have exacerbated a huge gap in per-capita energy consumption between Israelis and Lebanon, the West Bank and Gaza. And that sharp disparity helps explain why the Palestinians have never been able to build a viable economy.

Edward S. Walker, former president of the Middle East Institute, a Washington-based think tank, says the fuel supply program is emblematic of U.S. military support for Israel. Walker, who has served as U.S. ambassador to the United Arab Emirates, Egypt and Israel, explains that the FMF money allows the Israelis to “do with it what they want. They can buy equipment or fuel. It’s their choice, not the government’s choice. It’s the only program where we give someone a blank check and they can use it any way that they choose.”

Given the recent spike in oil prices, which helped send the U.S. and the world economy into a tailspin, and Americans still smarting from paying $4 at the pump, says Walker, “Why are we supplying fuel to Israel when we are paying such high prices?”

Since 1948, oil has been a critically important commodity for both the Israel Defense Forces and the Israeli economy. And Israeli leaders have long worried about their energy security. In 1957, Israeli Prime Minister David Ben Gurion wrote in his diary, “The only sanctions which could defeat or break us are oil sanctions.”

In 1967, Egypt’s blockade of the Straits of Tiran precipitated the Six Day War. The Straits, writes Israeli historian Michael Oren in his book on the conflict, “Six Days of War,” were “a lifeline for the Jewish state, the conduit to its quiet import of Iranian oil.” In 1973, the Yom Kippur War (Arabs call it the Ramadan War) led to the Arab Oil Embargo, an event that still reverberates in the U.S., particularly in the fanciful political rhetoric about the desire for “energy independence.”

The U.S.-Israel oil relationship goes back to 1975. In September of that year, Henry Kissinger, who was then secretary of state, struck a deal with Israeli Prime Minister Yitzhak Rabin that led the Israelis to partially withdraw from the Sinai Peninsula. The agreement required Israel to pull out of the Giddi and Mitla passes and relinquish the Sinai oilfields the Israelis had captured during the 1967 war.

In return, Kissinger agreed that America would provide multibillion-dollar economic and military subsidies to Israel. He also agreed that the U.S. would supply Israel with oil in case of any emergency. That agreement was formalized in 1979 about the time of the Camp David peace talks. It says that the U.S. will “make every effort to help Israel secure the necessary means of transport” for the oil that it purchases. The agreement concludes by saying that the U.S. and Israel will “meet annually, or more frequently at the request of either party, to review Israel’s continuing oil requirement.”

Since 1979, the agreement has been quietly renewed every five years. (The most recent approval of the document was done by the U.S. State Department in November of 2005.) The U.S. does not provide any other country the same insurance.

Nor does any other country get anything close to the volume of fuel that Israel does under FMS. In 2004, more than 140 countries received FMS aid from the U.S. Of that group, only about 13 countries received fuel of any kind through the FMS program and the biggest recipient, after Israel, was Singapore, which got $7.3 million in fuel. That year, Israel received 17 times more FMS fuel than all of the other countries combined.

Why did the U.S. Defense Department begin providing oil to Israel in 1986? And why does the program persist, particularly given that Israel no longer sees its refineries as strategic assets? The Defense Security Cooperation Agency, which manages the FMS and FMF programs, referred questions about the program to the Israeli government. The press office of the Israeli Embassy in Washington did not respond to numerous requests about the program.

While the rationale for the oil transfers remains elusive, the facts behind Israel’s refinery privatization are freely available. In 2006, the government sold the Ashdod refinery to Israeli tycoon Zadik Bino for about $500 million. And in early 2007, it sold the larger refinery in Haifa to a group led by Israel Corp., the shipping and chemicals conglomerate, for $1.5 billion.

The sale of the refineries marked a major turning point in Israel’s attitude toward oil. In its earliest years as an independent nation, Israel’s survival was made possible by using crude from the Soviet Union and Venezuela. From the 1950s to the late 1970s, Iranian crude was the lifeblood of the Zionist state. Later still, the Israelis relied on the Kuwaitis. Today, the Russians are providing much of Israel’s crude needs. And the sale of the refineries is indicative of the Israeli government’s confidence in its ongoing ability to purchase the oil it needs on the international market.

Nevertheless, the FMS fuel shipments to Israel have continued. The most recent shipments for which records are readily available occurred in July and October 2008.

On July 7, 2008, the spot price for U.S. crude oil hit a near-record of $141. That same day, the San Antonio Business Journal reported that San Antonio-based refiner Valero Energy Corp. had been awarded a contract by the Defense Energy Support Center (DESC) worth $46 million to provide fuel to Israel. Valero has won a number of lucrative contracts from the DESC, the Defense Department agency that handles all of the Pentagon’s bulk fuel purchases. On Oct. 9, the Journal reported that Valero had been awarded a $235 million contract under FMS. Bill Day, a spokesman for Valero, says that the company “doesn’t talk publicly about its contracts.”

Documents obtained under the Freedom of Information Act show that U.S. taxpayers are paying the shipping costs to move the fuel from refineries — many of them on the Texas Gulf Coast — to Israeli ports at Haifa or Ashkelon. Shipping costs vary but one specific bid called for shipping costs of $.30 per gallon. Officials with the Defense Security Cooperation Agency, the arm of the Pentagon that manages programs that “strengthen America’s alliances and partnerships,” has confirmed that the costs to ship the fuel from U.S. refineries to Israel have been paid for with FMF money designated for Israel by Congress.

The huge FMS fuel shipments are puzzling to the Israelis. Amit Mor, CEO of Eco Energy, an Israeli consulting and investment firm, has worked on energy issues in his home country for about two decades. In a recent e-mail, Mor says that “there is a paradox” in the fuel shipments that Israel gets from the U.S. He said that the privately owned Israeli refineries export jet fuel in “FOB prices,” while the defense ministry imports jet fuel in “high CIF prices,” with the funds of U.S. military assistance.

FOB, short for “free on board,” means that customers must take possession of the fuel at the refinery and then pay for all shipping and related costs to get the fuel to its final destination. On the other hand, as Mor explains, the Israeli military is importing fuel from U.S. refineries located 7,000 miles away, while incurring the CIF, short for “cost, insurance and freight,” of moving the fuel that distance.

Mor says Israeli refiners have “complained about this issue” but have had no luck with the Israeli government. He goes on to say that “it is the U.S. government that insisted for some reason to continue with this historical, costly and inefficient arrangement.”

Energy analysts squabble about a myriad of issues. But if there is one truism that draws near-universal agreement, it’s this: As energy consumption increases, so does wealth. And while that truism holds for oil use, it is particularly apt for electricity. As Peter Huber and Mark Mills point out in their 2005 book, “The Bottomless Well,” “Economic growth marches hand in hand with increased consumption of electricity — always, everywhere, without significant exception in the annals of modern industrial history.”

That statement underscores the significance of the FMS fuel shipments to Israel, many of which have occurred at or near the time that the Israeli military has attacked the electric power plants of its neighbors.

In late June 2006, Israeli aircraft fired nine missiles at the transformers at the Gaza City Power Plant, the only electric power plant in the Occupied Territories. (One of the original partners in the project was Enron, but that’s another story.) The missiles caused damage estimated at $15 million to $20 million and, for a time, made Gaza wholly reliant on electricity flows from Israel. The 140-megawatt power plant, owned by the Palestine Electric Co., was insured by the Overseas Private Investment Corp., an arm of the U.S. government. Thus the U.S. was providing fuel and materiel to the Israeli military, which destroyed the plant, but it was also paying to fix the damage. Call it cradle-to-grave service.

The Israeli attack on the Gaza City Power Plant offers a stark example of how the FMS fuel helps assure that Israel stays energy rich while many of the citizens in neighboring regions live in energy poverty.

Two weeks after the attack on the Gaza City plant in 2006, during Israel’s monthlong war against Hezbollah forces in Lebanon, Israeli aircraft attacked the 346-megawatt Jiyyeh power plant, the oldest electric power plant in Lebanon. Those attacks resulted in the largest-ever oil spill in the eastern Mediterranean. About 100,000 barrels of fuel oil that was stored in tanks at the Jiyyeh site flowed into the sea, creating an oil slick that stretched for more than 150 kilometers.

The attacks on the Jiyyeh plant occurred on July 13 and July 15. Those dates are important because they underscore the timing of the U.S. fuel transfers to Israel.

On July 14, 2006, the U.S. military issued two press releases. In one of them, the Defense Security Cooperation Agency announced that it would be providing up to $210 million in JP-8 jet fuel to the Israeli government. The other release, put out at 5 p.m. Eastern time, came from the Defense Logistics Agency, which said that it had awarded a $36.7 million contract to Valero as part of another JP-8 supply deal for Israel.

The July 14 release contains this rather bland description of the fuel deal: “The proposed sale of the JP-8 aviation fuel will enable Israel to maintain the operational capability of its aircraft inventory. The jet fuel will be consumed while the aircraft is in use to keep peace and security in the region. Israel will have no difficulty absorbing this additional fuel into its armed forces.” The release goes on to claim that the “proposed sale of this JP-8 aviation fuel will not affect the basic military balance in the region.”

While the attacks on the Jiyyeh plant were important, Lebanese citizens could get electricity from other power plants in the country. That was not true in Gaza, a province in which electricity has always been in short supply. According to the CIA Fact Book, the Gaza Strip ranks dead last — 214th out of 214 countries and territories listed — in the amount of electricity consumed. According to the Palestinian Energy and Natural Resources Agency, in 2004, the average Gazan used about 654 kilowatt-hours of electricity. By contrast, the 7.1 million residents of Israel consume about 6,295 kilowatt-hours of electric power per person per year, nearly 10 times as much as the average Gazan.

Although more recent energy consumption data for Gaza is not available, there’s no question that the endemic poverty in the West Bank and particularly in Gaza, is due, largely, to a continuing lack of energy resources. And the Israelis have frequently cut off the flow of fuel and electricity, which has exacerbated the Palestinians’ energy poverty.

Over the past few years, the Israelis have cut off the flow of energy to Gaza as retribution for various transgressions. And those cutoffs have forced the Gaza City Power Plant to shut down for lack of the fuel oil it needs to operate. When the power plant is idled, most of the residents of Gaza City are left without power and overall power supplies in the Gaza Strip decline by about 25 percent.

In May 2006, Israel cut off the flow of oil into the Occupied Territories after the Islamic group Hamas won local elections. In January 2008, the Israelis closed the border crossings into Gaza, which resulted in a fuel shortage that closed the Gaza power plant. In April 2008, the United Nations Relief and Works Agency stopped distributing aid in Gaza after it ran out of fuel. The Israelis stopped the fuel flow as retribution for attacks that killed two Israeli civilians and three Israeli soldiers. In November 2008, the U.N. Relief and Works Agency was again forced to suspend work due to lack of fuel. The fuel shortage occurred after Israel closed the border into Gaza in response to rockets and mortar shells that had been fired into Israel from Gaza.

The disparity in energy consumption between the Palestinians living in the West Bank and Gaza and their counterparts in Israel is just one element in the centuries-old story of tragedy and conflict in the region. But with the U.S. squarely on the side of the Israelis in the Gaza campaign, the potential for an angry backlash against the U.S. appears to be growing.

And that anger will likely only increase when Arabs begin to understand that much of the fuel that the U.S. is giving to Israel is being refined from Arab oil. The Valero refinery in Corpus Christi, Texas, which has won several of the FMS contracts for Israel, is a big buyer of Mideast crude. During the second quarter of 2006, according to data collected by the U.S. Energy Information Administration, the refinery got about 40 percent of its crude oil from Kuwait or Saudi Arabia.

In short, U.S. taxpayers are paying for U.S. energy companies to buy Arab crude, ship it across the Atlantic to refineries in the U.S., refine it, and then ship it back across the Atlantic so that the Israel Defense Force can use it in its wars.

While the origination point of the crude may only matter to part of the Arab world, it is becoming apparent that bloodshed in Gaza is further complicating America’s efforts to gain credibility as an honest broker in the region. Anti-U.S. sentiment is not in America’s long-term interest, says former diplomat Chas Freeman, a man whose résumé in international affairs extends back nearly four decades.

Freeman is a former U.S. ambassador to Saudi Arabia, as well as a former assistance secretary of defense. He served as Richard Nixon’s chief interpreter during Nixon’s visit to China in 1972. Now the president of the Middle East Policy Council, a Washington think tank, Freeman says the FMS fuel program for Israel runs counter to long-term goals of resolving the Palestinian conflict and America’s stated goal of protecting the flow of oil out of the Persian Gulf. The Defense Department has assumed “unilateral responsibility for the protection of the oil trade in the Persian Gulf, and yet it’s assuming responsibility for the delivery of aviation fuel for the Israeli military,” he says. “That’s confused and contradictory.” The program, he adds, is “one of many elements of our relationship with Israel that is very hard to explain.”

Freeman may be correct, but the House of Representatives has scant doubt about continued U.S. support for Israel. Nor has Congress shown much interest in the fuel shortages among Palestinians. On Jan. 9, the 14th day of the fighting in Gaza, the House passed a resolution sponsored by House Speaker Nancy Pelosi, “recognizing Israel’s right to defend itself against attacks from Gaza.” The vote was 390 to 5.

Two days before the vote, UNICEF estimated that 800,000 Gazans did not have running water and 1 million were living without electricity.

In 2005, as the insurgency in Iraq grew, about 50 percent of all attacks against U.S. and coalition forces were from IEDs. By late 2006, that percentage surged to about 75 percent. In October, there were an average of 82 IED attacks per day against U.S. forces — a record high for the war. Salon obtained the late-2006 data from a source who works directly on the IED problem for the Joint IED Defeat Organization (JIEDDO), the agency set up by the Pentagon to fight the problem. The source asked not to be identified because he is not authorized to speak to the press.

IEDs are the insurgents’ weapon of choice for two reasons: They are effective, and they allow the insurgents to attack U.S. forces with minimal risk to themselves. Although the Pentagon has spent billions on “up-armoring” vehicles and deploying various technologies — including electronic jammers to prevent detonation of IEDs — the military’s efforts are “having absolutely no effect,” the source told Salon. “The trend line hasn’t changed one iota,” he added, calling the military’s track record of protecting U.S. troops from IEDs “criminal.”

In an interview, Brig. Gen. Dan Allyn, deputy director of operations for the JIEDDO, defended the Pentagon’s efforts to combat the IED threat and asserted that some progress has been made. But several military experts, including officers who have served in Iraq, say that the Pentagon has not been able to effectively counter the deadly devices. Moreover, the IED problem may well continue to grow in magnitude. The potency of the threat continues to force the U.S. military to spend heavily on protective efforts that are often contradictory and cumbersome. Meanwhile, insurgents are using larger numbers of a deadlier type of IED, known as an “explosively formed projectile” (EFP), that can pierce almost any type of armor.

There are many reasons why the United States has met with disaster in Iraq. At the top of the list: terrible postwar planning, lack of knowledge of Iraqi/Arab culture and the failure of America’s occupying forces to control Iraq’s oil sector. But on the most basic tactical level, America has been drubbed in Iraq because it hasn’t been able to counter the IEDs.

They are essentially the same weapon that Lawrence of Arabia used against the Turks during the Arab Revolt of 1916 to 1918. In his memoir, “Seven Pillars of Wisdom,” published in 1922, T.E. Lawrence, the British army officer who helped lead the revolt, wrote that his use of roadside bombs made traveling “an uncertain terror for the enemy.” Back then, Lawrence and his men targeted trains; today, hidden explosives are being used by insurgents to target the U.S. military’s Humvees and other vehicles.

Their deadly effectiveness can be seen on almost any day of the week. Consider Dec. 6, the same day that the Iraq Study Group released its long-awaited report offering suggestions to the Bush administration about what it should do in Iraq. On that day, 11 U.S. soldiers died in Iraq. Seven of them were killed by IEDs.

Perhaps the most obvious example of the military’s anti-IED effort is the increased application of armor to its vast fleet of vehicles in Iraq and Kuwait. That armor helps protect soldiers, but it has other, deleterious effects: It makes the vehicles heavier, slower and less stable. It increases the wear and tear on tires and other parts, and increases fuel consumption. That increased fuel load means that the U.S. military must use more trucks to import fuel from Kuwait. In turn, the increased number of fuel trucks provides more targets for insurgents and their IEDs. Furthermore, the added armor has made military vehicles more prone to accidents. As reported by the Dayton Daily News last year, the M1114, the up-armored Humvee used by the military in Iraq, has been involved in dozens of fatal rollover accidents.

Improved explosive devices have also forced the U.S. military to deploy dozens of huge IED-handling trucks, called the Buffalo — a 32-foot-long, rubber-tired vehicle equipped with a remote-operated steel arm for handling ordnance. The vehicle has proved effective in dealing with IEDs, but it’s expensive, weighs more than 14 Toyota Camrys and gets — at best — about four miles per gallon.

There is other fallout from the IED problem. The military has found that jammers used to prevent IEDs from being detonated through the use of walkie-talkies, cellphones and other devices are, in some cases, also jamming its own communications. That has forced the military to sink more money into defense contracts for developing software and devices that allow the jammers to function while still allowing soldiers to use their radios and other communications gear. On a personnel level, the IED threat has forced the military to equip individual soldiers with bulkier, heavier body armor.

There is also psychological fallout from IEDs. “They generate fear,” says G.I. Wilson, a former Marine Corps colonel who served 28 years on active duty (including 15 months fighting in Iraq in 2004 and 2005) and has written extensively on insurgent warfare. The constant threat of being hit by an IED “creates heightened states of arousal which makes soldiers react in abnormal ways. They can’t think clearly because they are all jazzed up,” he explains.

Fear and frustration apparently fueled atrocities allegedly committed by U.S. Marines in Iraq. In December 2006, four U.S. Marines were charged with murder after they reportedly went on a rampage in November 2005 in Haditha, leaving two dozen Iraqi civilians dead. A key part of the Haditha story is that just before the Marines from Kilo Company allegedly began shooting the civilians, their four-vehicle convoy was hit by an IED. That attack killed a member of Kilo Company’s team, Lance Cpl. Miguel Terrazas. The Marines had been stationed in Haditha for weeks, constantly facing the IED threat. The insurgents were getting ever bolder in planting their bombs — sometimes planting new IEDs just after the Marines had passed through an area.

The psychological impact of the IED threat in fact played a part in one of the worst atrocities in the history of the U.S. military: the My Lai massacre in Vietnam. In the weeks before Lt. William Calley and the other soldiers killed as many as 500 civilians in the Vietnamese village, their company had been hit several times by mines and booby traps.

IEDs also increase distrust between U.S. troops and Iraqi civilians — and that decreases the likelihood that the U.S. will be able to mount an effective counterinsurgency effort, which requires effective interaction with and intelligence gathering among the local population.

Not only is the number of IEDs rising, but the insurgents are also using more sophisticated explosives. Those include increasing numbers of deadly “explosively formed projectiles.”

EFPs are sometimes referred to as “super-IEDs.” They are simple to manufacture and therefore can be built in almost any moderately equipped machine shop. Here’s how they work: The heat and shockwave created by the detonation of explosives inside a shallow metal tube propels a metal plate mounted at the front of the weapon. That plate — usually steel or copper — forms a molten metallic “dart” that travels at speeds of up 2,000 meters per second and can penetrate 4-inch-thick armor at a range of up to 100 meters. That means that not even the M1A1 Abrams tank — the backbone of America’s armored infantry — can withstand a direct hit by an EFP. It also means that EFPs are more likely to kill or maim soldiers.

And here’s the worst of it: According to the source who works for the Pentagon on the IED problem, the number of EFPs encountered by U.S. troops in Iraq has more than doubled over the past year, going from about 20 per month to about 50 per month.

The type of EFPs being used against the U.S. military in Iraq were developed by Hezbollah in the 1980s and 1990s during the Israeli occupation of southern Lebanon. Military experts have said they believe that Iranian-made EFPs are now being used against U.S. troops in Iraq.

Asked about the EFP threat during a phone interview in early January, Brig. Gen. Allyn said he was “not going to get into enemy tactics … We are focused on countering that threat and helping forward commanders and defeating the networks that employ those systems,” he said.

Over the past three years, Allyn’s IED agency has become one of the fastest-growing bureaucracies in the U.S. military. Now numbering more than 500 employees, the secretive agency has already spent some $5 billion, and billions more are on the way. Allyn says that the military has been working to increase the amount of IED-specific training for U.S. soldiers in Iraq and to help commanders develop tactics that will reduce the numbers of IED attacks. But according to the Boston Globe last June, a report commissioned by the Pentagon found that the anti-IED effort was “poorly focused” and that a better strategy “would focus on preventing Iraqis from becoming involved in the insurgency.” It also found that the U.S. military’s main response to the IED problem has been to emphasize “technical solutions which have proven insufficient.”

Insufficient or not, the military’s push to find a technical solution has meant big money for defense contractors. Last year, the military bought 3,800 electronic jammers designed to defeat IEDs, each of which cost $79,000, from defense giant General Dynamics. Another company, electronics maker EDO Corp., has supplied more than 4,000 IED jammers, known as Warlocks, to the military — at a cost of some $200,000 apiece. Those two companies have pulled in a total of more than $400 million in IED-related contracts.

Allyn refused to comment on the number of jammers that have been deployed or the amount spent on them, citing operational security. “Putting that information into the public domain,” he said, “is akin to, during a football game, inviting the defensive captain to join your [offensive] huddle.” But Allyn also said that his agency is having success because fewer IED attacks are resulting in death or injury to American troops. Today in Iraq, he said, about one in five IED attacks results in a death or injury for U.S. forces. “While we are not satisfied, that’s an improvement over what it was two years ago, when it was about one in three,” he said.

Still, the number of IED attacks has doubled over the past two years, says the source who works for the Pentagon on the problem. And that increase in attacks has meant larger numbers of overall casualties from IEDs, he says — a fact that Allyn ignored in claiming that IED casualty numbers have “remained relatively constant” over that time period.

For Wilson, the former Marine colonel, the military has engaged in a lot of “money shoveling” when it comes to the IED problem. “Their solution is to throw money at it,” he says. “Which makes everybody in D.C. happy while, at the same time, our people are dying in Baghdad.” Wilson believes the U.S. military must push for more control over Iraq’s borders to stop the flow of Iranian-made explosives and other weapons into the country. He also contends that the U.S. military needs to better control the Tigris and Euphrates rivers, which he believes are being used as routes to smuggle arms.

One potential way to address the IED threat that has not been tried, according to military experts: constant, manned, aerial surveillance of main convoy routes and other thoroughfares with light, single-engine, fixed-wing aircraft. This approach — advocated by Wilson, as well as military veterans like Greg Wilcox, a retired Army lieutenant colonel, Vietnam veteran and frequent critic of the Pentagon — would allow ground-based commanders to be in constant communication with a member of their combat team circling overhead in a small aircraft. The spotters would look for suspicious activity and alert ground forces as potential IEDs were being installed. Wilcox and others call this the equivalent of putting a “police car in the sky.” Proponents of this approach contend that manned aircraft would be fairly inexpensive to equip and could be deployed quickly.

But Wilcox, Wilson and others say that the military has resisted using this approach. (Allyn refused to comment directly on the manned aircraft concept.)

In the coming weeks, Congress will consider an emergency spending bill that would provide an additional $100 billion for the wars in Iraq and Afghanistan. (IEDs are also becoming more common in Afghanistan.) That spending bill includes $2.5 billion more for the anti-IED effort. Much of that $2.5 billion will be spent on additional high-technology equipment like jammers and machines that can allegedly detect explosives.

While the Pentagon continues its spending spree, the skills that made Lawrence successful — complete command of the Arabic language, deep understanding of Arab culture and an appreciation of the needs of the local population — are likely to remain in critically short supply among U.S. forces in Iraq. And IEDs are likely to continue to proliferate. Wilson says that Bush’s decision to concentrate the escalation effort on Baghdad means that “we’ll see a dramatic increase in the use of IEDs.” Those devices will end up killing and wounding many more American soldiers, Wilson predicts, and as the casualties continue mounting, the insurgents will “get U.S. troops to overreact,” he says. “That’s exactly what they want. And we are going to give it to them.”

Instead of the energy riches predicted by Wolfowitz, millions of Iraqis are now living in dire energy poverty. In Baghdad, there is little or no electricity, little or no motor fuel, and little or no kerosene for home heating. Moreover, according to energy expert Jim Placke, who has been following Iraq’s oil business since 1959 when he worked for the State Department in Baghdad, the situation appears to be getting worse. The insurgents are targeting the energy infrastructure with increasing success, says Placke, who is a senior associate at Cambridge Energy Research Associates. “By doing so, they embarrass the coalition forces and the Iraqi government that they can’t keep gas stations supplied with motor fuel. It’s very disruptive and it makes the average Iraqi’s life that much more difficult.”

From the outset, America’s game plan in Iraq has depended on the ability to control the flow of energy. Whether for the gargantuan amounts of fuel needed by U.S. troops on the ground, the export of Iraqi crude, or the production of motor fuel at the refineries in Baghdad and Baiji, the U.S., as Wolfowitz suggested, was depending on Iraq’s vast oil reserves to keep the Iraqi economy afloat and to sustain the rebuilding process in the post-Saddam era. But despite the $30 billion that U.S. taxpayers have spent to rebuild Iraq and its energy infrastructure, Bush policies have resulted in scant progress. A Government Accountability Office report released last October summarized the situation, saying that yet more reconstruction money will be needed “due to the severely degraded infrastructure, post conflict looting and sabotage, and additional security costs.” That same report says that soaring security costs are soaking up much of the money that was originally earmarked for energy infrastructure.

Meanwhile, the insurgents are targeting every part of the energy infrastructure — crude oil, electricity, refined products — and the American military has been able to do little to stop the destruction. And it’s killing the Iraqi economy.

On Jan. 4, an Iraqi writer who uses the pseudonym Riverbend and posts on the Baghdad Burning blog, wrote about the plight that she and other Baghdad residents are facing: “How about 6 hours of no electricity for every one hour of electricity? Or … 6 hours of waiting in line for gasoline that is three times as expensive as it was in 2005?” On Jan. 2, Najma, a 17-year-old student living in the northern city of Mosul who blogs on A Star From Mosul, wrote a post for the New York Times, in which she discussed the frequent electricity outages. As for motor fuel, she wrote that “prices in the black markets dropped to only 12 times the legal price. If someone chooses the hard way, he can wait in the line for up to a day — a line that is not less than three kilometers.” In late December, Najma wrote that because of surging gasoline prices, her father was “now paying more than half of his salary on fueling the cars. Students at the universities are on strike now because they can not afford paying for the gasoline.”

The surge in fuel prices is due, in part, to the Iraqi government’s decision to reduce its fuel subsidies. Last year, Iraqis were paying about 5 cents for a gallon of gasoline. The International Monetary Fund agreed to forgive much of Iraq’s debt if the country cut its fuel subsidies. In December, the Iraqi government agreed and raised prices. But the resulting surge in prices has led to widespread anger among Iraqis who are now paying up to 65 cents per gallon. That may sound cheap by U.S. standards, but even the best-paid workers in Iraq make only about $130 a month, and a quarter of the population lives on just $1 per day.

While fuel prices are surging, a key concern is supply, which is being hampered by both corruption and insurgent attacks. There are conflicting accounts of a Jan. 4 attack on a fuel tanker convoy that was to replenish service stations in Baghdad. Reuters reported that 20 of the 60 trucks in the convoy were destroyed. Other reports said fewer trucks were destroyed, but whatever the actual number, tanker trucks are now a prime target of the insurgents, who have been attacking them for months. The U.S. military provides armed escorts to the tanker trucks that are importing its fuel from Jordan and Kuwait. Many of the convoys are also escorted by a helicopter gunship. But it is not clear if the U.S. military has diverted any of its resources toward protecting tanker trucks that are delivering fuel for Iraqi civilians.

The U.S. military’s energy consumption in Iraq is soaring. According to recent data from the Defense Department, the U.S. military is now using about 3 million gallons of fuel per day in support of Operation Iraqi Freedom. Thus, keeping each of the 153,000 American soldiers on the ground in Iraq requires the consumption of about 19.6 gallons of fuel per soldier per day. That’s double the amount in January 2005, when each soldier in Iraq was consuming on average about 10 gallons of fuel per day.

Meanwhile, according to a recent New York Times report, the city of Baghdad is now using about 2.4 million gallons of motor fuel per day, so the average Iraqi among the 5.9 million residents of the war-torn capital is using less than a half-gallon of fuel per day. That means that the average American soldier in Iraq is using nearly 40 times more fuel per day than the average Iraqi. That disparity will only compound resentment of the U.S. presence, says retired Army Lt. Gen. Jerry Granrud, who served during both the Vietnam War and the first Gulf War. If Iraqis are waiting for hours in line to get fuel while the Americans are driving around in their Humvees and other vehicles, Granrud says, “They’ll get madder than hell at their government and at U.S. forces.”

Iraq’s crude oil pipelines are in tatters. The Institute for the Analysis of Global Security reports that Iraq’s pipelines have been attacked nearly 300 times since mid-2003. Repeated insurgent attacks are preventing Iraq’s oil ministry from exporting any oil from its northern oil fields through the Turkish port of Ceyhan. Instead, all of the country’s oil must be exported through two oil terminals (both built by Halliburton in the 1970s) on the Persian Gulf.

The pipeline attacks are preventing Iraq’s refineries in Baghdad and Baiji from running at full capacity. According to an Energy Information Administration report written last month, “Iraqi refineries currently are operating at only 50 percent to 75 percent of capacity, forcing the country to import around 200,000 bbl/d [barrels per day] of refined products, at a cost of $200-$250 million per month.”

Because of pervasive corruption within the energy sector, much of that refined product is not getting to Iraqi consumers, further exacerbating prices. “The black market is flourishing,” a former Iraqi oil ministry official told Salon. The official, who now works for an international oil company and was granted anonymity because he was not authorized to speak to the press, said that much of the fuel that is either produced by Iraqi refineries or bought from foreign suppliers “is being re-exported,” to neighboring countries. Some of the stolen fuel is also being sold on the domestic black market.

While fuel prices are soaring, Iraq’s oil exports are falling. In December, exports were just 1.1 million barrels per day. That’s less than half of the 2.8 million barrels per day Iraq was exporting back in 1990, and a far cry from the goal of 6 million barrels per day that Iraqi planners made at the end of the Iran-Iraq war. (According to the former Iraqi oil ministry official, the Iraqis believed that reaching 6 million barrels per day would require investing at least $37 billion. Today, given the sharp increases in the cost of oil-field supplies and equipment, that figure would likely be several times higher.)

According to Placke, Iraq’s oil fields need at least $10 billion in immediate investment just to stabilize production from the existing fields, many of which have been damaged by poor maintenance and over-production. But getting that investment is impossible given the ongoing security problems in Iraq. And therein, says Placke, lies the conundrum of Iraq’s tremendous oil wealth: “Until there’s security they can’t develop the oil resources they need to fund their security. And I don’t know how that endless cycle stops.”

As that quagmire deepens, Iran is exerting more influence on Iraq’s energy affairs. Two decades ago, during the bloody Iran-Iraq war, the Iraqis bombed one of Iran’s main oil export terminals, Kharg Island. But last July, the two countries agreed to a deal that will allow the Iraqis to export crude oil from Kharg Island. The swap agreement allows the Iraqis to ship crude from their oil fields near Basra to Iran’s Abadan refinery. In exchange, the Iranians will ship a similar amount of their crude from Kharg.

It’s not yet clear how this new Iraq-Iran energy deal will affect the global flow of oil out of the Persian Gulf, but the alliance appears to be deepening. On Jan. 9, Iran’s MEHR news agency reported that Iran is building new power transmission lines into Iraq. Although the initial lines will carry only 230 kilowatts of power, the agency predicts that Iran could eventually export 1,000 megawatts of power to Iraq.

Right now Iraq needs the Iranian power, because its own electrical system is a disaster. In this area, the U.S. has mismanaged and squandered much of a $4 billion project to restore Iraqi electricity, according to a recent report in the Los Angeles Times. The October GAO report pointed out that by July 2005, about 30 percent of the money that was budgeted for electricity projects a year earlier had instead been diverted into security spending. Inefficiency and waste have been pervasive in other ways: “Due to limited access to natural gas, some Iraqi power plants are using low-grade oil to fuel their natural gas combustion engines,” the report said. “The use of oil-based fuels, without adequate equipment modification and fuel treatment, decreases the power output of the turbines by up to 50 percent, requires three times more maintenance, and could result in equipment failure and damage that significantly reduces the life of the equipment.”

America and Iraq are “coming to a crucial point” with Iraq’s energy situation, according to Phebe Marr, a senior fellow at the U.S. Institute of Peace and a leading historian on modern Iraq. “When the new government gets established, it must decide what it will do with its oil resources: Who will control it? Will it be centrally controlled? I predict it’s going to be very difficult.” Marr says she is “not totally pessimistic” about the situation in Iraq today. But right now the country “is failing,” she says, “and it could keep going down.”

In 2001, Bush appointed him to chair the PFIAB. But Scowcroft, who was national security advisor under two presidents, George H.W. Bush and Gerald Ford, has been openly critical of Bush’s decision to invade Iraq. “I don’t think in any reasonable time frame the objective of democratising the Middle East can be successful,” Scowcroft recently told the New Yorker. “If you can do it, fine, but I don’t think you can, and in the process of trying to do it you can make the Middle East a lot worse.” That kind of independent thinking led Bush to dismiss Scowcroft from the chairmanship of the PFIAB about a year ago.

With Scowcroft out, Bush’s cronies are in. Last month, the White House announced that Dallas oil billionaire Ray Hunt, one of Bush’s biggest financial backers, was reappointed to the PFIAB. So was Cincinnati financier William DeWitt Jr., who has backed Bush in all of his business deals going back to 1984, when DeWitt’s company, Spectrum 7, bailed out the faltering entity known as Bush Oil Co. The new appointee of note to the PFIAB is former Commerce Secretary Donald Evans, a Bush confidant since his days in Midland, Texas.

(Other notable appointees to the PFIAB include Netscape founder Jim Barksdale, former Reagan White House counsel Arthur Culvahouse, and former U.S. congressman and 9/11 commission vice chairman Lee Hamilton.)

Ray Close, a member of Veteran Intelligence Professionals for Sanity, a group that has been critical of the Bush administration’s handling of intelligence matters, doesn’t mince words when discussing Bush’s latest appointments to the PFIAB. “It’s unbelievable,” says Close, who worked for the CIA for 27 years as an Arabist. “I can’t imagine anyone who has the president’s interest in mind allowing him to do this. With the notable exception of Lee Hamilton, most of the choices look very weak, and several scream of cronyism.”

Created in 1956 by President Dwight Eisenhower, the PFIAB is designed — according to the White House press release — to give the president “objective, expert advice.” In an ideal world, the PFIAB members would analyze the intelligence they get and give the president their unvarnished opinions about the relative merits of the different agencies and the work they are doing. PFIAB members are granted access to America’s most secret secrets, known as SCI, for Sensitive Compartmented Information. Members of PFIAB have security clearances that are among the highest in the U.S. government. They have access to intelligence that is unavailable to most members of Congress. They are privy to intelligence from the Central Intelligence Agency, the National Security Agency, the military intelligence agencies and others.

Everything that members do as part of PFIAB is done in secrecy. None of the information that they discuss or view is available to the public. They are not subject to the Freedom of Information Act. And unlike other public servants who work for the president, there is no public disclosure of the PFIAB members’ financial interests.

In 1999, the PFIAB opened up slightly when it released a report about security at the Department of Energy’s nuclear labs. That 1999 report is a prime example of how the PFIAB has — and could in the future — play an important role in helping the president deal with intelligence issues. That report bluntly assessed the DOE, saying that a “culture of arrogance — both at DOE headquarters and the labs themselves — conspired to create an espionage scandal waiting to happen.” That report led to a major reorganization of the labs.

Despite the PFIAB’s power, coverage of it by the news media is sparse. Bush’s most recent PFIAB appointment was almost completely ignored. The only significant story by the national media on the PFIAB was a snarky item posted on Newsweek‘s Web site on Nov. 2, which said that after all the recent intelligence failures, “you might think the president would be wary about the appearance of cronyism.”

To be fair, the PFIAB has long been stocked with people close to the president in office. Under Bill Clinton, the PFIAB had far more intelligence expertise than it does now. Clinton’s PFIAB appointments included former Defense Secretary Les Aspin, former Speaker of the House Tom Foley, and a former chairman of the Joint Chiefs of Staff, Adm. William Crowe. Clinton also appointed a pair of his big money contributors to the PFIAB: New York banker Stan Shuman and Texas real estate whiz Richard Bloch.

For Bush, it appears that campaign cash counts far more than expertise. And few backers have given Bush’s campaigns more cash than Ray Hunt, son of the legendary Dallas billionaire bigamist oilman H.L. Hunt. PFIAB membership is a plum position for Hunt, who raised about $100,000 for Bush during the 2000 campaign and also served as the finance chairman of the Republican National Committee.

Hunt’s position at PFIAB may benefit a familiar entity in the Bush crony network: Halliburton, which is doing billions of dollars’ worth of reconstruction and logistics work for the U.S. government in Iraq and on the Gulf Coast. Hunt sits on Halliburton’s board of directors. He got his spot on the Halliburton board in 1998 while Dick Cheney was running the company. As soon as Hunt got on the Halliburton board, he was put on its compensation committee, where he helped determine Cheney’s pay. Indeed, in 1998, Hunt’s committee decided that Cheney deserved a bonus of $1.1 million and restricted stock awards of $1.5 million on top of his regular salary of $1.18 million.

Hunt has been on the PFIAB since 2001. Presumably, months ahead of everyone else, he had access to intelligence indicating that the Bush administration was going to invade Iraq — information that could have been of value to certain oil service companies with operations in the Middle East.

Hunt isn’t the first Halliburton board member to be tied to PFIAB. From 1982 to 1990, the PFIAB was chaired by Anne Armstrong, a wealthy Texan whose Republican ties go back to the Nixon White House. (Karl Rove now occupies Armstrong’s old office in the West Wing.) During her entire eight-year stint as chairwoman of the PFIAB, Amstrong also served on Halliburton’s board. In fact, Armstrong was on Halliburton’s board in 1995, when the company decided to hire Dick Cheney as its CEO. Asked about it later, Armstrong said there was “instant backing” for Cheney when his name was first mentioned for the job.

Hunt can use what he learns at PFIAB to help Halliburton. Or he can help his own company, Hunt Oil, one of the world’s largest privately owned energy companies. “Even without taking advantage of any particular intelligence report, the PFIAB affiliation is gold,” says Steven Aftergood, who heads the Project on Government Secrecy at the Federation of American Scientists. “It lends itself to exploitation for commercial and other interests.”

Among Hunt’s biggest projects is the controversial $2.6 billion Camisea liquefied natural gas project in Peru, which will soon begin delivering gas to markets on the West Coast of the U.S. Amazon Watch, a nonprofit environmental group, calls the project the “most damaging project in the Amazon Basin.” It points out that the majority of the gas extraction will be done in a reserve that was set aside for local indigenous people. Similarly, Environmental Defense points out that Camisea will affect some of “the most pristine forest regions of the Amazon.” In 2003, the Export-Import Bank, which was under heavy pressure from environmental groups, refused to provide financing for Camisea.

Does Hunt’s position on PFIAB give him an edge in dealing with Peru and Camisea? There’s no way to be certain. But it is clear that Hunt’s business operations are so varied that every bit of foreign intelligence he sees at PFIAB might be of value to him.

Hunt’s company is also active in Argentina, Chile and Guyana. One of Hunt Oil’s most important projects is in Yemen, where his company has been producing oil for more than two decades. Hunt Oil’s next Yemen project is a multibillion-dollar liquefied natural gas project on the Arabian Sea. The gas will come from Hunt’s wells in the the vast desert that separates Saudi Arabia and Yemen. A 199-mile pipeline will carry it to a port on the Yemeni coast. That port is about 200 miles east of Aden, where al-Qaida suicide bombers hit the USS Cole in 2000. Of course, Hunt doesn’t have to rely on just the PFIAB for intelligence. His former right-hand man, James Oberwetter, is now the U.S. ambassador to Saudi Arabia.

An employee of Hunt Oil told Salon that Hunt and his public affairs representative, former ambassador Jeanne Phillips, were traveling and that a return phone call should not be expected anytime soon.

Bush also reappointed DeWitt to the PFIAB. DeWitt has raised more than $300,000 for Bush’s presidential campaigns. In addition to backing Bush’s failed ventures in the oil patch, DeWitt played a key role in the syndicate that Bush put together to buy the Texas Rangers in 1989. It was DeWitt who told Bush that the baseball team was for sale. DeWitt then became an investor in the syndicate that paid $89 million for the team. (In June of 1998, Dallas billionaire Tom Hicks bought the Rangers for $250 million. The sale gave Bush nearly $15 million, a 24-fold return on his investment. Nine months later, Bush announced that he was running for president.)

DeWitt did not return a phone call to his office.

A new appointee to PFIAB is one of Bush’s oldest and best friends, former Commerce Secretary Donald Evans. Less than three months after leaving commerce, Evans found a new job as CEO of the Financial Services Forum, which represents 20 of the biggest financial institutions doing business in the U.S. The roster of companies includes GE, Merrill Lynch, Citigroup, Deutsche Bank, AIG and Morgan Stanley. According to its Web site, the forum is designed to “promote policies that enhance savings and investment in the United States, and that ensure an open, competitive and sound financial services marketplace.”

For Aftergood, from the Project on Government Secrecy, the latest PFIAB appointments represent a missed opportunity to help resolve the disastrous condition of America’s intelligence agencies. He says the decision to appoint Hunt, DeWitt and Evans is part of the “familiar pattern that we’ve seen so often with this administration: The president’s pals and supporters are esteemed more highly than those who have genuine competence.” He continues: “These people aren’t the best and the brightest. They are the best connected. And the quality of our government suffers as a result.”

Alas, we can’t blame Hurricanes Katrina and Rita for the looming price spike. Although 10 refineries (accounting for about 14 percent of domestic capacity) remain shut down from the storms, the coming diesel disaster will be caused by several other things that have nothing to do with the weather. Those factors include stringent new federal regulations on sulfur content in motor fuel, a global shortage of refining capacity, and soaring demand for diesel, both in the United States and around the globe.

Beginning next year, American refiners must comply with the biggest change in federal motor-fuel regulations since leaded gasoline was banned three decades ago. In January, refiners must cut the amount of sulfur in their gasoline from 90 parts per million to 30 ppm. And by next June, refiners will have to reduce the amount of sulfur in their diesel from 500 ppm to 15 ppm. These rules were designed to improve America’s air quality. And while they may benefit the environment, the rules are coming into play at a terrible time for the refining industry and will thus help propel prices higher across the board for both fuels.

The primary reason for the higher prices is simple: The mandates add more complexity to the supply chain. Last year, American refineries produced 45 blends of gasoline. Add in the new requirements from the recently passed energy bill, which requires more ethanol to be used in gasoline, and those 45 blends could easily become 50 or more. Each of those blends requires segregation while being shipped, stored and sold. The same goes for diesel, where the more volatile market will be in ultra-low sulfur diesel (ULSD). While refiners are producing the ULSD, they will also be producing conventional diesel that meets the old 500 ppm standard. Thus, the ULSD will have to be segregated from the conventional diesel.

Add in state-specific blends of diesel, and the situation gets even more complex. California, Minnesota and Texas are all implementing regulations that will require specific diesel blends for their states. (For instance, Minnesota is requiring refineries to add 2 percent biodiesel to their product). Between these boutique diesel blends and ULSD, the industry will require more tanks and more pipes. That means more capital investment, which means higher costs.

Although the EPA has projected that the ULSD rules will add just 5 to 6 cents per gallon to the production cost of diesel fuel (and 6 to 7 cents for consumers), the truth is that no one can predict how the new rules will affect a volatile motor fuel market — one that has been repeatedly spooked by fears of storms, shortages and sharply higher crude prices. Some economists and motor-fuel traders say they are expecting prices to fall in early 2006. They point to the recent downward trend in crude oil prices to support this position.

But the supply of crude oil is only one factor; the bigger problem may prove to be the demands the new rules will place on the refining and fuel-delivery infrastructure. Big consumers of diesel are already worried about the effect of the new low-sulfur regulation. “It’s going to exacerbate shortages in an already tight market,” says Tavio Headley, staff economist at the American Trucking Associations, an industry group located in Alexandria, Va.

Refiners are busy trying to figure out how to comply with the rules. In May, Colonial Pipeline, a major shipper that carries refined products from the Gulf Coast to the East Coast, said that it would not accept any ULSD for shipment that contains more than 8 ppm sulfur. Colonial’s mandate is the result of tests showing that each time ULSD gets moved from one shipper to another, the sulfur content increases. That stands to reason: the same pipes and tanks that will carry ULSD will also carry jet fuel and heating oil, which may contain up to 3,000 ppm of sulfur.

One refinery official who works at a big plant on the Houston Ship Channel, who requested anonymity because he is not authorized to talk to the media, said that in order to deliver diesel to the pipelines at 8 ppm, the diesel leaving his refinery would have to contain — at most — 6 ppm of sulfur. Going from 500 ppm down to 6 ppm is a reduction of about 99 percent, and getting all that sulfur out is expensive. It requires additional hydrotreaters, which require refiners to make huge quantities of hydrogen. And making that hydrogen also requires additional equipment. The new mandates are pushing “all the compliance issues back to the manufacturer,” the refinery official said. “So whatever slop happens downstream, like sulfur contamination from pipelines or tanks, the refiner has to deal with. It’s simple: Manufacturing costs have to go up.”

Domestic refineries like the one on the Ship Channel are now running at about 95 percent of capacity. Adding new capacity to manufacture more gasoline or diesel will take years. Recently, the Financial Times reported that by 2007, America may need to import as much as 300,000 barrels of diesel per day in order to keep pace with demand. And while President Bush recently called for new refineries to be built in America (no new ones have been built since the 1970s), the permitting and construction process for a new plant takes years.

Foreign refiners won’t be able to help. While Americans are decrying high gasoline prices, those prices would be far higher if not for foreign refiners. The United States is now importing about 1.4 million barrels of gasoline per day to meet demand. But it’s unlikely that foreign refiners will be able to supply enough diesel — particularly of the low-sulfur variety — to help meet rising U.S. demand. That’s because the EPA’s new standards are far more stringent than those in Western Europe, a leading consumer of diesel. Furthermore, the entire European market currently has a shortage of diesel-refining capacity.

Then there’s the problem of demand. Over the past few years, demand for distillate fuels (diesel, jet fuel and heating oil) in the United States and other Western countries has soared. Since 2000, diesel consumption in Western Europe and the United States has jumped by 20 percent. (By comparison, consumption of gasoline in those same regions has risen just 5 percent.) And it appears that demand for diesel will continue to surge. American and foreign automakers are adding lots of new diesel vehicles to their product lines in order to take advantage of their better fuel efficiency. As those new cars get on American roads, they will add further demand to the already tight diesel market.

All of these factors will contribute to the looming spike in diesel prices. But there is a wild card: The Bush administration can choose to delay enforcement of the rules. In fact, it did just that when it suspended enforcement of federal clean air rules on refineries after Katrina and Rita hit. The move was done to ensure an adequate supply of motor fuel after Katrina struck.

But delaying the new ULSD rules would be no silver bullet. The companies that manufacture big diesel engines are already retooling their products so that they can use ULSD. While the new truck engines will be able to burn the older higher-sulfur diesel, their fuel efficiency may suffer. It may also mean higher maintenance costs for owners of the new trucks.

At this time last year, diesel was selling for about $2 per gallon. Today, prices are well over $3 per gallon. And given the new regulatory scheme, that upward trend is likely to continue — particularly if the Gulf of Mexico gets hit by another storm, or we have an extraordinarily cold winter.

Welcome to the world of tight refining capacity and high motor fuel prices. We’d better get used to it.