End Draws Near for Oil as a Strategic Commodity

Thursday, June 16, 2011

The following was written by Alan Anderson, a freelance writer focusing on green renewable alternative fuels such as sugar based ethanol and biodiesel. He has written for many online publications including Newsvine.com and EnergyBoom.com.

As we are well into the eleventh year of the 21st century, it’s time to reflect on the one thing we haven’t been able to fix from the last century that has caused the most trouble throughout the world. Over 150 years ago oil was discovered for the first time right here in America. At the time no one knew just how important or dangerous this discovery would be.

Edwin Drake — the man who was the first to discover this black sticky fluid back in 1859 — knew what he was looking for and just started drilling. After drilling 69 feet down he found the discovery of a lifetime. From that time on it was the goal of every country in the world to find the biggest deposit of oil possible.

In 1911 the first large oil deposit was found in Iran. Over the next few decades every Middle Eastern country was pumping their fair share of the new strategic commodity. Until the 1970s, foreign companies owned and managed the gulf oil industry. In most cases, European- and United States-based concerns formed subsidiaries to work in specific countries, and these subsidiaries paid fees to the local rulers — first for the right to explore for oil, and later for the right to export the oil.

 In the 1970s, most of the gulf countries, which by then were independent of British control, bought major shares in the subsidiary companies that worked within their borders.

In September 1960, Venezuela and Saudi Arabia called a meeting with the governments of Iraq, Iran, and Kuwait to discuss ways to increase the price of the crude oil produced by their respective countries. OPEC was founded at this meeting in Baghdad, triggered by a 1960 law instituted by American President Dwight Eisenhower that forced quotas on Venezuelan and Persian Gulf oil imports in favor of the Canadian and Mexican oil industries. Eisenhower cited national security, and land access to energy supplies in times of war, as reasons for the quota. When this led to falling world prices for oil, Venezuela's president Romulo Betancourt reacted by seeking an alliance with oil producing Arab nations as a preemptive strategy to maintain the continued autonomy and profitability of Venezuela's oil resources. This was the beginning of the Oil Cartel known to us today that controls 3/4 of the world’s oil supply, and completely controls what it sells for on the world market.

As of today, the 16th of June 2011, they control the price every drop of oil produced, including the relatively small amount of oil we produce here in the United States. How? OPEC determines the supply of oil for the world because they have the most of it in their member countries.

If the supply OPEC wants the world to use = X, and the amount the rest of the non-OPEC counties produce = Y, and the amount OPEC will produce = Z, then the equation looks something like this: X=Z+Y. If OPEC wants 50mil barrels a day on the market (because that amount of available oil will result in the price they want) and non-OPEC producers pump 5mil, then OPEC pumps 45mil. If non-OPEC producers increase their output to 9mil, then OPEC lowers theirs to 41mil.

Given this formula, you can see that it doesn’t matter how much more oil the U.S. produces. The total available supply is controlled by OPEC, and the total available supply controls the commodity price.

The only reason this matrix works for OPEC is because 97% of the world's transportation sector is reliant on oil to get from point A to point B, and oil has no competition. A basic fundamental of business is: If you have no competition, you can monopolize the market with both supply and price.

Since the oil embargo of the 1970s, the world has been challenged with finding a way around this monopoly.

Brazilian sugarcane
So far only one country has figured out how to beat the cartel of OPEC at their own game — Brazil. In the mid 1970s Brazil decided to use the only resource they had available to them and produce fuels made from sugar. Being a tropical climate, Brazil was perfect for the expansion of sugarcane production for the duel use of world sugar and their own ethanol.

This wasn’t an easy transition or a quick one but Brazil mandated the change for their own national security. And as of the end 2010, 90% of all vehicles in Brazil can run on any fuel available at the gas pump when they fill up (and both ethanol and gasoline are available at every pump). They call the Brazilian cars and trucks Flex Fuel Vehicles (FFV), most of which are made by Ford and GM, American car companies with manufacturing facilities in Brazil.

The only difference between ethanol made in Brazil and ethanol made in the U.S. is the crop used as a feedstock. Sugar is better suited for ethanol than the corn we use here, although corn is still economically competitive with the price of gasoline. But farmers in the Midwest (with the help of some of our brightest minds from universities around the country and the world) have found crops that outperform corn for ethanol production.

 The crops of the new ethanol era in America are sugar beets, sweet sorghum and switchgrass from unfarmed land. Any single use (or combination of the three) can even outproduce the yields of sugarcane for making ethanol, and reduce the input production cost compared to corn. Ethanol made from sugar beets also has a 60% reduction in greenhouse gas when burned as fuel.

We can't drill our way out of the Oil Pit. But we can create vehicles that give the consumer a choice when buying fuel, and we can produce fuels that can compete with the price of gasoline. Since WWI the U.S. has fought to secure oil as a national interest. Today we still provide security for the Middle East to keep those oil interests safe from terrorists (who are supported by the same commodity we protect). This not only consumes American wealth but also the real American resource — American lives on the battlefield.

This is a change we need to start today. So tell your Congressional Representative to support the only bill in Congress that solves this problem for future generations: The Open Fuel Standard Act of 2011 (H.R. 1687).

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