How to Break OPEC

Sunday, November 27, 2011

The following was written by Kevin D'Arcy. Reprinted with permission.

Energy Secretary Steven Chu has stated that his goal is to boost gasoline prices to "European levels." Chu's logic is that high prices will cause us to conserve and force us to choose "alternative" fuels. But the amounts we can save through conservation are so minimal that at best we can only slow down the increasing demand as worldwide population and industrialization grows. But the greater fallacy of Chu's logic is the notion that European level prices will cause us to use alternative fuels. What alternative fuels might those be? Can you fill your Ford with solar energy? Can you drive that Volvo under wind power? How many geothermal miles do you get per tankful in your Toyota? The fact is that oil maintains a vertical monopoly on transportation fuels. Ninety-seven percent of the fuel used to transport people and goods in the United States is petroleum based; consumers have no choice in the matter. Big Oil is very happy about that and OPEC is absolutely depending upon it.

Three popular solutions to our oil dependency have been advocated. T. Boone Pickens urges America to convert its transportation fleet to natural gas — at the cost of tens of billions of dollars in government subsidies. And the expensive Pickens scheme would only swap one straight jacket for another since the vehicles would again operate on a single fuel which America does not possess in long-term abundance.

Another popular answer is "Drill, baby, drill." Increasing domestic production is desirable because it means buying less from foreign sources. But the U.S. produces less than 2% of the world's oil. If we increased our production by 10% a simultaneous decrease of less than 1% by OPEC would keep the world supply unchanged, and prices steady. But OPEC would not even need to cut production because rising worldwide demand would quickly swamp America's increase. "Drill, drill, drill" cannot by itself break OPEC and won't decrease prices in the long run.

Others have proposed a new Manhattan Project to rid us of our "oil addiction." But that idea has floundered because the problem appears so overwhelmingly complicated, and possible solutions so expensive.

The good news is that there is no need for such costly, ineffective, and grandiose schemes; we can rid ourselves of our straight jacket by employing current technology at very little cost. An inexpensive microchip and sensor has been developed that permits car engines to combust any combination of gasoline or alcohol fuels, from 100% gasoline to 100% alcohol or any mixture in between. For an additional $100 or less automakers can build vehicles that break the monopoly of oil and open the transportation fuel market to genuine competition. But relatively few of these "flex fuel" cars are being made for the domestic market because America is in a Catch 22 situation. Consumers don't demand flex fuel cars because filling stations sell only gasoline and diesel. And filling stations don't offer alcohol fuels because most cars can't operate on them. If we solve the chicken-and-egg conundrum by mandating that most of the cars sold in America are flex fuel vehicles (the Open Fuel Standard) a market will be created for alcohol fuels. Producers will supply that market, and consumers will finally have a genuine choice.

Most of us Tea Party folks are economic libertarians who have a well-founded animus toward government regulation. Our knee-jerk reaction to the flex fuel mandate is, "Stay out of it and let the free market handle it." That response would be perfectly sound if the transportation fuel market was truly "free." But free markets work only when there is competition; without it the "invisible hand" becomes a strong-arm tactic. OPEC is a strong cartel and oil maintains a vertical monopoly on transportation fuels. When the price of oil spikes we must buy it anyway. Demand is extremely inelastic because we have no alternative to oil. When the price of orange juice spikes we can substitute something else or simply go without it. When the price of beef is too high, we can buy other meats or even pasta, rice, etc. Lack of choice in the transportation fuel market leaves us hostage to OPEC and Big Oil. The federal government has a duty to break such monopolies and foster competition. But once it has created a competitive market the government must eliminate subsidies, get out of the way, and let freedom and the profit motive do the rest.

So, how do we know this Open Fuel Standard Act [OFSA] will work? We know it will work because it has already been done. Brazil began selling flex fuel vehicles in 2003 and has reduced its oil imports from 80% to 0% by substituting sugar cane ethanol. Naysayers claim this plan can only work in Brazil because it has an ideal climate for sugar cane and plenty of arable land. But only 1% of Brazil's arable land is used for ethanol sugar cane, and every country has its unique resources and its own advantages. America cannot grow much sugar cane, but we have other amazing options in abundance.

Currently, most of America's alcohol fuel comes from corn ethanol. But not all ethanol comes from corn and not all alcohol fuels are ethanol. The beauty of flex fuel cars is that they operate on any alcohol from any source. Enterprising entrepreneurs can make ethanol (ethyl alcohol) from sugar beats, switchgrass, potatoes, and a myriad of other crops. But we can also make methanol (methyl alcohol) from numerous carbon sources including garbage, natural gas, and coal. America has enough coal to fuel us for centuries, and we cannot even imagine the new processes and technologies that will emerge to produce alcohols cheaply and sustainably. Even without the tremendous market incentive that will come with flex fuel cars, scientists and entrepreneurs are already experimenting with ways to make ethanol rapidly and economically from algae. Brazilian sugar cane yields 700 gallons of ethanol per acre. The potential yield from algae is an incredible 5000 gallons per acre, and algae can be grown almost anywhere, including in sea water and in deserts. Never underestimate Yankee ingenuity.

We can produce methanol from coal for about $1.00 per gallon. Since methanol contains half the energy of gasoline, that price is equivalent to about $2.00 per gallon of gas. With economies of scale, new and more efficient methods, innovative technologies and dynamic competition, prices would be reduced further, but even at the current price methanol is an attractive option. And methanol would be produced in America and would generate jobs and profits in America. Even the environmentalists will be on our side because ethanol has a Tom Thumb-sized carbon footprint compared to the T. Rex-sized footprint of 'dinofuel.' And in a tremendous bit of serendipity, methanol can be made directly from CO2 itself. Believers in man-made global warming should be ecstatic.

Until we create the market for them, these alternative fuels will remain insignificant. But as the entire industrialized and "emerging" world converts to flex fuel vehicles (and the world will follow America's lead) oil will become just another commodity like orange juice or beef. Under such circumstances Big Oil would be no more powerful than Big Breakfast Cereal or Big Textile. And OPEC would be broken. Imagine being able to say, "Hey, King Abdulla, President Hugo, and Colonel Muammar, we don't need you any longer. We kicked our addiction, now go take a hike." OPEC lives in fear of that.

America spends about 600 billion dollars per year on foreign oil, and this year OPEC revenues will exceed 1 trillion dollars. We have become so jaded by TARP, Quantitative Easing, and Bush and Obama funny-money that one trillion no longer staggers us. But keep this in mind: 600 billion dollars is equal to one half of the yearly U.S. after-tax corporate profits. Every year we give the equivalent of 50% of U.S. corporate profits to foreigners in exchange for oil. Much of that money ends up in the hands of oligarchs, autocrats, and dictators. It also funds Wahhabi extremist schools in the Muslim world and trains and equips anti-Western terrorist groups. When we break OPEC and lower the price of oil we will put dictators and terrorists on a starvation diet, and do so without sending a single bomb or soldier "over there." Our unhealthy obsession with Mid East politics would end and we could focus on our true national interests. And that 600 billion dollars that we keep at home could be the basis for a long-lasting economic recovery, provided we keep the heavy hand of government out of the development process.

Breaking OPEC and ending the oil monopoly should be a national priority because it is easy to do and the results could be astonishing. In 2008 presidential nominee Barack Obama indicated he favored the OFSA yet he has done nothing to help pass it. President Obama certainly has no qualms about intervening in the auto industry. Not only has he made himself the virtual CEO of Government Motors, he has imposed fuel efficiency regulations which will increase the average cost of a car by $1300 while improving fuel economy by a meager 10 m.p.g. in 8 years. That 10 m.p.g. savings will be subsumed almost immediately by increasing worldwide demand. President Obama also spent 3 billion dollars on the feckless Cash For Clunkers program. That squandered 3 billion dollars could have put 30 million flex fuel vehicles on our highways, giving us a quick start down the road to energy independence. Obama and both parties in Congress have ignored the flex fuel option in favor of costly and non-effective programs. We can't prove motive but Big Oil has plenty of money and influence in Washington and Big Oil does not like the OFSA.

If we are ever going to break the oil monopoly it will take prodding by millions of voters to get it done. The Tea Party must make the OFSA a priority since it will further our goals of strengthening America economically and strategically. Ask your local representative to sponsor H.R. 1687, The Open Fuel Standard Act of 2011. Here is a convenient link to do just that. For more information about the OFSA visit setamericafree.org.

America faces many problems for which there are no easy and politically viable solutions. But here is one major pain in our rears and pocketbooks that can be alleviated easily, quickly, and without controversy. We have been complacent for too long; let's act like Americans. Let's get smart, and let's get busy.

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