A Petroleum-Only Society Leaves Our Economy Vulnerable

Saturday, July 28, 2012

Saudi forces are constantly detaining terror suspects
plotting attacks on energy installations.
Even though Saudi Arabia deliberately restrains their oil output to keep world oil prices high, they still export more oil than any other country in the world. And the U.S. imports more oil than any other country.

The global price of oil is determined by production levels. If something happened to seriously slow down Saudi Arabia's production, oil prices would go through the roof, which would seriously damage the economic stability of every country except Brazil. I don't think it would be an overstatement to say it would be an economic catastrophe for the United States.

We are extremely vulnerable to oil shock. It doesn't matter how much oil America gets from Saudi Arabia. A disruption in Saudi oil production would immediately and critically raise the global price of oil.

Security on one of Saudi Arabia's biggest facility is weak, and it is considered an important target by terrorists:

Wikileaks Cables Show Worry About Saudi Oil Security

In all likelihood, it is only a matter of time before terrorists successfully cripple Saudi Arabia's facilities. And that is not the only possible way Saudi oil production could be disrupted.

But the Open Fuel Standard would greatly reduce America's vulnerability. Once the bill passes, within three years most gas stations will provide fuel pumps for alcohol fuels because there will be enough flex-fuel cars on the road to justify it. Then fuels can begin to compete. And our vulnerability will begin to wane. If something happens to Saudi Arabia, American drivers would simply put alcohol fuel in their tanks on their very next fill up.


Choke Point

Sunday, July 22, 2012

In threatening to close the Strait of Hormuz, Iran is risking more than war. It just might make the vitally important oil shipping route irrelevant.

By Gal Luft, originally published in Foreign Policy.

One hundred years ago this week, five Italian torpedo boats conducted a raid in the Straits of Dardanelles, a long, narrow body of water connecting the Aegean Sea to the Sea of Marmara — then the world's most important shipping passage. It was the height of the Italo-Turkish War, a precursor to World War I, and the Young Turks in Constantinople responded by playing their trump card: They closed the strait to international shipping intermittently for a few weeks by deploying their warships. But instead of aiding the war effort — the Turks eventually lost control of their Libyan provinces — the closure had disastrous consequences for the Ottoman Empire.

At the time, the Russians sent 90 percent of their grain exports through the Turkish Straits out into the Mediterranean. Closure of the Dardanelles thus meant that millions of tons of grain were spoiled, bringing ruin to Russia's agricultural economy and reducing its export revenues for the year by 30 percent. The lesson for Tsar Nicholas II: never allow a foreign power to hold the key to your prosperity. From that point onward, Russia's foreign policy in the lead-up to World War I was laser-focused on one objective: accelerating the demise of the Ottoman Empire and inheriting control over Constantinople and the Straits.

Fast forward 100 years and free passage through another strategic strait, the Strait of Hormuz, is endangered. This time it is the disruption of the oil supply, not grain, that has great powers vexed, and it is Iran that's doing the threatening. Meanwhile, Saudi Arabia and its Sunni neighbors — with China's help — are assuming Russia's role in altering the world's geopolitics.

Today, Iran's economy is in shambles. Its oil exports have plummeted by nearly 50 percent since last year because of U.S. and European sanctions, while its annual inflation rate has surpassed 30 percent and its currency has declined by 50 percent against the dollar. And the more desperate the Iranians become, the more aggressively they threaten to block the Strait of Hormuz, through which 40 percent of the world's seaborne oil passes each day.

In late June, the commander of the Iranian army's ground forces, Brig. Gen. Ahmad Reza Pourdastan said that "if conditions arise in which the Iranian nation feels threatened, it will use all [its] means of pressure, including in the Strait of Hormuz" — a sentiment that his superior, Maj. Gen. Seyed Hassan Firouzabadi, echoed a few days later. Iranian naval officials have confirmed that they have already installed sea-to-sea missiles on small, speedy patrol vessels with advanced maneuvering capabilities. Later this month, Iran's parliament is scheduled to vote on a bill to block passage through the Strait to oil tankers linked to countries applying new European Union (EU) sanctions — a measure that would apply to 27 EU counties and the United States and violate the Law of the Sea Treaty, which permits passage through the Strait in both directions even though part of the navigation route falls within Iran's territorial waters.

So far, Iran's threats have invited yawns from the oil market, which seems to be more concerned about declining demand from stagnant economies than a drop in supply. (Oil prices have dropped nearly 20 percent since April.) And there are good reasons to think Iran is bluffing: At its narrowest, the Strait is about 25 miles wide — a fact that even the most neurotic traders seem to have grasped. Blocking an area as wide as Singapore will require a vast and sustained naval effort that the Iranians cannot muster. To be sure, they could mine coastal waters and harass the occasional vessel, but closing the Strait for a meaningful length of time is a far-fetched scenario that would undoubtedly trigger a swift and decisive U.S. military response. Yet Tehran would have us think otherwise.

What the mullahs, their generals, and the 100 Iranian lawmakers who've expressed support for the bill to block the Strait should know is that, like the Ottomans a century ago, they are likely to be the prime casualties of any real or threatened disruption to maritime trade. The reason is simple: It's not about the heavy price the Iranians would pay if they went through with a military effort to close the Straits. In fact, they're paying the price already, as talk of closure has already made the Strait of Hormuz increasingly irrelevant.

In recent weeks, two pipelines that bypass the Strait have become operational. In the United Arab Emirates (UAE), the Abu Dhabi Crude Oil Pipeline can now pump as much as 1.5 million barrels per day from Habshan in Abu Dhabi some 230 miles south to Fujairah in the Gulf of Oman. This represents 60 percent of the UAE's oil exports already, and this capacity can be easily expanded to almost 2 million barrels per day. In addition to becoming the new outlet to the Arabian Sea, Fujairah will have storage space for 12 million barrels as well as three sub-sea pipelines and mooring buoys for deepwater tanker loading.

Saudi Arabia has also invested in infrastructure that enables it to bypass the Iranians. In June, it reopened the Iraq Pipeline through Saudi Arabia (IPSA), which was confiscated from Iraq in 2001 and travels from Iraq across Saudi Arabia to a Red Sea port north of Yanbu. This pipeline will be able to carry 1.65 million barrels per day.

Together, these two pipelines could eventually reduce oil traffic in the Strait by 25 percent. But this is only the beginning. At least two more projects connecting Saudi Arabia to Oman and Yemen are under consideration. Iraq also has an outlet, which is currently being expanded, to the port of Ceyhan in Turkey via the Kirkuk-Ceyhan pipeline. Should whatever regime replaces Syrian President Bashar al-Assad be interested, Iraq may also revive the Iraq-Syria pipeline as another means of shipping crude from southern fields to the Mediterranean.

These projects have the potential to remove millions of additional barrels from Hormuz's busy schedule. But it is not only Iran's neighbors who are behind the efforts to reduce the strategic importance of Hormuz on their export lifeline — China's also involved. Like Tsarist Russia (though for the opposite reason), fuel-hungry China is fixated on keeping its economic lifelines open and under control. China is one of the top purchasers of Iranian oil, and though it has been less than cooperative in the international boycott over Tehran's nuclear program, its allegiance to Iran pales in comparison to its dependency on the other Gulf energy exporters — Saudi Arabia, Iraq, Kuwait, and the UAE — which in total supply 35 percent of China's crude imports, or three times the volume supplied by Iran. Securing the flow of oil from those countries is therefore a paramount objective for Beijing. It was a Chinese state-owned construction company that built the pipe to Fujairah, and there are also plans in the works to build an oil pipeline connecting Pakistan's Arabian Sea port of Gwadar to Xinjiang province in western China. If built, this pipeline will be able to collect oil from African ports and the alternative terminals mentioned above and pump it directly to China.

Much of Iran's current regional clout derives from its geographical location, but its antagonistic behavior is driving the country's neighbors and clients to seek ways to defuse this power and eliminate their dependence on the Strait of Hormuz. The effort to reduce Hormuz traffic presents the West with a new opportunity to augment its current Iran containment strategy while eliminating for good one of the biggest impediments to global energy security: a choke point that for decades has enabled rogue regional players to hold the world economy hostage. Using steel on the ground rather than aircraft carriers in the water, world powers can do to Iran what Russia did to the Ottomans. This time around, however, it won't require a world war.

Gal Luft is co-director of the Institute for the Analysis of Global Security and senior advisor to the United States Energy Security Council.


Consumers Can Use Any Fuel They Want ... As Long As It's Gasoline

Friday, July 13, 2012

By Marc J. Rauch, Executive Vice President and Co-Publisher of The Auto Channel.

When Ford designed the Model T it was said that you can get the car in any color you want, as long as it’s black. The public has that same limited choice when it comes to fuels.

At the SAE (Society of Automobile Engineers) World Congress meeting that has been taking place in Detroit this week, a group of automaker representatives voiced their collective opinion that internal combustion engines — versus electric — would continue to dominate new vehicle manufacturing for at least the next two decades. This confirms what we at The Auto Channel have been saying for the past few years: That electric vehicles are currently nothing more than just a diversion to keep the public from earnestly seeking and accepting alternative fuel solutions.

While the various OEM experts voiced somewhat differing opinions on the efficiency and economy of gasoline or diesel, they pretty much remained centered on these petroleum-based fuels.

Paradoxically, different automotive media outlets, such as Wards and NADA reported on the SAE event by headlining their stories with “Consumers Will Determine Future Fuels...” — as if consumers will actually be given the opportunity to make their own decision. In fact, of course, as long as the oil-gasoline industry is allowed to circulate misinformation about biofuel alternatives, and pay-off politicians or media spokespeople, the public will never get the opportunity to vote with their wallets because the alternative fuels will either never be readily available to them or they’ll not have engines that are capable of using the fuels (as in the case of CNG and propane).

In general, the lack of correct information within the automaker community about biofuels is so prevalent that it is laughable. For example, I recently had a conversation with a technical rep from Volvo where I asked him why Volvo cars are not marketed as being flex-fuel cars. He said that they weren’t marketed as such because they are not flex-fuel capable. I asked where the Volvo cars sold in America are manufactured, and he replied in Sweden (and other Scandinavian countries). I then asked what differences there are in cars sold in Sweden compared to America, outside of some structural safety changes. He replied that to his knowledge there weren’t any. So then I said, “Then your cars are flex-fuel because they have to be flex-fuel for Sweden since the use of biofuels is mandated by law.” He had no reply, except to ask for my business card and said he would get back to me.

Similarly, I was in Vancouver a few months ago for the Land Rover Evoque launch and happened to share a table for lunch with the president of Land Rover Canada. Our conversation moved to biofuels and he gave me the usual top-ten list of all the bad things about ethanol (this is the list that was invented by the oil-gasoline industry to denigrate ethanol). I politely ran through the factual rebuttals. He didn’t have much to say, but it was clear that he was unhappy about being corrected (or perhaps just uncomfortable because the two of us were alone at the table and he had no company assistance in formulating a reply). In any event, he moved to the subject of compressed natural gas and recited a few of the rumored problems with using CNG. Since I own and regularly drive a CNG vehicle I was able to counter with my personal experience, which is completely contrary to what he had heard about CNG.

But that’s not all. Very recently AutoNation, America’s number one seller of new cars, held a “Future Fuels” symposium in South Florida that was moderated by their CEO, Mike Jackson. The 90-minute event took place at a university was broadcast live over the Internet (we carried it on TheAutoChannel.com, naturally). Mr. Jackson is a very popular and very knowledgeable car guy. He opened the session with a presentation about existing and potential vehicle propulsion systems and alternative fuel sources. While it would be incorrect for me to say that he got everything wrong, I will say that he got enough wrong so as to taint his entire presentation and make it seem like electric is the only viable alternative to gasoline or diesel. When you take into account that electric cars might only be significant in the second-half of this century, he basically said “You can use any fuel you want, as long as it’s gasoline or diesel and as long as we continue to make terrorist regimes rich.”

Obviously, my point is that if automobile executives, technology experts and media outlets don’t know the truth about biofuels, and continue to spread misinformation about the alternatives, then the public will never determine the future of fuels or powertrains outside of the most rudimentary of choices (Do you want a 4-cylinder or a 6-cylinder? Do you want regular 87 octane gasoline or mid-grade 89 octane gasoline?).

If our politicians are incapable of pushing themselves away from the bribes given to them by the oil-gasoline industry it would be nice if they were less complicit in creating roadblocks that prevent the public from being able to make better, more informed and much more economical buying decisions.


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