The Political Prospects of an Open Fuel Standard in Obama’s Second Term

Saturday, January 26, 2013

By Daveed Gartenstein-Ross, originally published on The Truman National Security Project. Reprinted with permission.

At the beginning of President Obama’s first term, there was reason to believe that an Open Fuel Standard (OFS) could pass within four years. It did not, and now the OFS faces a different political climate as his second term commences. In some ways, this new climate is more conducive to OFS passage, but in others it makes such a proposal a harder sell.

The OFS is designed to address what can be called a “chicken-and-egg” problem that afflicts such petroleum alternatives as alcohol fuels, including ethanol and methanol. The market for alcohol fuels is small, in part because most drivers do not have flex-fuel cars that can utilize them. This means that filling stations have little incentive to carry alcohol fuels—which in turn discourages people from buying flex-fuel cars. Illustrating this, only about 2,250 service stations in the U.S. (excluding private stations) have ethanol pumps, out of a total of about 176,000 stations.

An OFS would address this impasse. The Open Fuel Standard Act of 2011 shows how this might be accomplished. The act was co-sponsored in the House by John Shmikus (R.-Ill.), Eliot Engel (D.-N.Y.), Roscoe Bartlett (R.-Md.), and Steve Israel (D.-N.Y.). It would require each auto manufacturer’s vehicle fleet for any particular year to be comprised of at least 50 percent qualified vehicles beginning with model year 2014, scaling up to 80% of qualified vehicles for model year 2016, and 95% beginning with model year 2017. To be a qualified vehicle, an automobile must either a) operate solely on natural gas, hydrogen, or biodiesel, b) be a flex-fuel vehicle, c) be a plug-in electric vehicle, or d) be propelled by a fuel cell that produces power without petroleum.

It is obvious how such legislation would address the chicken-and-egg impasse: since the fleet would have an increasing number of vehicles capable of being powered by alternative fuels, such fuels would find a larger market in which they could compete with petroleum. As a fact sheet drafted by OFS advocates states, “Competition and consumer choice in the transportation fuel market would, by enabling drivers to choose to purchase a different fuel on the fly should it be less expensive on a per mile basis, serve to dampen the impact of oil price volatility, and OPEC supply manipulation, on our economy.”

Some OFS advocates are hopeful that it will pass soon. A recent article about the launch party for the alternative-fuel promoting Fuel Freedom Foundation notes that those involved with the group believe the OFS can pass next year. I spoke to Roger Ballentine, president of the consulting firm Green Strategies, Inc., and a keen observer of energy politics. He noted that there are a couple of reasons for optimism about such legislation. For one thing, the auto industry is in much better shape than it was in 2009-10. “Trying to impose anything that looked like a mandate on that industry at that time would have been difficult,” he said. Further, Ballentine said that passage of difficult legislation is always more feasible in a president’s second term than his first one.

But in other ways, developments have dampened prospects for an OFS. The first major development in this regard is the perception that the U.S. will enjoy more abundant liquid fuels due to the development of unconventional oil and gas, something that is discussed in the National Intelligence Council’s Global Trends 2030 report (which I discussed earlier on this blog). There are reasons to be concerned about oil’s virtual monopoly over the transportation sector even if the U.S. is able to produce more petroleum. But the burden will be on those pushing for such changes to our energy policy as the OFS to make the case for why our dependence on oil remains a concern that should be addressed legislatively.

The second development, though, is far more significant for OFS advocates: biofuels have a far more negative reputation now than they did in 2009. Biofuels have been under attack for their impact on food prices, their effect on the environment, and because advanced biofuels have not advanced as quickly as advertised.

The past summer’s historic drought highlights the growing antipathy toward biofuels. As extreme weather conditions ravaged the country’s crops, there were loud calls for the administration to suspend the renewable fuel standard that mandates a certain amount of renewable fuel to be blended into gasoline. Perhaps due in part to the stigma currently attached to ethanol, OFS advocates have recently been emphasizing methanol’s potential to reduce the U.S.’s dependence on oil. Indeed, the public strongly perceives the U.S.’ abundance of natural gas to be a significant positive development, and an Open Fuel Standard would allow it to compete with traditional gasoline. But the growing unpopularity of biofuels will surely complicate the public debate if there is a renewed OFS push.

Hence, there are reasons to think that the prospects of an OFS passing have improved, but it also faces some more pronounced challenges. The entrenched interests that will oppose an OFS are considerable: as Ballentine said to me, the oil industry is “the most successful industry in the history of mankind.” And when likely opponents include not just oil producers, but also refiners and auto manufacturers, the objections to an OFS can proliferate rapidly.

Daveed Gartenstein-Ross is a Contributing Writer for The Truman Doctrine. He is a senior fellow at the Foundation for Defense of Democracies and a Ph.D. candidate in world politics at the Catholic University of America. He is also the volume editor of From Energy Crisis to Energy Security: A Reader.

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Thought Experiment

Friday, January 18, 2013

R. James Woosley
R. James Woosley, former Director of Central Intelligence, has an interesting comment on the back of the book, Princes of Darkness: The Saudi Assault on the West by Laurent Murawiec. Woosley wrote:

"Try a thought experiment: that Ferdinand and Isabella's Spain of five centuries ago exists today and is fabulously wealthy from oil — and that Torquemada and his followers are given billions of dollars a year to bring the world under the Spanish Inquisition's sway. We would face a dangerous and determined spread of malignant hatred and cruelty masquerading as religion. As Laurent Murawiec persuasively demonstrates, so we do."

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BREAKING NEWS: No Hostages Taken at Ethanol Plants...Again

All is peaceful at America's ethanol plants.
AUTO CENTRAL - January 16, 2013: The Auto Channel was able to confirm this morning that no hostages have been taken at any ethanol plant in America. And while we're still awaiting confirmation that no hostages have been taken at any ethanol plants throughout the world, TACH's management is confident that once reports are finalized that it will be confirmed.

Counting today, it appears, unofficially at least, that this is the 14,312th consecutive day since the October 1973 oil crisis that no hostages have been abducted by any militant group from any ethanol plant. There was a report in May 2003 that Mary Bruener, a sales clerk at an Iowa-based ethanol plant was taken hostage, but it turned out it was just friends of hers who were taking her to the local Applebee's for a birthday celebration.

Today's report means that, once again, no lives were lost, no U.S. combat troops were dispatched, no naval assets were deployed, no Tomahawk missiles were fired, no helicopters were shot down, and no drones were needed to go behind enemy lines in order to protect any ethanol production facilities or the flow of ethanol to American service stations.

In a related story, televised reports are showing that service stations around America are not reporting any long waits for motorists to fill up on any fuel.

This story comes in the wake of the latest news from Algeria that Al Qaeda militants raided a BP gas field and abducted 41 hostages from nine or ten different nations, including seven from America. Meanwhile American troops and military assets continue to be deployed around the world, at tax payer expense, to protect the global oil industry.

- Originally published at The Auto Channel here.

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Breaking Monopolies is One of Government's Most Important Responsibilities

Friday, January 11, 2013

Anne Korin and Gal Luft make a very persuasive argument in their new book, Petropoly, that the most influential free market advocates have always been in favor of one particular use of government: To prevent or break monopolies so free markets and competition could occur.

Many people are in favor of fuel competition but think the Open Fuel Standard is an overreach of government. Korin and Luft's arguments make it clear that nothing could be further from the truth.

Many people believe that the reason other fuels don't compete with gasoline is because they can't — they're too expensive. But this is not so. Ethanol and methanol can both be sold today for less money per mile than gasoline. The only reason people don't use them is because their cars are not warranted to burn them. The engines themselves could burn the fuel. But the cars are warranted to burn one fuel only, regardless of how easy and inexpensive it is to make them capable of burning all three. And that's the only reason fuels are not competing today.

What we have is a virtual monopoly. And since transportation underpins our economy, this monopoly rules our most economically important commodity. What would Nobel Laureate (in Economics) Friedrich August Hayek think should be done about this? He was, as Korin and Luft put it, "One of the greatest economists and political philosophers of the 20th century and the world's leading free market proponent...In 1945, Hayek published his triumphantly successful book The Road to Serfdom, a manifest in defense of markets and competition which made him the darling of conservative parties and leaders all over the world, including Margaret Thatcher."

Hayek said that you can't rigidly stick to rules with regard to free markets, and he named especially laissez-faire as one of those rules you should not be inflexible about. Hayek believed that the government should function as "a counterweight to monopolistic coercion" as Luft and Korin put it. That's exactly what we have in the transportation sector. "Cars that block competing fuels," they write, "are a barrier to the development of a free market in fuels."

Because we don't have any other attractive options for breaking OPEC's monopolistic coercion of our economy, Hayek would probably have wholeheartedly supported the Open Fuel Standard Act.

Another important and influential free market advocate was also a Nobel Laureate in Economics — Milton Friedman. He wrote that "the first and most urgent necessity in the area of government policy is the elimination of those measures which directly support monopoly."

What is something within our borders that directly supports the petroleum monopoly? The petroleum-only vehicle.

What could eliminate that monopoly? The Open Fuel Standard.

Many people are understandably angry at our government's constant interference and meddling in the free market. But freeing markets from a monopoly's dominance of an important commodity is one of the few good reasons our government should intervene. Let's hope this understanding reaches enough people in time.

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Is the Open Fuel Standard a "Dangerous Scheme?"

Thursday, January 10, 2013

Someone sent me an article by Robert Werner that harshly criticizes the Open Fuel Standard Act. Werner said the OFS bill is a "dangerous scheme we can do without." Below are my responses to various statements in the article. You can read his article here.

1. In the title, Werner calls the bill "Open Fuel Standardization Act," which is not its correct name, although he provides a link to the correct bill.

2. Werner writes, "H.R. 1687 would mandate that 50% of all new cars and light duty trucks produced by 2014 be engineered to run on some type of alternative fuel." This is somewhat misleading. In the context of the rest of the article, this seems to imply that the vehicles will not be able to also burn petroleum.

The Open Fuel Standard Act makes it clear that the only type of car no longer allowed to be sold is a car that perpetuates oil's virtual monopoly over transportation fuel. So a normal internal combustion engine vehicle would need to be warranted to burn ethanol and methanol in addition to gasoline.

This is a very simple engineering tweak. In fact, according to Robert Zubrin, our cars are already capable of burning all three fuels very well, except for one thing: The flex fuel software in the cars' onboard computer is missing or has been disabled. That's an easy and inexpensive thing to remedy. Read more about Zubrin's research here.

3. Werner writes, "Step aside, Free Market, Big Government coming through! If only 'We The People' weren’t so obtuse. Unwilling to do the right thing; passing over Chevy Volts in favor of Ford F-Series Pickups and Honda Accords. Shame, shame." Again, this is misleading and inaccurate. Ford pickups and Honda Accords could very easily burn ethanol, methanol and gasoline if they were legally warranted to do so.

After the Open Fuel Standard bill passes, if someone with a Ford F-Series Pickup wanted to burn nothing but gasoline in her truck, she would be able to do so. Gasoline would still be one of the many fuels she could fill up with. But she would have other choices too — choices we don't have now.

The main purpose of the OFS bill is to introduce a free market for America's most important commodity. What we have now is a virtual monopoly. Very few cars are sold that can burn multiple fuels, so very few fuel stations have the motivation to put in competing fuel pumps (and oil companies actively block them). Auto buyers have very little incentive to purchase a flex fuel car since there aren't many fuel pumps available with anything but petroleum. The result: No competition.

The Open Fuel Standard would break through this impasse and open up the fuel market to competition for the first time in a hundred years.

4. Werner writes, "Common sense in Washington dictates that we should burn food in our cars (Ethanol, Biodiesel)." Again this misleading statement ignores the many possible feedstocks ethanol and methanol can be made from, implying that the OFS bill would make everything unavailable except ethanol made from corn. He ignores ethanol made from municipal waste, switchgrass, miscanthus, corn stover, wheat and barley straw, and algae, to name just a few non-food crops ethanol is already being made from. And he ignores methanol, which can also be made from municipal waste, agricultural waste, coal, natural gas, and waste from the paper industry, to name just a few. 

5. Werner writes, "Think you’ll outsmart them by maintaining your current gas guzzling beast? Plan on camping out at the dealership for a chance to buy a rare, new gasoline burning car?" If he means a car that can only burn gasoline, he's probably right. But with the OFS, most cars could burn gasoline like just like they do now, and just as well.

We have about 9 million flex fuel vehicles (FFVs) on the road in America, out of 250 million. According to the National FFV Awareness Campaign, a large percentage of people who already own an FFV don't even know it. They are buying gasoline, completely unaware that they have any choice. The vehicles are just as good at burning gasoline as any gas-only car, and buyers are often not even told that the car they're buying is anything different than what has always been available — a car that can only burn one fuel, a car that maintains oil's virtual monopoly over our nation's transportation fuel, a car that enables OPEC to control our economic destiny.

So once the Open Fuel Standard Act is passed, anyone who wanted to could completely ignore their new choices and stick to old-fashioned gasoline for the rest of their lives. They will have other choices, but they don't ever have to act on them. 

Robert Werner grossly misunderstood the Open Fuel Standard. And he's not alone. In our conversations, all of us need to do a better job of clarifying what this bill is and what it can do for America. Start here.

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The Serious Consequences of High Gas Prices

Saturday, January 5, 2013

Some places were higher than average.
According to Bloomberg, "motorists in the U.S. paid record high prices for gasoline in 2012...the national average price of gasoline in 2012 was $3.60 a gallon, nine cents more than the previous annual record set last year...Prices touched $3.94 a gallon on April 5 and 6..."

Higher gas prices are not just irritating. They affect the economy rather broadly, as the following excerpt from the book, Fill Your Tank With Freedom makes clear:

There is an insidious side-effect of rising gasoline prices. As people spend more money on gas, they spend less money on other things, and that causes the loss of jobs. “Since consumer spending is the main driver of the U.S. economy,” says Mark Cooper, Research Director of the Consumer Federation of America, “when speculators, oil companies and OPEC rob consumers of that much spending power, the inevitable result is a dramatic reduction of economic activity and employment.”

In Cooper’s study of the effect of oil prices on jobs, he discovered that every time oil prices have spiked since World War II, we’ve had a recession in America. In his study, he showed that because oil was about $30 a barrel higher than “costs or historic trends justify,” (from the summer of 2010 to the summer of 2011) gas prices rose by a dollar a gallon in one year, which drained about 200 billion dollars from the economy. This is about two percent of consumer spending. That doesn’t seem like much, but two percent less spending (200 billion dollars) created the loss of hundreds of thousands of jobs.
Another way to look at it is that because most of our cars are not capable of burning anything but gasoline, we imported about $500 billion dollars per year of oil, sending that money out of the country. That would have paid five million workers $100,000 a year! But the money leaving our country just leaves — doing nothing for us. If the same money was paid to workers here, it would have a huge ripple effect in our economy because that money would then be used to buy other goods and services in America.

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What Should President Obama Do? "Kill the Oil Monopoly" Says Gal Luft

Thursday, January 3, 2013

Foreign Policy Magazine put it to ten experts: What should President Obama try to accomplish with his second term? Gal Luft of the Institute for the Analysis of Global Security, was one of the experts. His suggestion: Kill the oil monopoly. Here's an excerpt from the article:

Most cars sold in the United States — roughly 14 million annually — are allowed under their warranties to run on nothing but oil: gasoline and, in some cases, diesel. Due to this virtual monopoly, oil has taken on inordinate strategic importance, and oil prices have a significant economic impact. Oil-price spikes have the power to reduce consumer confidence, trigger recessions, and inflate the country's trade deficit. Were drivers able to respond to high oil prices by switching from gasoline to less costly fuels, oil's importance would be greatly diminished. But they can't...

Obama, who pointed out during his campaign that America is "the Saudi Arabia of natural gas," can break oil's stranglehold over America's transportation sector by sending Congress a simple, no-subsidy, open-fuel-standard bill that would ensure that new vehicles sold in the United States are open to some sort of fuel competition. The law would allow automakers to choose whether they want to go the least costly route — liquid-fuel choice — or some other pathway. The new vehicles would then create the demand that would spur increases in the production capacity of competing fuels...

Best of all, from the perspective of the president's political advisors, support for such a move would be genuinely bipartisan. Co-sponsors for an open-fuel-standard bill in 2011 ran the gamut from liberals like California's Rep. Brad Sherman to Tea Party favorites like Iowa's Rep. Steve King. With backing from the increasingly powerful alternative-fuels lobby, as well as national security hawks like former CIA Director James Woolsey and former Homeland Security Secretary Tom Ridge, this could be one energy proposal that Republicans who would never touch a carbon tax or cap and trade would be willing to sign on to.

Read the whole article here: Kill the Oil Monopoly.
More by Gal Luft: Will Gas Prices Ever Return to Normal?

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OPEC Makes a Trillion Dollars in 2012

Wednesday, January 2, 2013

Quoting from an article in CNN entitled, OPEC cartel to reap record $1 trillion: "The Opec oil cartel, led by Saudi Arabia, will pocket a record of more than US$1tn in net oil revenues in 2012 as the annual average price for Brent, the benchmark, heads to an all-time high in spite of weak economic growth.

"The windfall will provide fresh capital to some of the world's largest sovereign wealth funds. United Arab Emirates, Saudi Arabia and Kuwait, the most influential members of the cartel, are home to three of the world's 10 largest SWFs by assets under management, according to estimates by the SWF Institute."

The average price per barrel of oil in 2012 was $111.5, an all time record. Saudi Arabia's oil minister says they planned to keep oil prices above a hundred dollars a barrel in 2012. They've achieved their goal, much to the detriment of the rest of the world's economy.

The price of oil is rising steeply, driven by OPEC's desire to bleed the world. Only ten years ago, OPEC made $200 billion. In 2012, they made over a trillion dollars. This greatly helped the Save the King Foundation and the spread of Wahhabism worldwide, but caused economic damage to the rest of the world. The last paragraph of the article makes it clear that our gasoline prices are only going to go up:

"The International Monetary Fund estimates that Riyadh and Abu Dhabi both need oil prices at about $80 a barrel to balance their budgets. Only a decade ago they were able to balance their budgets with oil prices averaging $25." Gal Luft says they will need at least $110 a barrel by 2015.

If we had fuel competition in America, we wouldn't have to worry about this. You can do something about it right now. Start here.

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MIT Professor of Economics Emeritus Says What the Real Problem Is

Tuesday, January 1, 2013

M.A. Adelman, the MIT professor, wrote:

"The real problem we face over oil dates from after 1970: a strong but clumsy monopoly of mostly Middle Eastern exporters cooperating as OPEC...Price fixing by private companies on the OPEC scale would not be tolerated in any industrial country. In the United States, the officers of firms that engage in such activities go to jail. But the OPEC members are sovereign states, subject to no country's laws."

- Quoted from the book, Petropoly, by Anne Korin and Gal Luft.

This is, in fact, the real problem: We are victims of an illegal fuel monopoly. But the Open Fuel Standard can solve this problem cleanly and efficiently. And it won't cost taxpayers any money. It is not a subsidy or handout. It's a simple change of policy. It is doing what governments are supposed to use their power for: Preventing monopolies from stopping free market forces from doing what they do best.

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