A New Fuel Choice Bill

Friday, April 10, 2015

The following is an April 9th, 2015 article in National Review by R. James Woolsey and Anne Korin. Ambassador R. James Woolsey is a former director of Central Intelligence, co-founded the U.S. Energy Security Council, and chairs the board of the Foundation for Defense of Democracies. Anne Korin is a co-director of the Institute for the Analysis of Global Security (IAGS) and an adviser to the U.S. Energy Security Council. The article is entitled, The Flexible-Fuel Solution.

Negotiators in Geneva
Negotiators in Geneva appear to be sleepwalking into a Sunni–Shia nuclear arms race, so a bad neighborhood — as former Israeli prime minister Ehud Barak so memorably described the Middle East — is likely to get much worse. The Islamic State’s Mesopotamic marauding is adding industrial quantities of fuel to the fire. Since the region is home to some two thirds of world conventional oil reserves, oil prices are unlikely to stay at two digits for very long.

That’s unfortunate, since low oil prices — while depressing for the shale patch — are certainly fantastic for the majority of Americans. High global oil prices erode disposable income and act as a tax hike on Americans, while funneling billions upon billions of dollars to some of the world’s worst regimes. It’s been nice to have a respite from $147 oil, but policymakers should be well aware that, despite reduced imports, it is still the regimes of OPEC that — by both their action and their inaction — have the most influence over the price of oil. While we’ve never imported more than 15 percent of our oil needs from the Middle East, what we have imported and still do import from the region — due to the fungibility of the commodity — is the price of the black liquid. Analysts wait with bated breath for Saudi oil minister Ali al-Naimi’s statements because they know that if the Saudis choose to tighten the taps significantly, oil prices will climb.

The increase in U.S. domestic oil production due to the shale revolution makes all the more stark the 40-year freeze we have had in OPEC production capacity. The oil cartel, which sits on 72 percent of the world’s cheapest and easiest-to-lift oil — $2.50 a barrel is the Saudi production cost — produced 30 million barrels a day in 1974, and lifts less than that today. Assuming OPEC’s reported reserves are not inflated, a deliberate choice to keep production capacity over four decades much smaller than reserves allow is in keeping with normal cartel behavior: keeping supply tight to maximize revenue, and periodically cranking up production (or refraining from cranking it down) to allow the market to flood in order to bankrupt competitors. The short-term cost to Persian Gulf royals of lower prices such as we have today is well compensated by the long-term gain, especially as Asian customers lock themselves into a dependence on Saudi Arabia by building refineries optimized to the Kingdom’s products, namely medium and heavy sour crude (shale-patch oil is sweet and light).

This dynamic makes a great deal of sense for OPEC regimes, rentier states that need to ensure that the long-term price of oil is high in order to balance their oil-fueled national budgets, while keeping domestic spending high enough to dissuade their subjects from storming the palace doors. It is not such a good deal for the United States and its allies, since oil-price spikes tend to trigger economic downturns. That there will probably be increasing hits to supply from wars and terrorism in the region will only make things worse.

There is a way out of this conundrum, and it involves the shale patch. The reason oil-price spikes send our economy into a tailspin is that most cars and trucks are open only to gasoline or diesel. As a collective, OPEC, with its lowest marginal cost of production, acts as a monopolist in the oil market. Our petroleum-dedicated fuel tanks allow OPEC to act as a monopolist in the transportation-fuel market as well. While the vagaries of geology mean there is not much, despite the admirable efforts of American entrepreneurs, that can be done about the former, the latter is a problem that can be solved. Opening our fuel tanks to fuel competition would allow fuels made from natural gas, coal, and biomass to be arbitraged against petroleum-based fuel. Eventually, such competition would serve to keep oil as moderately priced as its competitors.

Shale-patch production has so tremendously increased the supply of natural gas that, even with oil in the mid two digits, on an energy-content basis natural gas is still three times as cheap. Cheap liquid fuel made out of natural gas, such as methanol, can be used in flexible-fuel vehicles that cost less than $100 extra to manufacture than do gasoline-only cars and that allow drivers to decide at the pump whether to fuel with gasoline or with something else based on comparative price or other considerations. Natural gas can also be used directly, as compressed natural gas, and it can be used to generate electricity, which fuels plug-in hybrid and electric vehicles.

Opening the transportation-fuel market to competition has long faced a chicken-and-egg issue: Why should automakers sell cars that are open to a fuel not retailing at many fuel stations, and why should fuel stations retail a fuel if cars aren’t warranted to use it? Flex-fuel vehicles overcome the technical part of this conundrum, because they can be fueled with gasoline while fuel stations catch up with the new fuels at their leisure. A bill just introduced by Senator Rand Paul (R., Ky.) answers the question for automakers. The no-subsidy, no-mandate Fuel Choice and Deregulation Act would give automakers the option of reducing their existing hefty and expensive fuel-economy obligations by opening at least half the vehicles in their fleet in a given model year to fuel competition of some sort. The bill is technology neutral, letting the market rather than government decide which fuels and drivetrains make most sense at any given time. It would serve to throw open America’s fuel tanks to competition and keep prices at the pump low over the long term. It is a critical policy shift that would insulate our economy from the volatility of a region in which the likelihood that the Arab Spring becomes an Islamic nuclear winter rises by the day.

Read more: Fuel Choice and Deregulation Act of 2015 Introduced.

Read the full text of the bill: Fuel Choice and Deregulation Act of 2015.

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How the Oil Industry Influences National Beliefs

Sunday, March 22, 2015

"The New York Times recently published an op-ed attacking renewable fuels from the Manhattan Institute's Robert Bryce," wrote Denise Robbins in Media Matters, "without disclosing his ties to the oil industry, despite a directive from its former public editor for the paper to fully disclose its op-ed contributors' financial conflicts of interest."

While the Renewable Fuel Standard (RFS) is an incomplete solution at best (robust fuel competition is what we need), we thought the excerpt below was an interesting look at one of the ways the oil industry has managed to keep its transportation fuel monopoly despite innovations such as turning municipal waste profitably into clean fuel (while reducing landfill bulk and greenhouse gases) or the ability to create ethanol for a dollar a gallon using undrinkable water and unfarmable land. Robbins writes:

In a March 10 New York Times op-ed, Robert Bryce falsely characterized the Renewable Fuel Standard (RFS) as an expensive "tax." The standard, which requires oil refiners, blenders, and gasoline and diesel importers to blend a set amount of renewable fuel into their gasoline supply, was dismissed by Bryce as a "boondoggle" and a "rip-off."

But the Times failed to disclose Bryce's financial incentive to attack the RFS, identifying him only as a "senior fellow at the Manhattan Institute and the author of a new report from the institute, 'The Hidden Corn-Ethanol Tax.'" The Manhattan Institute has, in fact, received millions from oil interests over the years, including $635,000 from ExxonMobil and $1.9 million from the Claude R. Lambe Charitable Foundation, where Charles Koch and his wife sit on the board of directors. Koch made his fortune from oil and currently has significant holdings in oil and gas operations.

Bryce is, in essence, acting as a spokesperson for the oil industry, which has much to gain from weakening or repealing the RFS. The renewable fuel requirement is set to increase over the next several years, potentially replacing up to 13.6 billion gallons of the conventional fuel supply by 2022.

These financial ties might explain why Bryce's op-ed was peppered with industry myths, including that renewable fuel can damage car engines (this has been proven wrong) and is bad for the environment (ethanol's lower greenhouse gas emissions are better for the climate).

The New York Times faced backlash after similarly failing to disclose Bryce's financial interests in a 2011 op-ed attacking renewable energy policies. A letter signed by more than 50 journalists and media professionals expressed concern that such a lack of disclosure is "a growing problem in American journalism" and asked the public editor to "lead the industry and set the nation's standard by disclosing financial conflicts of interest that their op-ed contributors may have at the time their piece is published."

Read the whole article here: NY Times Fails To Disclose Oil Funding Behind Pro-Oil Op-Ed.

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Can the American Energy Revolution Survive a Deal with Iran?

Friday, March 20, 2015

By Gal Luft, originally published in Downstream Today:

There is no lack of voices warning against the dangerous implications of the nuclear agreement the Obama Administration is advancing with Iran. The opposition has mostly focused on the destabilizing geopolitical impact of a nuclear Iran and what it means for the security of the U.S. and its allies. But there is one less obvious casualty — the North American oil and gas industry.

Undoubtedly in the event of lifting of the sanctions, cash-starved Iran would do all in its power to quickly ramp up its oil exports to make up for lost revenues, and the oil market could face an injection of 500,000-800,000 barrels/day of Iranian crude. At a time when U.S. crude oil supplies are already at their highest level in more than 80 years and storage facilities are reaching their maximum capacity, an influx of Iranian oil could easily slice current oil prices by half. This would be a crippling blow to America’s oil and gas industry, effectively marking the end of the North American energy renaissance.

Even before Iran opens the floodgate the industry finds itself in a precarious situation. To cover their capital investment and operational costs, North American oil drillers have collectively borrowed in recent years about half a trillion dollars. This debt was secured from financial institutions on the premise that the oil would be sold for $100 a barrel or so. But at $50 a barrel the revenues are out of tune with expectations. To avoid bankruptcy, oil companies are forced to pump as much oil as they can to generate sufficient cash flow in order to service their debt. But such Red Queen practice cannot go on for much longer. Hence, many projects have been shelved or streamlined; U.S. rig count, a key barometer of drilling activity, has been declining for the past six months; oil services companies have announced 40,000 layoffs to cope with lower oil prices; and independent oil and gas companies, particularly those with high production costs, are facing defaults and bankruptcies.

The slide in oil prices also impacts the natural gas market. The North American shale revolution has unleashed huge amounts of natural gas but due to lack of infrastructure to export the gas to international markets America’s gas is under-demanded and oil companies holding large amounts of gas in their portfolios are losing their shirts on this commodity as well. So far, the industry has put its faith on the construction of several multi-billion dollar LNG terminals from where the gas could be shipped to Europe and Asia. And indeed five such projects have been approved for construction by the Federal Energy Regulatory Commission (FERC). But a few of these projects could be derailed if the Iranian oil tsunami occurs. LNG prices in Asia are indexed to oil. This means that low oil prices drag down LNG prices — the spot price of LNG in Japan in at its lowest level in five years despite the fact that the country's fifty nuclear reactors are still idle — making America’s LNG less competitive in the Asian market compared to Australian or Qatari gas. Developers of LNG liquefaction facilities in the U.S. who for years struggled to obtain export permits will soon realize that their revenue projections and debt structure may no longer be viable under the low price scenario.

If there is any salvation for the industry it is in the creation of a new market for its product. This can be done in the sector in which it already has a big stake — transportation. Indeed this is the only sector that can gobble an amount of domestic natural gas significant enough to recover the depressed natural gas market.

A barrel of oil has roughly six times the energy content of a million Btu of natural gas. At current oil prices gas is almost three times cheaper than oil on an energy equivalent basis. This means there is enough room for oil prices to come down without crowding out gas from the transportation fuel market. But to generate demand for natural gas in transportation, cars, trucks and ships must be opened to fuels derived from the commodity, like methanol, ethanol, compressed natural gas and electricity. For this to happen automakers should be offered an option to reduce their fuel economy obligation — an unachievable 54.5 miles per gallon by 2025, twice the current efficiency level — if they open most of their cars to some sort of fuel competition, whether through flex fuel engines, electric motors, natural gas engines, fuel cells etc. The abundance of choice enabling vehicles would give rise to greater demand for natural gas and this would pad the balance sheets of America’s energy companies and keep them viable until the oil market rebalances itself. It will also provide consumers with lasting protection against future oil price hikes.

Unlike other industries that are used to investing a great deal of resources in creating demand for their product, oil and gas producers have never been challenged to seek new sources of demand. It has always been there for them. But the new market conditions beg for a new industry mindset — one that views fuel choice not as dangerous competition but rather as a lifeline in what could be a protracted and challenging period.

Gal Luft is Co-director of the Institute for the Analysis of Global Security and Senior Adviser to the United States Energy Security Council. He is also Co-chairman of the Global Forum on Energy Security.

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