Friday, September 16, 2011
It’s possible, with the right policy.
We can’t do it just by expanded domestic drilling. In order for gasoline prices to fall to $2 per gallon, oil prices must be cut to $50 per barrel. And oil prices are set globally, with the dominating influence being the OPEC oil cartel. Since 1973, this cartel, which controls 80 percent of the earth’s commercially viable oil reserves, has refused to expand production, thus keeping petroleum prices artificially high. While, with a more pro-business government, the United States might conceivably be able to expand its production by a million or two barrels per day, OPEC could easily counter by cutting its production to match, or more likely, by simply continuing its non-expansion policy and letting increased Chinese demand take care of the slack.
If we are ever to get $2 gas, the power of OPEC to control oil prices needs to be broken. The United States Congress could do this with a stroke of the pen, simply by passing the bipartisan Open Fuel Standard bill (H.R. 1687). This act would effectively destroy OPEC by requiring that all new cars sold in the USA be fully flex fuel, able to run equally well on gasoline, ethanol, and — most important — methanol. This latter capability is critical because methanol can be, and is, made cheaply in large quantities from coal, natural gas, or any kind of biomass without exception. The United States has only 4 billion tons of oil reserves, but we have 270 billion tons of coal, vast amounts of natural gas, and an enormous capacity to produce biomass. By requiring that all cars sold here (and thus all cars made worldwide) be compatible with methanol, the act would force oil to compete with a fuel whose sources are not controlled by the cartel, and that we and our allies possess in abundance.
Methanol has only about half the energy per gallon as gasoline, but is 105 octane, which means it can be burned more efficiently. Taken together, these two factors make methanol’s current spot price of $1.38 per gallon roughly competitive with $2 gasoline.
Of course, the passage of the OFS bill would not cause gasoline prices to crash instantly. While it would no doubt hit oil futures hard, and thus cut the speculative premium on petroleum prices, the most immediate result of allowing methanol to compete against gasoline in the vehicle-fuel market would be to send methanol prices up, perhaps by as much as 60 percent. This situation would not, however, last for long. Methanol can be made and sold profitably today for $1.38 per gallon. At a 60 percent markup, its manufacture would be super-profitable, and massive amounts of capital would rush in to expand production. This would drive the price of methanol down, dragging gasoline and oil down prices with it, until methanol reached a price point where its production offered no greater profit than that prevailing in the economy at large. The fact that methanol would reach this price — what Adam Smith would term its natural price — follows from the fact that the sources to make methanol are plentiful and diverse, so that no cartel can artificially limit its production.
This underscores the key issue. There is not a free market in oil. Adjusted for inflation, the price of oil has increased eightfold since 1973, but OPEC production has not increased at all. In a free market, such a price increase would spur increased investment, with subsequent expanded production driving the price right back down again. That is why the inflation-adjusted price of coal, and nearly every other industrial commodity, has not risen in four decades. But because of the cartel, oil production has not responded to price increases in the way that it should in a properly functioning capitalist economy. In order for the free-enterprise system to do its work and deliver the cheap fuel the world needs, the ability of this cartel to limit the world’s liquid-fuel supplies needs to be broken. The Open Fuel Standard bill would accomplish that.
High oil prices are wrecking our economy. Since the United States imports 5 billion barrels of oil per year, the current price of nearly $90 per barrel will hit us for $450 billion this year alone, a huge tax on our economy. As a result, millions of jobs and thousands of businesses are being lost. If this wealth-draining process is allowed to continue, fiscal necessity will require us to withdraw the military forces protecting our national interests abroad, without a shot being fired.
Instead of seeking to exploit this catastrophe by placing its blame on their opponents, or posing with empty promises of salvation contingent upon their promotion to higher office, politicians need to take action. Two-dollar gas is not just a nice idea for inclusion in a campaign speech. It’s a critical necessity for economic recovery.
Either we break the cartel, or the cartel breaks us. The Open Fuel Standard bill needs to be passed.
— Robert Zubrin is a member of the Board of Advisors of Americans for Energy and author of Energy Victory: Winning the War on Terror by Breaking Free of Oil.