Achieving $2 Gas

Friday, September 16, 2011

It’s possible, with the right policy.

Republican presidential contender Michele Bachman has said that if she is elected, gas prices will fall to $2 per gallon. Such promises have understandably been greeted with considerable skepticism. But $2 gas is exactly what America needs. The question is, how can we get it?

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.

3 comments:

Michael Dawson September 28, 2011 at 11:05 AM  

While we're at it, why don't we pass a law saying death is abolished? It has exactly the same chance of working as this dishonest garbage.

Our problem is cars, not fuel.

Abe Shackleton September 28, 2011 at 12:23 PM  

Michael, would you please elaborate on your position? In what way is the methanol proposal dishonest? And it what way are cars the problem? What are you saying exactly?

Steve From Virginia September 28, 2011 at 9:47 PM  

Hmmm ... it's hard to know where to start ...

- why is $2 fuel desirable? Is there a better rationale for $20 fuel or $50? The high price would force conservation. It would make life a lot more pleasant, no- or few cars.

- There are about 300 million autos in the US, about 1 billion worldwide. It is inconceivable that enough of these can be converted in order to have an effect on service fuel type.

- If the world food supply has trouble supplying 7 billions plus a handful of vehicles, how will the food supply feed a 7 billion plus a billion vehicles which use in the aggregate more energy than do the people? Is ethanol abiotic, also?

- The value of fuel as well as the value of money is set by the millions who swap money for fuel when the pull up to the pump. This reality is why central bankers and OPEC are failures/irrelevant.

- Fuel prices worldwide are shrinking because people who would buy fuel are broke. Operating a car isn't a remunerative activity. Driving has been paid for by drivers' governments borrowing vast sums in the drivers' names.

- Both drivers and governments are bankrupt because of overconsumption caused by low fuel prices. Drivers and governments are bankrupt because our economies are built around waste as a primary activity. What is taking place around the world right now -- what has taken place for the past five years -- is the decline/fall of USA-style waste based economy. The high prices strand infrastructure designed around cheap crude. This economy cannot earn enough to cover its expenses.

- Etc.

What must be done: the easy, cheap petroleum is gone, what is left is expensive. Our terminally straitened economies are too poor to extract the expensive fuels or subsidize alternative fuels as are promoted in this article.

The strategy to deal with situation is strict conservation. There is no other way, there is no alternative, either. If nothing is done the result will be 'conservation by other means' such as debt default/credit collapse ... as is taking place right now under everyone's noses!

Look to the EU: underway is Greek default (loans to Greeks so as to buy German cars and OPEC fuel that cannot be repaid). Post-default the Greeks will issue currency that OPEC and other suppliers will not accept b/c it will be worthless. Greek criminal underground (government) will flood Europe with contraband (heroin, whores, guns, terrorists, etc.) in exchange for black market euros that will be used to buy fuel, also to be sold on Greek black market. The new Greek currency will hyper-inflate into oblivion (discount caused by fuel spread). Inflation will infect Europe, the same mechanism in every country, it cannot be stopped sorry, has already started. Fuel prices in Greece will reach $40- 50 per GALLON- it will be contraband. Greece is in the process of being de-automobilized, to be followed by rest of PIIGS. Europe is trapped within this process. So is the US. Unemployed do not by cars nor do they buy fuel.

The future: get rid of the cars. It's them or us. Get rid of TV and hamburgers while at it, you'll be happier: TV makes people depressed, so does the stress of driving. Your grandchildren will also thank you rather than murder you in your beds ...

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