Ending OPEC's Control Over American Transportation

Friday, August 31, 2012

The following was written by T. Boone Pickens and R. James Woolsey, originally published in National Review Online on August 27, 2012.

Recent headlines provoked by two positive but modest developments — a slight early-summer decline in gasoline prices and a laudable increase in domestic oil production — have trumpeted that these developments mean we are on the verge of achieving “energy independence.”


Oil monopolizes about 95 percent of the world’s transportation, and OPEC — eight nations in the Middle East and four others — controls nearly 80 percent of the world’s conventional oil reserves. We cannot change anything fundamental if we continue to permit oil and OPEC, a monopoly with a cartel nested inside it, to maintain their dominance of the transportation-fuel market and if we relegate ourselves merely to working within the framework of that dominance to increase our share of the oil market. It’s true that by doing so we can improve our balance of payments and add some domestic oil-related jobs. Good. But this won’t fill the basic need: to break oil’s monopoly and OPEC’s cartel.

Why is that essential? Because oil is not just a commodity. It is a crucial strategic commodity, as salt was for many centuries when it was the only means of preserving food (to borrow Anne Korin’s excellent analogy). So long as transportation is almost exclusively dependent on oil, we are in thrall to OPEC and its decisions on how much to pump and what to charge us. OPEC has made the basic decision to maintain oil prices at a level where we borrow about a billion dollars a day — equivalent to a tax of some $4,000 a year on every American family. OPEC has this power to, essentially, tax us (without any more representation than George III provided our ancestors), because the Saudis and some others in OPEC can lift oil for less than five dollars a barrel, whereas for the U.S. and most other non-OPEC nations the cost is tens of dollars a barrel.

Saudi Arabia, the swing producer — the nation with large oil reserves that it can tap or not, as it wishes — has indicated that, to meet its domestic-welfare commitments, it needs oil’s price to be more than $90 per barrel. What it means is that, if the price of oil were lower, the Saudi government would need to go to the trouble of putting together an economy in which it couldn’t afford to keep a staggering half of its men unemployed and on the dole.

This low cost of lifting oil, especially in Saudi Arabia, and OPEC’s control of over three-quarters of the world’s reserves of conventional oil is why improved fuel economy for our vehicles, although a good idea, is not the solution to our central problem. Seeing us economize, OPEC can just cut production to keep prices up. We could never reclaim anything like the oil-market dominance we held in the Fifties and Sixties. OPEC would manipulate the market to plunge the U.S. deeper and deeper into debt and force us to spend the maximum it can wring out of us.

OPEC chooses to sell only about 31 million barrels of oil a day, almost exactly what it sold 40 years ago when both oil demand and the size of the world’s economy were about half what they are today. Like John D. Rockefeller at the beginning of the 20th century, OPEC withholds oil from the market to keep the price up. It holds nearly 80 percent of the reserves of conventional oil, but only about a third of what is sold daily on the world market is sold by OPEC. We cannot escape the consequences of OPEC’s price-fixing by buying more oil from, say, non-OPEC Canada and less from Saudi Arabia. There is essentially one worldwide oil market. Other countries will just buy more from Saudi Arabia and less from Canada.

But suppose we become what many, inaccurately, call “energy independent” — that is, we produce about as much oil as we use. Wouldn’t that solve our problem?


The U.K. was, by this distorted definition, essentially energy independent in 2008, and yet there oil hit the same peak, over $145 a barrel, that it hit everywhere else. The high price of diesel fuel in the U.K. led truckers there to strike.

A good idea would be the creation of a North American Energy Alliance. In the event of major hostilities that halted international shipping, the U.S., Canada, and Mexico could still share resources among themselves. Our two major neighbors are allies and good friends, and we should work with them when we can — for example, by permitting construction of the Keystone pipeline in an environmentally sound fashion — from Canada to the Gulf of Mexico.

We should not plan to secede from the world’s oil market. The problem is OPEC’s control of prices, not the fact of trade itself. As long as oil overwhelmingly dominates transportation and OPEC controls oil’s price, we cannot end OPEC’s control of oil prices simply by seceding from the world oil market. We do not become “energy independent” just by being able to produce as much as we use, as Britain learned in 2008.

“Independent” means “free from control by others” — not autarky, that is, shunning imports. We should neither move toward secession nor assume that our oil problems are solved merely because we produce more oil and improve our balance of payments. Instead we should follow Teddy Roosevelt’s example in dealing with Rockefeller’s Standard Oil monopoly and make OPEC’s cartel face competition. The only realistic way to accomplish this is to enable vehicles, in short order and with relatively little investment in new infrastructure, to operate on alternatives to petroleum products.

What are those alternatives?

Biofuels? Probably, to some degree. At present, the best candidates are mainly those made from algae. Biomass gasification to produce synfuels also shows some promise. Ethanol may have a role as well, as long as it can compete, unsubsidized, with gasoline.

Electricity? It has promise, but it won’t move 18-wheelers, and it will take years before all-electric cars and plug-in hybrids are a large-enough share of the vehicles on the road to substantially reduce the market for oil.

Other renewables? We are fans of an evolution toward wind and solar for electricity generation and will be more so as batteries or other electricity-storage systems grow more affordable. But what gets lost in the shouting on the cable-news talk shows is that since less than 1 percent of our electricity is generated by oil, the president’s call for renewable electricity generation to reduce oil consumption is more than 99 percent off base. Two-thirds of the oil we consume is used to move our 250 million cars and light trucks and 8 million heavy-duty vehicles. We can’t solve our oil problem without making it possible for people, realistically and soon, to choose a different transportation fuel.

The laboring oar in any practical, affordable, and near-term competition with oil will have to be pulled by a plan to enable drivers to choose between gasoline and fuels derived from natural gas.

Natural gas has become a game-changer because of horizontal drilling and hydrofracturing (fracking), which now make available huge reserves in shale-gas deposits. The effect of this combination on energy prices is stunning. There are about the same number of BTUs in six thousand cubic feet (Tcf) of natural gas as in ONE barrel of oil. So some years ago, when oil and natural-gas prices tracked one another, if natural gas’s price (in Tcf) was at $8, oil would have been at about $48 — a ratio of 1 barrel of oil to 6 Tcf of gas. But because of horizontal drilling, fracking, and OPEC’s thirst for U.S. dollars, natural gas at one point this year was under $2 per Tcf, while oil was well over $100 per barrel — a ratio of more than 50 to 1.

Fracking and horizontal drilling have caused the price of natural gas to plummet, and OPEC’s machinations have caused oil’s price to reach new heights, so the days of a 6-to-1 price ratio of oil to gas are largely gone. We are now in a world where the ratios are 30 to 1, 50 to 1, or even higher. This completely changes the energy picture.

Certainly drilling, including fracking, must be done in an environmentally sensible manner, but this is entirely feasible. The two of us grew up in Oklahoma, a few miles and a few years apart, hunting, fishing, and camping on land that had been fracked (although at that point fracking had not yet been combined with horizontal drilling). Except when you came across a small valve (a “Christmas tree,” named after its size and silhouette) surrounded by a small cyclone fence, you had no idea of what had taken place thousands of feet below you. Indeed, of the some 4 million oil and gas wells drilled in human history, about 3 million of them were drilled in Oklahoma and Texas. And hundreds of thousands of those, beginning in the 1940s, were fracked. The environmental issues that have understandably been raised about fracking are manageable if both sides are committed to reason.

Cheap natural gas, which is key to ending our vehicles’ oil addiction affordably and promptly, can destroy oil’s monopoly and OPEC’s cartel.

We need to move expeditiously to convert a large share of our buses, delivery vans, and other fleet vehicles to run on compressed natural gas (CNG); and trucks, to run on liqueified natural gas (LNG). The conversions will pay for themselves within a year or two because of the now-huge price advantage that natural gas has over oil. The market is already moving this way.

Moreover, innovative companies are rapidly devising methods for using natural gas as a feedstock for liquid fuels as well as for industrial chemicals. Stay tuned — these will not be limited to the old version of the highly capital-intensive Fischer-Tropsch process invented in Germany in the 1920s. Silicon Valley, Houston, Oklahoma City, and other venues are home to concentrations of very smart folks turning their attention to the goal of driving on liquid fuels made from natural gas. They are already beginning to change the energy game fundamentally.

Finally, the two of us agree that the U.S. should have an open fuels standard, a requirement that vehicles be able to use multiple fuels, not solely fuels derived from petroleum. An open fuels standard would inject fuel competition into the transportation sector. The two of us disagree only on one point: whether, as an alternative to gasoline for powering the family car, natural gas itself or methanol (“wood alcohol”) made from natural gas is likely to move faster into the market.

One of us (Pickens) emphasizes transitioning the nation’s heavy-duty and fleet-vehicle market to compressed and liquefied natural gas, a move that could create more than 400,000 new jobs and cut OPEC dependence by 70 percent. The other (Woolsey) stresses the low, one-time cost (under $100 per car), according to recent studies by MIT and General Motors, of making it possible to use methanol and gasoline in the same vehicle. But the point is not for policymakers, or the two of us, or indeed anyone to resolve these disagreements at the level of policy. The point is to do something OPEC won’t — let the market, the people, decide. Do as the Brazilians do and the Chinese are beginning to do — let drivers pull into a filling station and make their own choice about what to fill up with.

Do we really want to stay on our current path of being less willing than the government of Communist China to permit competition in the transportation sector of the economy?

Moreover, freedom to drive vehicles that run on fuels other than gasoline entail important health benefits. Driving on either natural gas or methanol removes the need to add benzene, which is carcinogenic, or other dangerous chemicals to our fuel tanks for the purpose of boosting octane. Published work by Boyden Gray and Andrew Varcoe shows how the use of benzene, like the use of lead in an earlier era, leads to huge medical costs — tens of thousands of shortened lives and well over $100 billion annually.

Our dependence on OPEC oil and the consequent strain on our national security and the undermining of our economic vitality add up to a problem that does, though, have a solution, if we just stay at it. Let’s choose some leaders who understand the issue and can lead the transition to natural gas as a clean, lower-cost, domestic replacement for today’s diesel, gasoline, and other fuels made from OPEC-controlled oil. And let’s arrange the transition so that the people decide how much natural gas replaces oil.

Let’s make a national commitment to this and bring forward the day when we can all cheerfully tell OPEC that if they don’t like it they can go play in their oil ponds.

— T. Boone Pickens is a longtime oil-and-gas-industry executive. R. James Woolsey is a former director of Central Intelligence, a venture partner with Lux Capital, and chairman of the Foundation for the Defense of Democracies and of the Opportunities Development Group’s Advisory Board.


Borrowing from the Communists to Pay the Jihadis

Friday, August 24, 2012

by Clifford May

The debt crisis, chronic high unemployment, the tumbling stock market, the credit downgrade — these are — fairly obviously — symptoms of an economy in distress. We might disagree about the best policy responses. But perhaps we can agree on the worst: Borrow massive amounts of money from the Communists who want to diminish us and transfer that wealth to the jihadis who want to destroy us. Surprise: That long has been U.S. government policy. Both Democrats and Republicans have endorsed it and, so far at least, it remains in place.

This reality was driven home last week when China's rulers, who sit on at least $1.16 trillion in U.S. Treasury securities, scolded "debt-ridden Uncle Sam," instructing Washington that "the good old days when it could just borrow its way out of messes of its own making are finally gone."

At about the same time, it was announced that Rostam Ghasemi would be the next president of OPEC, the cartel that controls much of the world's oil and manipulates its price on global markets. Unsavory characters have run OPEC in the past, but this smashes all records: Ghasemi is a senior commander in the Iranian Revolutionary Guards Corps — the Brown Shirts of a regime that has been murdering Americans for more than a quarter century and which is openly dedicated to the proposition that a "world without America is . . . achievable."

Ghasemi is under EU and U.S. sanctions for his involvement in terrorism and nuclear proliferation. He also, until recently, headed Khatam al-Anbiya (KAA), the "industrial division" of the Guards, an entity deeply involved in the exploitation of Iranian oil, also under EU and U.S. sanctions — and U.N. sanctions, too.

The EU passed its sanctions with great fanfare last June, highlighting strict travel bans on designated persons as a particularly meaningful penalty. But — another surprise — the EU left a loophole in its law: An exception to the travel ban will allow Ghasemi, as Iran's new oil minister and president of OPEC, to travel to Vienna to attend meetings of an international organization.

To say this more succinctly: OPEC will now be headed by an Iranian terrorist master, but sanctions on him will be waived to help him do his new job, which is to squeeze out of Americans and Europeans as much money as possible, which he'll use to fund terrorism and illegal nuclear proliferation. If you'd read this in a novel, you'd say the plot was not believable.

What is fiction? The belief that we can reduce our dependence on foreign oil, shrink the amount of money we transfer to the Middle East, and lower the price of gas by driving our cars less. Nor does it help to raise fuel-efficiency standards as was grandly announced last week. When we use less gas, OPEC responds by tightening the faucet, reducing the supply, and causing the price to rise again.

What we need to do instead is lift the barriers that are preventing us from utilizing domestic, Canadian, and Third World energy resources, including not just Gulf of Mexico and Alaskan oil but also shale oil, shale gas, natural gas, and coal (all of which North America has in great abundance), and methanol (which can be made from coal, natural gas, urban garbage, and agricultural and forestry waste).

It would help if American automobile manufacturers would make all new vehicles capable of running on the widest possible variety of liquid fuels. The technology already exists. It costs about the same as a seatbelt. Having a critical mass of such vehicles on the road would open an enormous opportunity for entrepreneurs and investors to bring to market a variety of liquid fuels that can compete with gasoline.

That ought to be the goal: creating a diverse, abundant, and — most importantly — competitive market in transportation fuels. Let me stress: It is not for politicians to pick winners and losers. They should end subsidies for domestic ethanol. They also should abolish tariffs on imported ethanol. Purchasing energy from farmers in what we hopefully call the developing world is preferable — for many reasons — to purchasing energy from Iranian mullahs and Saudi sheikhs.

If Congress and the White House would establish and then maintain a truly free market, one in which consumers determine which transportation fuels and technologies offer the best values, that would put a leash on gas prices and reduce our need to spend in the Middle East and borrow from the Far East. Cheaper energy also would facilitate faster economic growth which increases tax revenues without increasing tax rates.

At the moment, however, U.S. policy continues to be what it has been: not just stealing from Peter to pay Paul, but also borrowing from Hu to pay Abdullah. It's hard to imagine how we could do worse.


Legalize Methanol: It Would Boost Our Economy and Our National Security

Monday, August 20, 2012

By Robert Zubrin from National Review:

Last year, I conducted a highly publicized demonstration showing that ordinary American cars could readily be made to operate on methanol, achieving over 40 percent better fuel economy and much lower emissions than on gasoline. In that test, a 2007 Chevy Cobalt was shown to achieve 24.6 miles per gallon running on 100 percent methanol, with the only required physical alteration being the replacement of a non-methanol-compatible Viton fuel-pump seal with a 41-cent part made of methanol-compatible Buna-n. And methanol is now selling for just $1.32 per gallon, without any subsidy.

As methanol can be cheaply produced from natural gas, coal, biomass, or trash — all resources the United States holds in great abundance — this test showed that America could readily free itself from oil imports simply by passing the Open Fuel Standard (OFS) law requiring that all new cars sold in the U.S. be methanol-compatible flex-fuel vehicles. By forcing gasoline to compete at the pump with cheap methanol, such a measure would put a permanent constraint on the price of oil, thereby breaking the power of the Islamist-led OPEC cartel and protecting the nation from the economy-wrecking effects of petroleum price spikes, shown in the figure below.

Every oil-price hike over the past four decades was soon followed by a sharp rise in unemployment.

In response to my article, a number of readers wrote in posing the following questions: Given the ease of creating methanol compatibility, and the manifest financial advantages that would accrue to motorists who undertook such conversions, why is an Open Fuel Standard law necessary at all? Instead of seeking a new law that would require that all vehicles be flex-fuel, why wasn’t I simply moving to launch a business that would undertake such conversions, set up methanol pumps, and let the Invisible Hand accomplish the rest?

These are very good questions and deserve answers. To start with, I should point out that national defense is the first and foremost obligation of the federal government. Therefore, when the nation is being looted into depression by a foreign cartel whose members are using the funds to promote armed movements and develop weapons intended for our annihilation, forceful action by the government is entirely appropriate, and in fact could not be more urgent.

But, given the fact that neither Congress nor the administration has chosen to take such action to defend the nation’s vital interests, wouldn’t it still make sense to try an entrepreneurial solution? The opening of the fuel market to methanol through a bottom-up approach might take effect more slowly than the crisis truly demands, but still, wouldn’t some progress be better than none?

Indeed it would. So I decided to look into the possibility. Here is what I found: The technology required is in hand. The business plan is straightforward. The financial requirements, while significant, are manageable. But: The regulatory obstacles are a show-stopper. Put simply, given the spread between current natural-gas and coal prices on one hand, and petroleum prices on the other, the main thing protecting the oil cartel from killer competition from methanol is the EPA. It has done this through regulations that make it illegal to sell methanol in significant quantities as motor-vehicle fuel, and also through restrictions that enormously increase the expense of commercial modification of cars to optimize their performance with any alternative fuel (or with gasoline, for that matter).

First, the prohibition. According to the EPA (FRL-9620-5, published January 20, 2012), “Section 211(f)(1) of the Clean Air Act makes it unlawful for any manufacturer of any fuel or fuel additive to introduce into commerce, or to increase the concentration in use of, any fuel or fuel additive . . . which is not substantially similar to any fuel or fuel additive utilized in . . . 1975. . . . The current ‘substantially similar’ interpretive rule for unleaded gasoline allows oxygen content up to 2.7 weight [sic] for certain ethers and alcohols.”

Since methanol is 50 percent oxygen by weight, this rule limits the amount of methanol that it is legal to add to gasoline to just 5.4 percent — if we assume that there is no ethanol in the gasoline – and going down to zero if the ethanol content of the gasoline is 8.1 percent or greater. (E10 and E15, which are 3.3 percent and 5 percent oxygen by weight respectively, are legal for sale only because of a special waiver granted by the EPA. It is the general practice of the EPA to declare impractical arbitrary limits to commercial activity in many fields, and then grant waivers on a case-by-case basis to those who are willing to spend the time and money required to beg well. (I mention this not to take exception to the waivers — I believe that ethanol producers should be allowed to sell their product in any concentration to anyone willing to buy it — but to the process that requires enterprises to grovel for such special favors, and thus places commercial activity firmly under the thumb of bureaucratic caprice.)

It should be noted that the EPA’s banning of methanol is categorically absurd from the point of view of environmental protection. My results showing sharp reduction in air pollution when methanol is used in place of gasoline are not unique, and not new. In fact, the original sponsors of the development of first methanol and then flex-fuel cars in the 1980s were the California air-quality agencies, which understood the value of methanol as a means of reducing smog. Methanol combustion produces no particulates and much lower amounts of NOx and carbon monoxide (in my tests, running the car on M60 repeatedly produced zero CO) than gasoline. In addition, methanol contains none of the carcinogenic aromatic compounds that are found in gasoline and whose emissions thereby contribute to the nation’s health bill.

Concerns about potential methanol releases to the environment are quite nonsensical, inasmuch as windshield-wiper fluid is one-third methanol, and billions of gallons of it have been dumped directly into the environment (that’s where it goes after your wiper throws it off the windshield) for decades, without any impact whatsoever. So for an agency whose supposed purpose is to ensure air quality to employ the Clean Air Act to keep methanol out of the automotive-fuel market is simply madness.

In addition to virtually banning methanol outright, the EPA has created regulations to prevent cars from being modified by small businesses to optimize their performance, including through the use of methanol. Such activity can be construed under Section 203 (a) (3) of the Clean Air Act to be “tampering” with the car’s emissions-control system, and to be subject to very heavy fines.

Now, it is true that there have been some people in the EPA at various times in its history who have sought to prevent such an abuse of the Clean Air Act. So, for example, on June 25, 1974, Norman Shulter, the director of the Mobile Source Enforcement Division of the Office of Enforcement and General Counsel of the EPA, issued Mobile Source Enforcement Memorandum 1A, stating that

in general, it is clear that the EPA’s primary objective in enforcing the statutory prohibition on “tampering” must be to assure unimpaired emission control. . . . It is EPA’s policy to attempt to achieve this objective without imposing unnecessary restraints on commerce. . . . In the absence of proof that the use of unoriginal equipment parts will adversely affect emissions, constraining dealers to the use of only original equipment would constitute an unwarranted burden on commerce. . . . [Therefore,] unless and until otherwise stated, the Environmental Protection Agency will not regard the following acts, when performed by a dealer, to constitute violations of Section 203 (a) (3) of the Act: (a) Use of a nonoriginal equipment aftermarket part . . . as a replacement part . . . (b) Use of a nonoriginal equipment aftermarket part or system as an add-on, auxiliary, augmenting, or secondary part or system . . . (c) Adjustments or alterations of a particular part or system . . . if the dealer has a reasonable basis for knowing that such adjustment or alteration will not adversely affect emissions performance.

Refining this standard of “a reasonable basis” for modifying a vehicle to use an alternative fuel, Bruce Buckheit, director of the EPA Air Enforcement Division, issued, on September 4, 1997, an Addendum to Mobile Source Enforcement Memorandum 1A, which stated (Section C.3.b.3) that such conversions would be considered acceptable if, afterwards, the converted vehicle was tested for emissions with all the fuels it used and found not to exceed its baseline gasoline-emission levels.

Unfortunately, however, EPA allowed this policy to expire in 2002, and on January 16, 2009, replaced it with a new policy, issued under the signature of assistant administrator Granta Nakayama, which explicitly allowed the EPA to impose massive fines for any vehicle alterations that had not been certified by EPA in advance, even if there were clear and compelling proof that no emissions increase had resulted from, or even been risked by, such changes. Thus, for example, the use of unapproved engine parts identical to the certified brands would still be considered an emissions violation (p. 13), even though it obviously entailed no increase in emissions, and in fact would subject the offender to triple fines (p. 17). “Even in absence of harm in the form of excess emissions, the gravity component of the penalty should reflect the seriousness of the violation in terms of its effect on the regulatory program,” Nakayama said (p.15).

So now, instead of just modifying each car and subjecting it to the same emissions testing faced by any other vehicle, a company wishing to offer conversions would have to have its technology certified by the EPA, in advance, for each make, year, and model it hoped to modify. Such a process would take many years and cost many millions of dollars, so much so as to effectively prevent any such initiative.

The economic damage being done by these regulations is enormous. As a result of improved technology, U.S. natural-gas production has recently been rising at a rate of 6 percent per year. Unfortunately, however, this cannot currently be marketed as liquid transportation fuel. And while the idea of using compressed natural gas directly as vehicle fuel has been the subject of much discussion, such conversions are very costly. This is why T. Boone Pickens and other advocates of such schemes are seeking federal subsidies of up to $11,500 per car, $64,000 per truck, and $100,000 per filling station — amounts that would add up to over a trillion dollars to convert half the American automobile fleet — which are clearly not in the cards. As a result, the price of natural gas has crashed to less than a quarter of what it was four years ago.

The natural-gas industry is screaming for new markets, and there are only two sectors where these can be found: transportation and power generation. These define two distinct policy options. The EPA could act to open the transportation-fuel market to vigorous competition from natural gas as well as coal, biomass, and trash, by legalizing methanol. This would force oil prices down, expand the economy, and create millions of jobs. Alternatively, the EPA could act to favor natural gas at the expense of coal by passing new regulations forcing coal-fired electric-power plants out of business. This would have the effect of driving electricity prices up while keeping oil’s monopoly on transportation fuel unchallenged. The net result would be to impose a massive, regressive, job-destroying electricity and fuel tax on the nation.

Unfortunately, the Obama administration has chosen the latter — a highly divisive and destructive course.

Can we really end our dangerous and costly dependence on foreign oil by legalizing methanol? The answer is unquestionably yes. The U.S. currently imports about 4.5 billion barrels of oil per year. At current prices of $90 a barrel, this works out to a cost of about $400 billion, equivalent to a loss of 4 million jobs at $100,000 per year each. If this were all to be replaced by methanol, about 166 billion gallons per year of methanol would be needed. If we were to make all of this from natural gas, we would need an additional 11.9 trillion cubic feet per year.

World natural-gas production stands at 120 trillion cubic feet per year, with the U.S. contributing about 29 trillion cubic feet of the total. At our current 6 percent per year rate of increase of natural-gas production, all of the necessary expanded natural-gas capacity could be developed from American sources inside of six years. If a significant fraction of the methanol were produced from coal, the target could be met even faster. The result would be the effective elimination of oil as a significant factor in our balance-of-trade deficit. Furthermore, by throwing the equivalent of 4.5 billion barrels of oil per year into the world market (which is now about 32 billion barrels per year) we would send the price of oil down to less than $50 per barrel, thereby causing the marginalization of the Islamist and other petroleum-financed tyrannies and setting off a worldwide economic boom driven by cheap oil.

We have here in North America all the resources needed to break the cartel-rigged restrictions on humanity’s liquid-fuel supply, and, by breaking them, to lead the world back to prosperity and on to freedom. The only thing in our way is an artificial policy wall that is stopping us from getting the fuel we can make ourselves into the market.

Mr. Obama, tear down that wall.

— Robert Zubrin is president of Pioneer Astronautics, a senior fellow with the Center for Security Policy, and the author of Energy Victory. His newest book, Merchants of Despair: Radical Environmentalists, Criminal Pseudo-Scientists, and the Fatal Cult of Antihumanism, has just been published by Encounter Books.


Rebuttal to Zubrin's Article, "How to Reduce Oil Prices"

Sunday, August 19, 2012

The following is a rebuttal by David Ruggles to Robert Zubrin's National Review article, How to Reduce Oil Prices.

RE: "It is in this light that the extreme malfeasance of the Obama administration in delaying the approval of the Keystone pipeline becomes apparent. While much has been made of the loss of 20,000 jobs building the pipeline, that is the smallest part of the matter. The real issue is that by refusing to approve the pipeline, the Obama administration is acting to block the introduction of 270 million barrels per year of Canadian oil into the world market. In doing so, the administration is acting in accord with the interests of the OPEC oil cartel, which wishes to see supplies limited so that it can maintain high oil prices at the expense of the West. At current prices of $100 per barrel, this will cause a loss to the North American economy of $27 billion per year — an amount sufficient to create 270,000 North American jobs. (Canada draws 65 percent of its imports, which amount to 31 percent of its GDP, from the United States. The two nations effectively share one economy.)"

Malfeasance?  First, Obama "Fast Tracked" the part of the pipeline project to relieve the bottleneck around Cushing OK.  Second, I have NEVER seen job estimates of 20K for the pipeline.  4K to 5K max.  Third, the Obama Administration is NOT acting to block introduction of 270 million barrels of Canadian oil in to the world market.  That oil can be transported to a Canadian port.  OR Canada can build a refinery to process it.  The premise that there is only one way this oil can be brought to market is patently FALSE.

Further, oils shale, oil sands, and oil from fracking depend on a relatively high world market price of oil.  The break even point is about $65. - $70. per barrell.  This oil REQUIRES a relatively high price at the pump to be viable.  Flood the market with oil, the price goes down, producers stop producing and/or go bankrupt.  What happens if money is borrowed to build the pipeline and OPEC opens its spigots, driving down the world price of oil?  Who pays the debt on all of the borrowed money?  After driving the pipeline and high cost producers out of the market, OPEC raises prices again.  They have a history.  There is a reason OPEC produces no more oil today than 40 years ago, despite the fact that the world population has doubled since then, and consumption of oil based energy has tripled.

RE: "small changes to the supply can cause large fluctuations in price. The 2 percent temporary reduction of Middle East oil supplies caused by the disorders associated with this year’s putative “Arab Spring” caused oil prices to go up 20 percent — a ten-to-one ratio."

The out of proportion increase in world oil prices seen when a relatively small reduction on world supply occurred was not rational.  In fact, it wasn't even a real supply reduction as there was extra supply injected to match the reduction caused by the "Arab Spring."  The price spike was caused by oil speculators and market manipulators using contango strategies.  It was all based on initial perception exacerbated by the manipulators buying and hoarding.

Further, the oil shale/sands oil is thick and nasty.  We are already exporting refined fuels because we produce more than we can use.  What we need is to invest in refining methanol from coal and natural gas, ethanol from non food stocks, CNG, and other alternative fuels so there is actual competition among the fuels.

Another point - High fuel prices have not hampered Europe and Japan.  What impacts the U.S. is volatility more than price.  IF we had a steady price of $4.50 at the pump for gas, the economy would adapt.  Extrapolating statistics based on the whipsaw reaction of American consumers to SUDDEN fuel price movements does NOT reflect reality.  Americans are NOT entitled to cheap fuel so they can ride around in their Excalades and Navigators with impunity.  Why write a piece that intimates that we are so entitled?

Its bad enough that so many Americans think that "Drill Baby Drill" would lead to cheap fuel prices.  Most Americans don't understand the concept of fungibility.  They don't understand that OPEC has had a decades old strategy of reducing their own output to match up with others' increased output.  They don't understand that American oil companies are NOT going to sell for less than world market price to Americans.  Why not try to educate them first, instead of attempting to enflame them based on their ignorance.  What do you have have to gain?

David Ruggles is a contributing columnist for variety of auto industry and finance publications. His family has been in the oil business since the 1920s. He also does consulting work and gives presentations at conferences and for local organizations. He did a yearly seminar in Japan for eighteen years on the U.S. Auto Industry. Ruggles wrote a positive review of "Turning Oil Into Salt" (read the review here). He blogs at autosandeconomics.com with Professor Mike Smitka, a leading expert on the automotive supplier chain. 

I showed Robert Zubrin the rebuttal above and asked him if he had a response. He did, and here it is:

1. It is certainly true that the Obama administration has acted to block the Keystone pipeline, and 20,000 direct jobs is a low estimate. Furthermore, while the Canadians can, in principle, find an alternative route to market by building a trans-Canada pipeline, this will both delay the introduction and add cost to the Canadian oil, both of which serves the interests of OPEC.

2. Yes. it is OPEC's policy to limit the amount of oil on the world market in order to drive prices up. That is why the United States, as the world's leading oil importer should seek to throw additional fuel on the world market, from all sources, including domestic oil, Canadian oil, and non-petroleum sources, in order to drive the price down.

3. We do not produce more oil than we use. The United States uses 18 million barrels of oil per day and only produces 5.5 million barrels of oil per day. That is why it is in our interests to have the price of oil driven down by the addition of more fuel to the world market.

4. It is not true that high oil prices have not hampered Europe and Japan, As major oil importers, both Europe and Japan are severely taxed by high oil prices, and their economies are suffering severely as a result. For example, the EU 27 official unemployment rate is now 10.4 percent, and it expects a negative rate of growth for this year. This compares horribly even to the to the US, which under current recession conditions has an 8.1 percent unemployment rate and a positive rate of growth of 1.5 percent.

5. Cheap oil helps the economies of the Western industrial democracies. Expensive oil hurts the West and props up the Islamist tyrannies. The reader should consider this and choose his side accordingly.

Dr. Robert Zubrin is president of Pioneer Astronautics, a member of the Steering Committee of Americans for Energy, and author of Energy Victory: Winning the War on Terror by Breaking Free of Oil. His next book, Merchants of Despair: Radical Environmentalists, Criminal Pseudoscientists, and the Fatal Cult of Antihumanism, will be published by Encounter Books in February.


Video: What Was Recently Fueling Relief at the Pump?

Friday, August 17, 2012

Follow the link below to watch a video from CNBC on Friday, May 25, 2012, where John Hofmeister, Citizens for Affordable Energy CEO, discusses what's driving the lower cost of gasoline as Americans take to the roads this holiday weekend.

The video is seven minutes long. Check it out:

What's Fueling Relief at the Pump?


Biofuels Not Worth the Trouble or Cost?

Marc Rauch of THE AUTO CHANNEL Slams Richard Rahn for His Foolish Stance on Biofuels:

Hi Richard –

I just finished reading your article, “Biofuels Not Worth the Trouble or Cost” on Newsmax.com.

As with the positions taken by your bloated colleague, er, I mean noted colleague at Cato Institute, Jerry Taylor, I shook my head in bewilderment over how you arrived at your conclusions in the article. It seemed to be written by someone who either has absolutely no idea what he is talking about, or it was written by someone in the employ of the petroleum oil industry. (Hopefully after reading my letter you'll be able to enlighten me as to which you are.)

I did what I normally do after becoming acquainted for the first time about someone or something, and that is that I researched your name. I read that you’re an esteemed economist, that you served as member of a national monetary authority, and that you are an economics professor. While I would agree that those credentials might entitle you to comment on how someone else accomplished a real goal, or to guide students through a curriculum that studies processes, it is not the credentials that would allow you to understand what the whole biofuel picture is about.

In my opinion, in order to understand the dynamics of what you attempted to explain, you would have needed true business experience. Perhaps, somewhere in the darkest recesses of your background you may have tried to sell lemonade as a child to your neighbors; or perhaps you flipped burgers during your high school summer vacations and you started to get an understanding of what business and supply and demand is really about. But if you did, then you got lost when you entered academia and you became just another zombie-economist prattling on about chalkboard business formulas and equations that mean nothing in the real world.

Almost all manufacturers manufacture products that they believe will make them the most amount of money. This is actually the key to the entire capitalist system. I shouldn't have to point this out to you since Cato Institute is supposed to be a bastion of capitalism and free market economy. Unfortunately your article seems to indicate that you don't understand this principle. Therefore, before you continue reading this letter, you may wish to consult with your others colleagues and confirm that manufacturers do, indeed, try to manufacture products that will make them the most amount of money.

In the meantime, I'll wait and look up some baseball scores……

Okay, I found out the latest Yankees score and we should be ready to continue.

Farmers are like manufacturers. The only difference is that they “manufacture” food items instead of refrigerators or cars or television sets. But, they have the exact same underlying goal: grow or produce items that will make them the most amount of money. If a farmer, because of environmental or geographical reasons can make more money growing apples than potatoes, the farmer should and would probably grow apples. This is not rocket economics (to coin a term) it is just basic business.

Consequently, if a farmer can make more money growing corn than apples, why shouldn't or wouldn't he do that?

According to your article, farmers are villains for choosing to grow more corn than other products. You don't portray them as savvy businessmen, you make it seem like they are greedily out to hurt people. What the heck is up with that?

And if the U.S. government should happen to provide some financial inducement for a farmer to grow corn, as opposed to some other produce, why is it wrong for a farmer to take advantage of the financial inducement? Would you vilify a building construction company for seeking government housing contracts during the national home-building depression? No, I don't think you would, so why not use some good old common sense in evaluating the decision/reason to grow corn?

By the way, I presume you noticed that I haven't even addressed…yet…the central point of your article, that biofuels are “Not Worth the Trouble or Cost.” I now turn my attention to dealing with your misinformed statements about biofuels, but I wanted to point out that since you can't even understand the most basic economic issues, then you are not competent to evaluate the value of biofuels.

In any event, you wrote:

“The argument for mandating ethanol in motor fuel was to help make the United States energy-independent and reduce carbon-dioxide emissions. Now the inconvenient facts:

  • Recent studies show that the total carbon-dioxide emissions from growing, harvesting, processing and burning corn as ethanol are much greater than those from oil and gas production and use. 
  • Ethanol reduces gas mileage in cars because it is less energy-dense than gasoline, and it causes more wear and tear on engines. 
  • Without subsidies, ethanol is more costly than oil and gas.“

Now, the facts about your “inconvenient” lies:

Recent studies do not show that the production and use of ethanol creates more carbon-dioxide emissions than the production and use of gasoline. Stories circulated by the oil industry have attempted to dissect the entire process of both fuels and then cherry-pick certain elements of gasoline production/use and compare them to cherry-picked elements in ethanol production/use in which they may appear favorable. However these are even necessarily “recent” stories, but simply re-worked lies and misinformation that the oil industry has circulated for decades.

To say that ethanol reduces mileage in cars because it is less-energy dense than gasoline is ludicrous and preposterous. Energy density has noting to do with why there is a difference in mileage. The typical spark-induced internal combustion engine will get better mileage using gasoline because the engine is optimized to run on gasoline. If the engine was optimized to run on ethanol, it would get at least the same mileage, with more power.

In order to optimize an engine for either ethanol or gasoline there are three key components: the fuel injectors used, the timing of the spark, and the length of the piston stroke. None of these three components rely on “energy-density.” The argument of energy-density, which is predicated upon BTU-ratings is not relevant to internal combustion engines. BTUs are a good measure for steam-powered engines.

Ethanol does not cause more wear and tear on engines, it helps them to run more smoothly. It is why ethanol must be added to gasoline – without it, or poisonous lead, the engines would shake apart from the knocking (I assume you've heard of engine knock).

Ethanol cleans engines. It removes the gunky deposits that form in gasoline-powered engines.

Ethanol costs less than gasoline. Even without pump subsidies, E85 costs less than gasoline. Additionally, in most cases, even when taking into account any reduction in mileage from using E85 in a gasoline-optimized engine, the lower cost for E85 makes up for the reduction in mileage. Therefore, there is a net advantage for the consumer.

Furthermore, since ethanol can be produced by anyone, anywhere, from a very wide assortment of raw materials that can cost as little as zero, ethanol will always be easier and cheaper to produce than gasoline… until and unless the oil industry can get the government to make alcohol production illegal, again. I hope you are not an advocate for probation.

However, Richard, the real issue is not even price related. The real issue is being independent from foreign interests who control our energy and our economy. If you do not support the idea of a New World Order in which the members of the United Nations tell us what to do, then how can you support an Oil World Order that controls us.

Put in its simplest terms: I rather have my fuel money go to American farmers than foreign terrorists!

I don't know what branch of Libertarianism you guys at Cato Institute practice, but it is certainly not pro-American Free Market Capitalism.

I challenge you to respond to this letter. I dare you to step up to the plate and take a swing. You don't need two good eyes to see the truth. Heck, you don't even need one.

You’re up!

Marc J. Rauch
Exec. Vice President/Co-Publisher


How to Reduce Oil Prices

Monday, August 13, 2012

From the National Review by Robert Zubrin:

The United States is by far the world’s leading oil importer. Thus, when the price of oil goes up, our economy is severely taxed. At the beginning of 2011, many economists were talking about an emerging U.S. economic recovery. Yet by spring, as oil prices climbed above $100 per barrel, it became apparent to all who were paying attention that no escape from recession was in sight.

The economic impact of oil prices on the American economy is shown on the graph below, which compares oil prices (adjusted for inflation to 2010 dollars) to the unemployment rate from 1970 to the present. Every oil-price hike for the past four decades, including those in 1973, 1979, 1991, 2001, and 2008, was followed shortly afterwards by a sharp rise in American unemployment.

The distress to American workers caused by such events is manifest, but the economic damage goes far beyond the impact on the unemployed themselves. A sustained oil price of $100 per barrel will add $500 billion to the U.S. balance-of-trade deficit. This represents a subtraction from our gross domestic product equal to that required to support 5 million jobs at $100,000 per year each. And when Americans are out of work, many cannot pay their mortgages — a factor that undoubtedly contributed to the recent crash of home prices and the resulting recession.

Looking at the data in the graph, it is clear that cap-and-trade plans, or alternative methods of carbon or fuel taxation, are not the answer. Indeed, by increasing the cost of energy, they will only make the economic situation worse. Rather, what we need is a policy that will force world oil prices down. The way to do this is to flood the world market with liquid fuel from every source available to us.

It is in this light that the extreme malfeasance of the Obama administration in delaying the approval of the Keystone pipeline becomes apparent. While much has been made of the loss of 20,000 jobs building the pipeline, that is the smallest part of the matter. The real issue is that by refusing to approve the pipeline, the Obama administration is acting to block the introduction of 270 million barrels per year of Canadian oil into the world market. In doing so, the administration is acting in accord with the interests of the OPEC oil cartel, which wishes to see supplies limited so that it can maintain high oil prices at the expense of the West. At current prices of $100 per barrel, this will cause a loss to the North American economy of $27 billion per year — an amount sufficient to create 270,000 North American jobs. (Canada draws 65 percent of its imports, which amount to 31 percent of its GDP, from the United States. The two nations effectively share one economy.)

Furthermore, because the amount of oil that consumers demand does not change much when the price rises or falls — i.e., the demand is “inelastic” — small changes to the supply can cause large fluctuations in price. The 2 percent temporary reduction of Middle East oil supplies caused by the disorders associated with this year’s putative “Arab Spring” caused oil prices to go up 20 percent — a ten-to-one ratio. Assuming a conservative five-to-one ratio, the 0.85 percent addition to the world’s oil supply represented by the Canadian oil could be expected to drive prices down by about $4.25 per barrel. This would save us an additional $20 billion, an amount that in theory could create 200,000 jobs.

In summary, then, what is at stake in the Keystone pipeline is not 20,000 jobs, but more like half a million jobs. Congressional Republicans are thus entirely correct in linking approval of the payroll-tax cut and the unemployment-insurance extension to approval of the pipeline, as without the revenues that come from economic growth, such benefits are unaffordable.

That said, however, the Keystone oil represents a limited addition to the world fuel market. A much larger impact could be achieved if we can find a way to make use of our natural-gas supplies.

As a result of improved technology, American natural-gas production is rising at a rate of 6 percent per year. Unfortunately, however, this cannot currently be marketed as liquid fuel. The result has been a crash in the price of natural gas that leaves oil prices, and oil imports, unscathed.

Natural gas can, however, be readily and cheaply converted to methanol, which in turn can be used in flex-fuel cars. This is a much faster and cheaper way to get natural gas into the vehicle-fuel market than converting cars to run on natural gas directly, as no high-pressure vehicle fuel tanks or costly compressor filling stations (which would require massive subsidies) are needed. Rather, the large majority of cars sold in the U.S. today (and for at least the past five years), including all GM and Ford vehicles, have been equipped with computers and chromated fuel lines that make them capable of flex-fuel operation. If provided with the right software, and methanol-impervious Buna-N plastic seals (costing less than 50 cents per vehicle) for their fuel systems, every new car sold in the U.S. could be fully flex-fuel, capable of running equally well on methanol, ethanol, or gasoline.

The bipartisan Open Fuel Standards bill (HR 1687), cosponsored by Reps. John Shimkus (R., Ill.) and Eliot Engel (D., N.Y.), contains provisions that would require that the flex-fuel capability of the majority of new cars sold in the U.S. be activated. If it passes, a market for methanol would be created that would very quickly call into being expanded production and distribution facilities, both in the U.S. and elsewhere as foreign auto manufacturers switched their lines over. This would force gasoline into competition with other fuels at the pump worldwide, thereby putting in place a permanent global competitive constraint on the price of oil. Furthermore, this would allow many other nations with resources suitable for producing methanol (and in some cases ethanol) to enter the world market, thereby increasing the downpour of additional supply.

If we assume the conservative five-to-one elasticity ratio, it would take the addition of the equivalent of 3.3 billion barrels of oil per year (10 percent of the world’s supply) to decrease oil prices by 50 percent (which would incidentally bankrupt the Iranian government, thereby stopping its nuclear-bomb program dead in its tracks).

If all of this were to be contributed by methanol, an additional production of about 122 billion gallons per year would be needed. To make this from natural gas would require 8.7 trillion cubic feet per year. Currently, world natural-gas production stands at 120 trillion cubic feet per year, with the United States contributing about 29 trillion cubic feet of the total. At our current 6 percent per year rate of increase of natural-gas production, the entirety of the needed expansion of natural-gas capacity could be developed from American sources inside of five years. The result would be the effective elimination of oil as a significant factor in our balance-of-trade deficit, the marginalization of the Islamist and other petroleum-financed tyrannies, and a worldwide advanced-sector economic boom driven by cheap oil.

We have here in North America all the resources needed to break the cartel-rigged restrictions on humanity’s liquid-fuel supply, and by so doing lead the world back to prosperity and on to freedom.

— Dr. Robert Zubrin is president of Pioneer Astronautics, a member of the Steering Committee of Americans for Energy, and author of Energy Victory: Winning the War on Terror by Breaking Free of Oil. His next book, Merchants of Despair: Radical Environmentalists, Criminal Pseudoscientists, and the Fatal Cult of Antihumanism, will be published by Encounter Books in February.


Robert Zubrin Explains Why the Open Fuel Standard Act is an Urgent Necessity

Monday, August 6, 2012

The author of Energy Victory, Robert Zubrin, speaks to a group of Google employees about the need for the Open Fuel Standard Act.


America: The Saudi Arabia of Ethanol

Friday, August 3, 2012

The following was written by George Marchetti.

America is Saudi Arabia of Ethanol
Historically, ethanol has been promoted and used as a gasoline substitute in Brazil and the United States, mainly as a response to the OPEC oil embargoes of the 1970s and to rising gasoline prices. In 2010, the production of ethanol from sugarcane in Brazil reached some 6.9 billion US gallons per year. As of 2011, 83% of the light duty vehicles sold in Brazil were flex-fuel vehicles (FFVs), which are capable of running on either gasoline or ethanol blends (such as E85). A gallon of pure ethanol (E100) has about 67% of the energy content of a gallon of gasoline and a gallon of E85 has about 73% of gasoline’s energy content (source).

The U.S. produced 13.2 billion US gallons of ethanol fuel in 2010, and together with Brazil, accounted for 88% of that year's global production. The ethanol market share in the U.S. gasoline supply by volume grew from just over 1 percent in 2000 to more than 3 percent in 2006 to almost 10 percent in 2010. By December 2010 nearly 9 million E85-capable FFV vehicles had already been sold. It is well known that virtually all of the U.S. ethanol supply is currently produced using corn as the feedstock. Less well publicized, however, are recent, major technological advances that will enable the U.S. to expand its ethanol fuel feedstock base well beyond corn in a cost-effective manner. As more FFVs enter the light duty vehicle fleet and as other abundant domestic resources are devoted to ethanol fuel production, the U.S. could well become not just the world’s major ethanol producer (as it is today), but the “Saudi Arabia” of ethanol. Both renewables and fossil fuels are domestic ethanol resources, which are available for the transition away from petroleum as a primary transportation fuel.

Fossil Fuel Resource Base

(1)    Coal or petcoke. Celanese has recently announced a “game changing” technology, which converts coal or petcoke to ethanol (source). According to Celanese, the cost of converting coal to ethanol is $1.50 a gallon, equal to making gasoline from crude oil costing $60 a barrel. Coal is the most abundant fossil fuel resource in the United States and represented about 90% of total U.S. fossil fuel energy reserves as of 2002. The Celanese process is an advanced “clean coal” technology.

(2)    Natural gas. The Celanese process can further be used with natural gas as the ethanol feedstock. Given the development of shale gas technology and the resulting decline in natural gas prices, the cost of converting natural gas to ethanol is likely in the same $1.50 per gallon range.

Renewable Resource Base

(1)    Corn. Because of the very significant volumes of petroleum remaining to be displaced as fuel for the light duty vehicle fleet (i.e., roughly 125 billion gallons per year at current usage rates), corn will remain an important source of ethanol. However, its overall market share will decline as other ethanol resources are developed.

(2)    Cellulosic Biomass.  Perhaps the most intriguing technological developments with respect to renewable ethanol utilize a cellulosic biomass feedstock.  For example, Novozymes has tailored enzymes, which can rapidly catalyze the conversion of cellulosic biomass to ethanol (source). The cost per gallon of ethanol from this process is estimated to be $2.00 per gallon.

(3)    Municipal Solid Waste. Municipal solid waste is a third source of renewable ethanol. The Fiberight process separates organic materials (the ethanol feedstock) from inorganic materials. The inorganic hydrocarbons can then be used as a process fuel and the residual inorganics can be recycled. The process should further result in a significant reduction in both the amount of landfill solid waste and the cost associated with landfill tipping fees.

In May 2011 the Open Fuel Standard Act was introduced to Congress with bipartisan support. If adopted, the bill would require that 50 percent of automobiles made in 2014, 80 percent in 2016, and 95 percent in 2017, be manufactured and warranted to operate on non-petroleum-based fuels, which includes existing technologies such as flex-fuel vehicles. Considering the rapid adoption of flexible-fuel vehicles in Brazil and the fact that the cost of making FFVs is approximately $100 per car or less, the bill's primary objective is to promote a massive adoption of flex-fuel vehicles capable of running on domestic ethanol. If enacted, the Open Fuel Standard Act would provide an expanded customer base for the ethanol fuel transition, as has already occurred in Brazil.

Current U.S. ethanol policy is tilted exclusively toward renewable ethanol resources to the exclusion of fossil fuel resources. The Energy Independence and Security Act of 2007, signed into law in December 2007, increased and expanded the renewable fuel standard. By 2022, 36 billion gallons of renewable fuel must be used per year. A certain percentage of the renewable fuel blended into transportation fuels must be cellulosic biofuel, biomass-based diesel, and advanced biofuel. In order to meet this mandate, there clearly must be enough vehicles capable of operating on the biofuels. The Open Fuel Standard Act complements the Energy Independence and Security Act by requiring increasing numbers of multi-fuel FFVs to be sold in the United States. Indeed, the policy goals of the Energy Independence and Security Act make little sense, and cannot be achieved, unless the Open Fuel Standard Act becomes law.

However, imagine if, in addition to 36 billion gallons of renewable fuel, there were 36 billion gallons of ethanol from coal and natural gas. By 2022, roughly half of the fuel requirements of the light duty vehicle fleet could be satisfied with domestic non-petroleum resources, creating a significant number of new jobs and enhancing national energy security at the same time. Having committed to renewable ethanol (corn and cellulosic biomass), Congress would be foolhardy to ignore the enormous contribution to ethanol production that could be made by abundant and inexpensive fossil fuel feedstocks like coal and natural gas. Ethanol production is a “big tent” project and does not require an “either/or” approach. Both renewable and fossil resources can be economically processed to yield ethanol transportation fuel. Flex-fuel vehicles, running on a blend of ethanol fuel derived from renewables, natural gas and coal, is a straightforward, and uniquely scalable, method to implement the transition toward non-petroleum vehicle fuels in the United States. Cost-effective technology is no longer an impediment. Hopefully, future U.S. ethanol policy will be modeled more on the policies of Brazil (the country) rather than on “Brazil” (the darkly satirical movie of bureaucratic incompetence).

Looking Into the Future

What if the United States actually became the “Saudi Arabia” of ethanol by 2022? What would be the effect on crude oil imports from the Middle East of substituting 72 billion gallons of ethanol for gasoline to power the light duty vehicle fleet? With the “back of the envelope” calculations below, I am assuming that overall fuel consumption by the 2022 light duty vehicle fleet is, on average, the same as today. It may be more; it may be less. With that very big caveat, it nevertheless appears that all US imports of crude oil from the Middle East could be eliminated by 2022. Here’s  a summary of my analysis and assumptions.

(1)     (1) As a rule of thumb, about 19.5 US gallons of gasoline on average can be derived from one barrel (42 US gallons) of crude oil (source).

(2)    The net US imports of petroleum as of 2010 were an average of 9.4 MMbd.

(3)    So, about 67 billion  gallons of gasoline per year were derived from petroleum imports( 19.5 x 9.4MM x 365), which is roughly half of total United States gasoline consumption.

(4)    If we add 24 billion gallons of cellulosic ethanol (from the Energy Independence and Security Act of 2007) and 36 billion gallons of fossil ethanol (from domestic natural gas and coal), we get 60 billion gallons of ethanol per year (in addition to corn ethanol at 12 billion gallons per year, which is already in the fuel supply). This would be a 50/50 blend of renewable ethanol and fossil ethanol overall.

(5)    A gallon of ethanol has 67% of the energy content of a gallon of gasoline. So, the  60 billion gallons of ethanol which have been substituted for gasoline have an energy equivalent of 40 billion gallons of gasoline.

(6)    That still leaves a deficit of 27 billion gallons of gasoline (67 billion-40 billion gallons of gasoline equivalents) per year or 74 million gallons of gasoline per day to be imported.

(7)    In 2011, the US imported the following amounts of crude oil from these countries: (a) Canadaà 2.157 MMbd; (b) Mexico à1.113 MMbd; and (c) Nigeria à 0.826 MMbd (source).

(8) The total petroleum imports from these three countries equaled 4.1 MMbd. Using the 19.5 gallons of gasoline per barrel of crude oil “rule of thumb”, it appears that we are able to derive 80 million gallons of gasoline per day from crude oil imports from these three countries alone, which is sufficient to cover the deficit of 74 million gallons of gasoline per day.

In principle, and based on these assumptions remaining relatively constant, the United States could entirely eliminate its dependence on Mideast oil by 2022 with a combination of domestic crude oil, crude oil imports from three non-Middle Eastern countries, biomass ethanol and fossil ethanol.  Isn’t that really the national policy goal that every President since Jimmy Carter has advocated? I think James Woolsey might even find this “back of the envelope” analysis of particular interest from a national security perspective.

If nothing else, it could be a topic of discussion if there is a lull (typically during the questions and answer period) at the conference. Clearly, adoption of the Open Fuel Standard Act is absolutely critical in this scenario.


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