May 22, 2012
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Energy and Gas Prices: The VBO Factor
by PETER HUESSY May 11, 2011
As recently as May 2nd, 2011, the national average price for a gallon of gasoline hit $3.96, more than a $1.06/gallon than it was on the same date just one year ago (Source: EIA) and over twice the cost compared to early 2009. The price of gasoline has consumed policymakers and commentators in Washington, yet we seem no closer to what many consider a rational energy policy than we were when President Nixon announced Project Independence in response to the oil energy embargo of 1973.
Why is this? For over a decade we have forced ourselves to live within the confines of a Kyoto-based, global warming framework which seeks to constrain and in some cases cut or eliminate energy production and consumption. This increases prices, often twists market forces into government run boondoggles, just at a time when the world desperately needs plentiful, affordable and flexible energy supplies. I call this kind of a “Very Big Oops” (otherwise known as a VBO).
Washington is paying attention for good reason, however. Nearly every significant economic indicator – from new hires to home foreclosures to the price of a gallon of milk – correlates with gas prices, and so do politicians’ reelection chances. And US economic recessions are usually directly correlated with dramatic spikes in the price of gasoline. This was recently and vividly explained in a piece by Robert Zubrin on National Review online.
The reaction of some is that US production options are not sufficient to change the price of oil. The argument is we are stuck with such a small portion of the world’s conventional oil reserves that producing more here doesn’t make sense. This is also part of a narrative that sees US oil consumption as somewhat immoral—we are 4% of the globe’s population but use 8 billion barrels of oil annually which is somewhere around 20-25% of the annual worldwide production of petroleum.
From that follows the idea that high energy prices are our due. And as a top Chinese official said not too long ago, “it is time we work to get the Americans out of their cars!” This is also part of a narrative that says high energy prices, such as European prices for gasoline, will be good for us because it will force us to choose alternatives.
Problem is: what alternatives? One cannot turn over the fleet of hundreds of millions American cars overnight. One cannot simply trade in a car on which a lot of money is owned, especially as the value of cars does not equal the remaining loan on the car. In addition, our society was designed to drive cars. One can dream of being a grand architect and change all that, but residential and business development patterns cannot be undone over night. And that of course brings us back to square one: high energy prices can swamp economic activity, throw people out of work, and bankrupt the country. Another example of a VBO.
Our priority should be to put 30 million Americans to work over the next 10 years including those now unemployed and underemployed. Part of that should be to stop the process of bringing in millions of new consumers who are here illegally as they displace Americans born here who do not or cannot work. Since the oil Utah says provide guest worker arrangements that do not lead to massive movements of new immigrants and permanent residents but temporary guest workers in return for really getting serious about border and over–stay security. This is called real immigration reform.
But then we come back to supply and the novel idea of “choice”: an open-fuel standard where Americans would actually be able to choose their liquid fuel. We could also speed the offshore drilling permitting process, (and not give out leases and then stop the permits), open ANWAR to oil exploration and get its 28 billion barrels of oil to the TAPS (Trans Alaskan Pipeline) only some 70 miles away; provide better incentives, lower market barriers and begin to establish infrastructure for electric vehicles; and end the Federal Reserve’s “Quantitative Easing”, (lowering the value of he dollar increases the price of imported petroleum).
But of critical importance: pass the recently newly introduced Open Fuel Standard Act (HR 1687). And we could open up our unconventional oil resources—shale and tar sands—to development. After all we have more of this stuff than Saudi Arabia has conventional oil. Why have we passed laws and regulations forbidding its development? Another VBO.
True, oil prices are determined in part by complex international forces, and the international landscape has changed (and continues to change, rapidly). Forget the recent “instability in the Middle East” to explain everything. Remember through a decades long war between Iran and Iraq prices first went up and then they plunged. The real problem is that we no longer set the global demand curve for oil or have a say in enough production.
Remember, OPEC produces 30 million barrels of oil today, the same as in 1973. The same after 40 years! The rest of the world? It produces 45 million barrels compared to 25 million barrels a day in 1973.
What does that say? We have to break the lock OPEC has on oil and we have to break the lock oil has on the transportation infrastructure of the industrial world.
But we should know the demand function is changing in an unprecedented way as well. China is gobbling up oil supplies at an unprecedented rate, and India is soon to follow. If China and India start using energy like the Czech Republic or the Republic of Korea, worldwide consumption of energy would have to increases six-fold. Recent actions by Russia suggest that Moscow is not exactly interested in lowering the price of oil. And too many terrorist sponsoring nations fund the war they are waging against us with the cash we send them whenever we fill up. Another VBO.
My question to this group is “How much can Congress do?” As Annie Korin and Gal Luft detail in their book “Turning Oil Into Salt”, it is time we thought strategically. In 1980, Chile changed its social security system into a private system. They now enjoy returns 4-5 times what current social security recipients can expect even though their investment climate was identical to ours. Chile’s economy just concluded a 15% growth rate for the past year!
But we had a failure of imagination and our political elites liked spending the social security surplus AND no-one wanted to admit they were wrong!
Brazil, some 15 years ago, decided to use its sugar cane resources to produce alternatives to oil. They did. We are now providing them loan guarantees and off-shore oil drilling platforms to drill for some 30 billion barrels of oil off their coast which they will export, while we prohibit such work here at home and get inline to buy their oil. Well, looks like another VBO!
As former DCI Jim Woolsey explains, the Korin books is a “small masterpiece -- right on the money both strategically and technically.” My friend , Robert C. McFarlane, former U.S. National Security Advisor to President Reagan, predicts it will become “the Bible for everyone who is serious about energy and national security."
What does it propose we do? Choice, folks. Like choosing to arm yourself if you want; choosing the right kind of retirement plan or health care policy; like choosing to work without having to join some organization and choosing freely where you send your children to school.
For example, we can make methanol from natural gas, coal, and biomass. But we cannot put it in our cars. A flex-fuel vehicle or open-fuel standard would allow that. At a cost of $100 a car, we can produce Methanol from resources here at home.
At a cost of $100 per new car, we can enable a vehicle to run (in addition to gasoline) on Methanol made from a variety of energy resources the US is blessed with.
Although Methanol gets half the MPG as gasoline, it is half the cost of regular. Yet it has the octane of premium and it was the fuel of choice for INDY 500. Congress can open ANWR and stop sending at todays price some $500 billion overseas every year. Wherever our energy may come from in the future, we have to drive the price of petroleum down to $30 a barrel or 70 cents a gallon wholesale. In short, turn oil into salt. Bankrupt the terror masters. Gain control over our own destiny. And grow the economy and give back to the American people the pursuit of the American dream.
FamilySecurityMatters.org Contributing Editor Peter Huessy is on the Board of the Maryland Taxpayers Association and is President of Geostrategic Analysis of Potomac, Maryland, a national security firm.
Peter Huessy is President of GeoStrategic Analysis of Potomac, Maryland , a defense and national security consulting firm.
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