Thinking Outside of the Barrel

About 10 years ago, al-Qaeda’s leader, Usama bin Laden, stated that his target price for oil was $144 a barrel, and that the American people, who allegedly robbed the Muslim people of their oil, owe every Muslim $30,000 in back payments.

At the time, $144 a barrel seemed farfetched. As of this writing, bin Laden was a mere $8 per barrel short of his target. Indeed, the economic warfare component of the global campaign against the West has undeniably been a resounding success for the jihadist movement. This has deep implications for the West and its ability to prevail in the long war of the 21st century.

The U.S., deeply embroiled in a struggle against radical Islam, nuclear proliferation, and totalitarianism, now faces difficult realities. Relations with the Muslim world are at an all-time low, but more than 70 percent of the world’s proven oil reserves and over a third of production is concentrated in Muslim countries. The theocratic and dictatorial regimes that most strongly resist America’s efforts to bring democracy to the Middle East are the dominant forces in the world oil economy. While the U.S. economy bleeds, oil-producing countries like Saudi Arabia and Iran—both sponsors of radical Islam—have enjoyed staggering windfalls. In 2006, the United States spent about $260 billion on foreign crude oil and refined petroleum products. This year, the figure could surpass $500 billion, the equivalent of our defense budget. As bin Laden had hoped, Muslim oil producers are taxing every American man, woman, and child.

Limited Leverage

The flow of U.S. petrodollars to the coffers of foreign oil producers not only casts a large shadow over America’s prospects of winning the war on terrorism. It also limits Washington’s diplomatic maneuverability on central policy issues like human rights and nuclear proliferation.

In April 2006, Secretary of State Condoleezza Rice told the Senate Foreign Relations Committee, “We do have to do something about the energy problem. I can tell you that nothing has really taken me aback more, as Secretary of State, than the way that the politics of energy is… ‘warping’ diplomacy around the world. It has given extraordinary power to some states that are using that power in not very good ways for the international system, states that would otherwise have very little power.”

One of these states is Iran. With 10 percent of the world’s oil reserves and the world’s second largest natural gas reserve, Iran’s President Mahmoud Ahmadinejad appears unfazed by the prospects of international sanctions against his country resulting from its efforts to develop nuclear weapons. Oil also lubricates the so-called Bolivarian revolution led by Venezuela’s President Hugo Chavez, who leverages Venezuela’s oil wealth to buy political influence and consolidate an anti-western bloc in the western hemisphere.

U.S. diplomacy is further complicated by the indefatigable thirst for energy in the booming economies of China and India, which are increasingly dependent on the very same countries the United States is trying to rein in. The growing appetite for oil not only bankrolls rogue nations, but also feeds what could become a global competition for control of energy resources. Rogue nations like Iran and Sudan can now quite literally buy the support of a third of humanity. They can also buy the protection of Chinese veto power on the U.N. Security Council simply by inking energy deals with this oil-hungry emerging superpower.

OPEC’s Scam

The Organization of the Petroleum Exporting Countries (OPEC), spearheaded by Saudi Arabia, is also squeezing the U.S. and its western allies by deliberately keeping oil supply tight to prop up prices. Not only is Saudi production lower today than it was two years ago, despite the increase in demand, but the cartel has effectively deleted 2.4 million barrels per day (mbd) from the global oil market in a scam.

In 2007, OPEC expanded its member roster to include Ecuador and Angola. Together, the two countries had accounted for nearly 2.4 mbd of non-OPEC oil. Yet, after the two nations were admitted, total OPEC production remained constant, allowing existing members to reduce production. The net result was a reduction in non-OPEC supply with no equivalent increase in OPEC supply. In fact, according to WRTG Economics, an Arkansas-based company that provides data and analysis for energy producers and consumers, OPEC production today is virtually identical to its production thirty years ago, even as global demand grown has skyrocketed.

A Grain of Salt?

With 97 percent of U.S. transportation energy based on petroleum, oil is the lifeblood of America’s economy. However, America is poor in oil relative to its need. It consumes one of every four gallons produced, but barely has 3 percent of the world’s proven reserves. As such, the U.S. now imports more than 60 percent of its oil.

Oil’s strategic value derives from its virtual monopoly on transportation fuel. Neither efforts to expand petroleum supply nor those to crimp petroleum demand will be enough to strip oil of its strategic value. The monopoly, which gives intolerable power to OPEC and the nations that dominate oil ownership and production, must be broken.

Not long ago, technology made another strategic commodity obsolete. Until the end of the nineteenth century, salt was vital to the global economy. It was the only means to preserve meat. Thus, salt mines conferred national power. Wars were even fought over control of them. Today, we import some salt, but we definitely do not have a “salt dependence problem.” Canning, electricity, and refrigeration ended salt’s monopoly on meat preservation, and, in so doing, its strategic importance. We can and must do the same thing to oil.

Ethanol & Methanol

Today’s vehicles have an average lifespan of 17 years and, for the most part, can run only on petroleum. Every year, 17 million new cars roll onto America’s roads. For a cost of less than $100 extra per car, automakers can make virtually any gasoline-powered car a flex fuel vehicle, capable of running on any combination of gasoline and a variety of alcohols such as ethanol and methanol, made from a variety of feed stocks including agricultural material, waste, and coal. Indeed, alcohol does not just mean ethanol, and ethanol does not just mean corn.

Flex fuel vehicles provide a platform on which fuels can compete and let consumers and the market choose the winning fuels and feed stocks based on economics. For example, China is rapidly expanding production of the alcohol fuel methanol from coal, and its vehicle industry is ramping up to fuel flexibility.

In Brazil, where ethanol is widely used, the share of flex fuel vehicles in new car sales is estimated to be 90 percent this year. These cars are manufactured by the same automakers that sell to the U.S. market and entail no size, power, or safety compromise by consumers. The proliferation of flex fuel vehicles in Brazil has driven fuel competition at the pump such that the Brazilian oil industry has been forced to keep gasoline prices sufficiently low to compete with ethanol in order not to lose more market share.

Fueling World Hunger?

At this point, it is important to address the fallacy that increased use of biofuels in general, and corn ethanol in particular, is driving world hunger. The primary drivers of price increases for food commodities spanning the spectrum from fish to rice (neither of which are used to make fuel) are the massive increases in oil prices. Skyrocketing oil has raised the cost of distribution, labor, and packaging. Even with increased corn ethanol production, the U.S. corn food and feed product has increased 34 percent over the last five years, and U.S. food exports overall have increased 23 percent on the year. America is clearly doing its share to feed the world.

Expanding U.S. fuel choice to include biofuels imported from developing countries can actually help ameliorate world poverty and hunger. Sugar, from which ethanol can be cheaply and efficiently produced, is now grown in 100 countries, many of which are poor and on the receiving end of U.S. development aid. Encouraging these countries to increase their output and become fuel suppliers (and by removing our protectionist 54 cent-per-gallon ethanol tariff) could have far-reaching implications for their economic development. By creating economic interdependence with countries in Africa, Asia, and the southern hemisphere, the United States can strengthen ties with the developing world, help reduce poverty, and wean itself from oil.

Biofueling the U.S. Economy

The International Energy Agency has noted that biofuels are key to keeping the lid on an overheated transportation fuel market. According to Merrill Lynch, without the increase in biofuels production, oil prices would have been 15 percent higher, which at current oil prices translates into a savings of over $80 billion a year to the U.S. economy.

Critics continue to hammer America’s $4 billion biofuels program as expensive. However, if it generated $80 billion in fuel savings, the program yielded a $76 billion return. Moreover, it sent $4 billion to America’s farmers instead of petro-dictators in the Middle East.

Plug-in Hybrids

America currently generates very little electricity from oil. Thus, using electricity as a transportation fuel would enable a full spectrum of electricity sources to compete with petroleum. Plug-in hybrid electric vehicles (PHEVs) can reach oil economy levels of 100 miles per gallon of gasoline without compromising the size, safety, or power of a vehicle.

The key is changing our thinking from miles per gallon to miles per gallon of oil-based fuel. Indeed, it is not the total energy consumption of the vehicle that is the problem. Rather, it is the portion of that energy that comes from petroleum that is our concern. If a PHEV is also a flexible-fuel vehicle powered by 85 percent alcohol and 15 percent gasoline, oil economy could reach over 500 miles per gallon of gasoline – each gallon of gasoline is stretched with alternative liquid fuels and electricity.

A Time for Action

A nationwide deployment of flex-fuel cars, flex fuel plug-in hybrids, and alternative fuels could take place within two decades. But this transformation will not occur by itself. In a perfect world, government would not need to intervene in the energy market. In a time of war, however, Washington is taking a great risk in leaving the problem to be solved by the free markets alone.

Every year that passes without congressional action to ensure that new cars sold in America are flex fuel vehicles is another year in which 17 million gasoline-only cars start their 17-year life on U.S. roads, further shackling us to foreign oil.

On the grounds of national security and in the interest of stemming the hemorrhaging of our economy, Congress should take swift action to require that new vehicles sold in the United States are flex fuel vehicles. Legislating an Open Fuel Standard would level the playing field and promote free competition among diverse energy suppliers. Failure to do so will ensure that we continue to finance our enemies, and allow OPEC to tighten its stranglehold on the global economy.