How To Destroy OPEC

A lot has changed since 1499, but Marshal Trivulzio’s famous aphorism still holds a great deal of truth. Yet, America doesn’t seem to be heeding it. In fact, in waging the war on terror, the United States is funding both sides.

Consider this: In 1972, the United States paid out $4 billion for oil imports, an amount equal to 1.2 percent of our defense budget at that time. In 2007, we paid $342 billion, and this year we will pay over $600 billion—which is more than 130 percent of our current budget for national defense. Over the same period, Saudi oil revenues have grown from $2.7 billion in 1972 to $240 billion in 2007, and this year are likely to exceed $400 billion.

Much of that money is being used to fund an international network of radical Wahhabi organizations and madrassas devoted to spreading terrorist ideology. Meanwhile, Iran is using its share of the take to fund its nuclear weapons program, not to mention terrorist groups like Hezbollah in Lebanon and Hamas in the Gaza Strip.

Furthermore, our oil exports are bankrolling the Organization of Petroleum Exporting Countries (OPEC)—the cartel that dominates and manipulates the global oil market. If something isn’t done to break this cartel, the situation is likely to get worse. With China and India industrializing, world demand for fuel is going up. OPEC is positioned to exploit this new demand by prompting more painful price hikes, going well beyond the 100 percent increase we have endured over the past year alone. In short, we are financing a war against ourselves—and paying the enemy more than we are paying our own military.

Taxing America

The enemy’s unconstrained ability to loot us is also threatening our economy. This year, with OPEC-rigged oil prices hovering around $120/barrel, Americans will pay $1 trillion for their oil ($600 billion foreign plus $400 billion domestic). The world, meanwhile, will pay $4 trillion. These petroleum costs are up a factor of 10 from what they were in 1999, and represent an enormous, highly regressive tax on the world economy. For Americans, the $1 trillion oil levy is equivalent to a 40 percent increase in income tax—with 60 percent of that sum going to foreign governments.

Distributed among America’s population of 300 million people, the $1 trillion OPEC tax comes to $3,300 per head—for every man, woman, and child in the country, or $13,300 for a family of four. The average American worker makes about $45,000 per year, or $35,000 after taxes. This means that over 38 percent of take home pay goes to oil. Compare this to 1999, when the average American supporting a family of four paid about 3 percent for oil. This is a massive financial drain on the U.S. economy. Is it any wonder that Americans are not buying houses? Economists now warn that consumer goods may be next.

Taxing the World

If this were a true tax increase, it would be the largest in American history. Perhaps that is why the United States appears to be headed for a recession. But for poor countries, the effect of the brutal OPEC global taxation program is much worse. It is one thing to pay $120 per barrel when you live in a country where the average person makes $45,000 per year. It is quite another if you live in Africa, for example, making $1,000 per year or less. The oil cartel is already starving many of these people by both driving up transport and fishing costs.

OPEC is also using its petrodollar funds to engage in speculation, which has driven farm commodity prices up by a factor of two—even in the face of massive increases of U.S. corn production (up 45 percent since 2002, leaving a 34 percent increase in available food and feed grain after the part used for ethanol is taken out).

And this may only be the beginning. The leaders of OPEC , including Venezuela’s Hugo Chavez and Iran’s Mahmoud Ahmadinejad, are already openly discussing raising the price of oil to $200 per barrel or more. In that case, Americans’ oil tribute will rise to $1.8 trillion per year, to a cartel whose total worldwide extortions will top $7.5 trillion.

Sword of Damocles

The economic depression resulting from $200 per barrel oil would pale in comparison to an oil cutoff, which could be accomplished by design by either OPEC or the Arab League (to punish the U.S. for its foreign policies, for example), or by accident, resulting from the irrational action of one of the unstable forces at large in the Persian Gulf.

In 1973, the Arab oil embargo threw our economy into chaos despite the fact that we still produced 70 percent of our own oil. Today, by contrast, we supply only 40 percent of our own fuel; another cutoff would be catastrophic. This vulnerability is like the Sword of Damocles hanging over the head of Western civilization—both a disaster waiting to happen and a source of blackmail that inhibits the necessary actions to defeat the Islamist threat.

How to Break OPEC

The top U.S. national security policy priority must now be to break the oil cartel. This imperative has been apparent since the 1973 oil embargo, but nothing effective has been done. Our only policy prescription—implementing domestic measures of energy conservation—has failed thus far, and has no chance of succeeding. Even if Americans consume less oil, with demand growing elsewhere, no conceivable conservation effort here could significantly undercut global oil prices. Even if we could hypothetically somehow induce global conservation, OPEC would simply respond by cutting production to create more demand.

What is needed is for Congress to pass a law requiring all new cars sold (not just made, but sold) in the United States to be flexible fueled—operable on any combination of alcohol (including both methanol and ethanol) or gasoline fuel. Such cars already exist. In fact, about 24 different models of flex-fuel cars are now being produced by the Detroit Big Three (General Motors, Ford, and Chrysler) this year, and they only cost about $100 more than the same car in a gasoline-only version.

The problem is that flex-fuel vehicles only command about 3 percent of the new car market. Indeed, there is little upside to a consumer in owning one, since it is hard to find stations in America with alcohol fuel pumps (such as E85 or M85, fuel mixes that are 85 percent ethanol or methanol, and 15 percent gasoline, respectively). Gas station owners don’t want to invest in fuel that only a small percentage of drivers will purchase.

However, within three years of the enactment of a flex-fuel mandate, there would be an estimated 50 million cars on the road in the United States capable of running on high-alcohol fuels. Under those conditions, E85 and M85 pumps would start appearing everywhere, creating for the first time an effectively open market in vehicle fuels.

Worldwide Change

To break OPEC, flex-fuel vehicles must spread beyond the United States. By creating laws stipulating that all new cars sold here have to be flex fueled, Congress would effectively force foreign car manufacturers to switch their lines to flex fuel as well, making flex-fuel the international standard. It is conceivable, then, that not only would 50 million American cars be capable of running on these fuels in three years, there would be hundreds of millions worldwide. This would force gasoline to compete everywhere against comparably priced ethanol and methanol fuels.

Around the globe, gasoline would be forced to compete at the pump against alcohol fuels made from any number of sources, including corn and sugar, as well as cellulosic ethanol made from crop residues and weeds, as well as methanol, which can be made from any kind of biomass, including coal, natural gas, and even recycled urban trash.

The spread of flex-fuels would break the oil cartel monopoly because it could hold the price of fuel to an estimated $50 per barrel. Indeed, that is where alcohol fuels become competitive.

It Gets Better…

It doesn’t end there. The spread of flex-fuel would also create a market that would mobilize tens of billions of dollars of private investment into techniques for the production of alcohol fuels like cellulosic ethanol and other advanced alcohol production techniques. These investments could spark new breakthroughs in production technology that would further reduce the price of alcohol fuels and, in the process, chip away at the price of oil.

Once a production and distribution infrastructure for flex-fuel vehicles is in place, we could proceed to not merely contain the nations that have extorted us with oil, but squeeze them by implementing tax and tariff policies that favor alcohols over petroleum. America could proudly redirect over a trillion dollars a year, now flowing to the oil cartel, toward the world’s agricultural and mining sectors instead. This would be of great benefit to farmers and miners in the United States as well as the Third World, which has been looted by OPEC’s unconstrained price hikes. Thus, there is not just a strategic and economic case for breaking the oil cartel, but a strong humanitarian case, as well.

The Way Forward

Bills are now circulating in both the Senate (S.3303) and the House of Representatives (HR.6559) to implement the policies laid out in this essay. Sponsored by Senators Ken Salazar (D-CO), Sam Brownback (R-KS), Joe Lieberman (I-CT), John Thune (R-KS), Chuck Grassley (R-IA), and Susan Collins (R-ME), and an extensive bipartisan group in the House led by representatives Eliot Engel (D-NY) and Jack Kingston (R-GA), these bills would make fuel choice the law of the land in America, and enable flex-fuel to be the standard for all new vehicles worldwide. A group called Citizens For Energy Freedom (CitizensForEnergyFreedom.org) is now mobilizing grassroots support for the bill, and similar legislative initiatives.

This is a fight America cannot afford to lose. Instead of financing terrorism, we could be funding world development. Instead of selling controlling blocks of Citibank or CNN to Saudi princes, we could be selling tractors to Africa. In the end, this will be the way to win the war on terror.