How much oil money does the U.S. send to OPEC and OPEC-partners?
It’s more than you think.
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Oil, petrodollars and war. Does the U.S. need to permanently police the Middle East?
The U.S. interest in going to war or supporting war efforts on behalf of our “democratic” allies like Iraq, Qatar, the United Arab Emirates, Egypt and Saudi Arabia is not based, as said by some political leaders, on converting those countries to democracies or providing their citizens with increased freedom. Neither is it, primarily, aimed at reducing terrorism possibilities here at home. For the most part, it is instead aimed at protecting the U.S. and our allies’ interests in oil and stability in some of the most corrupt, autocratic oil-producing states in the Middle East.
Surely, recent history indicates that use of patriotic and compassionate language reflecting America’s historical ethos to justify our actions often wins initial public support for “Operation This” or “Operation That,” but as conflicts drag on and U.S. soldiers, sailors or marines suffer physical and emotional wounds, the gap between articulated justifications and reality becomes clearer to the public. When the fog of war or near-wars lifts a bit, support for U.S. military activity, often becomes muted among the citizenry.
Concern for protecting oil resources, production and distribution has been, and is currently, a paramount objective of the U.S. The U.S. and its allies have helped overturn governments, remake global maps, redefine national or tribal borders, create new nation states and abandon old ones and dispatch national leaders. Contrary to Gen. Powell’s admonition, we sometimes have failed to own the disastrous results of the wars that we have fought (Libya, Iraq, etc.). Based on our own desire for oil, we have tolerated sometimes exotic and many times terrible behavior among private oligarchs and despotic rulers, which, regrettably, often, escapes coverage in text books and in the media. Clearly, the link between our large-scale addiction to oil and its negative political, social and economic consequences in several Middle Eastern countries lacks sustained attention in our public policy dialogue.
The importance of oil and the U.S. willingness to go to war or engage in covert activities to protect it has been intensified by the relationship between petrodollars and the U.S. economy. Since 1944 at The Bretton Woods Conference, the global reserve currency has been the good old U.S. dollar. First, gold was the back-up to the dollar. As reported by the Huffington Post, the dollar was pegged at $35 to an ounce of gold and was freely exchangeable. “But by 1971, convertibility of gold was no longer viable as America’s gold resources had drained away. Instead, the dollar became a pure fiat currency (decoupled from any physical store of value) until the petrodollar agreement was concluded by President Nixon in 1973. The essence of the deal was that the U.S. would agree to military sales and defense of Saudi Arabia in return for all oil trade being denominated in U.S. dollars.” We as a nation committed to go to war in return for ostensible economic benefits and access to oil.
Was it good for the American economy? Sure, at least in the short run. The dollar became the only currency for energy trading. All foreign governments desiring to secure and trade for oil had to hold U.S. currency. The dollar was easily converted into barrels of oil. As the Huffington Post indicated, the dollar costs for oil flowed back into the U.S. financial system. What a deal!
Recently, lower U.S. interest rates, a troubled, slow-growing U.S. economy and the rise of oil-shale production in the U.S. has muted the almost-absolute, four-decade direct relationship between the dollar, and other nations’ need for oil and or export of oil. Instead of “next year in Jerusalem,” some nations like China, Russia and even France and Germany have indicated next year either a return to gold or the use of their own currencies as a peg to trading. However, the petrodollar still plays an important role in the exchange of oil in the global trading system. Its demise, as Mark Twain suggested about reports of his death, is, if not greatly, (at least) somewhat exaggerated. I suspect the petrodollar will be with us for some time.
Our nation’s willingness to militarize support of countries that depart radically from supposed U.S. norms of global behavior (encoded in the U.N Charter and other international agreements), because of their oil resources and the post-World War II emergence of dollar-based trading in oil and its benefits, has muddled U.S. foreign policy. Critics have questioned our not-so benign initiatives in countries throughout the Middle East and, as a result, they have raised issues concerning supposed American exceptionalism.
We have more than just a Hobson choice (that is, there is no real choice at all) if we choose to break from oil dependency. Increased U.S. oil production to secure profits and reach demand will still require both importing and exporting oil. This fact, coupled with the desire to keep the dollar the key oil-trading denomination, will sustain U.S. entanglements and the probability that we will continue to play oil policemen in many places.
A different future could be achieved if we took the president seriously and tried to “wean” ourselves off of oil. Paraphrasing liberally and adding my own meaning, Léon Blum, former French leader, “Life doesn’t give itself to one [nation] who tries to keep all of its advantages at once…morality may consist solely in the courage of making a choice [between energy sources and fuels].” The U.S. has not had the political guts yet to really focus on converting from an oil- and gas-based economy and social structure to an alternative energy and fuel-based one (e.g., natural gas, ethanol, methanol, biofuels, electricity and hydro fuels). Such a strategy would allow consumers greater freedom at the pump. It would be fuel agnostic and let consumers pick winners and losers based on cost, and impact on the quality of their lives and the nation’s life. We know that if we do make alternative energy and fuel choices now, based on equity, efficiency, GHG emissions and pollution reduction criteria, we can secure important environmental, economic, social and security benefits. To fail to act is an act itself, one that will harm the nation’s efforts to become the country on the shining hill and pave the way for other countries and itself to access a better, more peaceful future for present children and their children.
Photo Credit: www.defense.gov
The Saudis and oil prices — the diminishing value of conspiracy theories
Everyone likes hidden conspiracies, either fact or fiction. Covert conspiracies are the stuff of great and not-so-great novels. Whether true or false, when believed, they often cause tectonic policy shifts, wars, terrorism and ugly behavior by groups and individuals. They are part of being human and sometimes reflect the inhumanity of men and women toward their fellow human beings.
I have been following the recent media attention on conspiracies concerning oil, gasoline and Saudi Arabia. They are all over the place. If foolish consistency is the “hobgoblin of little minds” (Ralph Waldo Emerson), then the reporters and editorial writers are supportive stringers for inconsistency. Let me briefly summarize the thoughts and counter thoughts of some of the reported conspiracy theorists and practitioners:
- The Saudis are refusing to limit production and raise the price of oil because they want to severely weaken the economy of Iran. The tension between the two nations has increased and, to some extent, is now being framed both by real politics (concerning who’s going to carry the big stick in the region) and by sectarianism. Iran’s oil remains under sanction and the Saudis hope (and may even be working with Israel, at least in a back-office way) to keep it that way.
- No, you’re wrong. The Saudis are now after market penetration and are lowering the price of oil to impede U.S. development and production of oil from shale. Right now, they are not worrying so much about oil from Iran-given sanctions…but they probably will, if there is a nuclear deal between the West and Iran.
- You both are nuts. The Saudis and the U.S. government are working together to blunt Russian oil sales and its economy. The U.S. and Saudis can withstand low oil prices, but the Russians are, and will be, significantly hurt economically. If it hurts Iran so much, the better! But the Cold War is back and the reset is a failure.
- Everyone is missing the boat. The Saudis don’t really control prices or production to the extent that they did in the past. Neither does OPEC. Don’t look for conspiracies, except perhaps within the Kingdom itself. The most powerful members of the Saudi royal family understand that if they limit production to raise prices per barrel, it probably wouldn’t work in a major way. The U.S. has become a behemoth concerning oil from shale. If a nuclear deal goes through, Iran will have sanctions lessoned or removed relatively soon. Should the Russian and West reach some sort of cold peace in Ukraine, Russia will become a player again. When you add Canada, Iraq, Libya and the Gulf States to the mix, lower global demand, and increase the value of the dollar, you get an uncertain oil future. The Saudis, led by their new king, are buying time and casing out their oil future.
To me, the Saudi decisions and the subsequent OPEC decisions were muddled through. Yet, they appear reasonably rational. Saudi leaders feared rising prices and less oil production. Their opportunity costing, likely, went something like this: “If we raise prices, and reduce production, we will lose global market share and maybe, in the current market, even dollar or riyal value. Our production costs are relatively low, compared to shale development in the U.S. While costs may go higher in the future, particularly once drilling on flat desert land becomes more difficult in light of geology, we can make a profit at the present time, even at $30-40 a barrel. Conversely, we believe that for the time being, U.S. shale developers cannot make a profit going below $40-50. Maybe we are wrong, but if we are, our cost/profit equation is not wrong by much. By doing what we are doing, we will undercut American production. Sure, other exporting countries, including our allies in the Gulf will be hurt temporarily, but, in the long run, they and we will be better off. Further, restricting production and assumedly securing higher prices is not a compelling approach. It could cause political and social tension in the country. We rely on oil sales, cash flow and profit as well as reserves to, in effect, buy at least short-term civic peace from our citizens. Oil revenue helps support social services and basic infrastructure. We’ve got to keep it coming.”
The Kingdom understands that it can no longer control prices through production — influence, yes, but, with the rise of U.S. oil development, it cannot control production. Conspiracy theories or assumed practices don’t add much to the analysis of Saudi behavior concerning their cherished oil resources. Like a steamy novel, they fill our reading time, and sometimes lead to a rise in personal adrenaline. Often, at different moments, they define the bad guys vs. the good guys, or Taylor Swift vs. Madonna.
No single nation will probably have the power once held by OPEC and the Saudis. While human and institutional frailties and desires for wealth and power suggest there always will be conspiratorial practices aimed at influencing international prices of oil and international power relationships, their relevance and impact will diminish significantly. Their net effect will become apparent, mostly with respect to regional and local environments, like Yemen and ISIS in Syria and Iraq.
Recently, I asked a Special Forces officer, “Why is the U.S. fighting in Iraq?” I expected him to recite the speeches of politicians — you know, the ones about democracy, freedom and a better life for the citizens of Iraq. But he articulated none of these. He said one word, “Oil”! All the rest is B.S. I think he was and remains mostly right. His answer might help us understand part of the reason for the strange alliance between the Saudis and U.S. military efforts in or near Yemen at the present time. Beyond religious hatred and regional power struggles, it might also help us comprehend at least part of the reasons for Iran’s support of the U.S.-led war against ISIS — a war that also involves other “democratic” friends of the U.S. such as the Saudis and the Gulf States.
The alliances involve bitter enemies. On the surface, they seem somewhat mystifying. Sure, complex sectarian and power issues are involved, and the enemies of my enemies can sometimes become, in these two cases, less than transparent friends. But you know, these two conflicts — Yemen and ISIS — I believe, also reflect the combatant’s interest in oil and keeping oil-shipping routes open.
President Obama has argued that we should use alternative energy sources to fuel America’s economy and he has stated that we need to wean the U.S. off of oil and gasoline. Doing both, if successful, would be good for the environment, and limit the need to send our military to protect oil lifelines. Similarly, opening up U.S. fuel markets to alternative fuels and competition would mute the U.S. military intervention gene, while curing us, to a large degree, of mistakenly granting conspiracy advocates much respectability. Oh, I forgot to indicate that the oil companies continue their secret meetings. Their agenda is to frustrate the evolution of open fuel markets and consumer choices concerning fuel at the pump. Back to the conspiracy drawing boards! Nothing is what it seems, is it?
Photo credit: http://blogs.telegraph.co.uk/finance/
Religion, structural changes in the oil Industry and the price of oil and gasoline
Americans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!
But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?
If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.
Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.
Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.
Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.
Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!
Airstrikes reducing oil revenues for ISIS, report says
The U.S.-led airstrikes against Islamic State in Iraq and Syria (ISIS) might not have eradicated the extremist group, as President Obama vowed to do. But at least the operation has interrupted the flow of oil money to the militants, according to an analysis in Bloomberg BusinessWeek.
Based on details from an IEA report, the magazine says:
Though the airstrikes have failed to keep Islamic State from advancing in the field, they have apparently succeeded in dismantling its sophisticated oil network, reducing the movement’s ability to make gasoline and diesel for its tanks and trucks and cutting off a vital source of funding. A report from the International Energy Agency in Paris has just estimated that Islamic State controls only about 20,000 barrels of daily oil production, down from about 70,000 as of August. Most of it remains in Iraq.
As BusinessWeek reported in September, at the time, when ISIS had seized oil fields and refineries in swaths of territory in Syria and Iraq, the group was bringing in up to $2 million a day from stolen oil.
Budweiser trades Clydesdales for natural gas
The famous Clydesdales that have hauled Budweiser’s barrels of beer since the 19th century are finally being replaced by 21st century compressed natural gas-driven vehicles.
Well, it isn’t quite that simple. There’s been an 80-year interval between the 19th and 21st centuries, when Budweiser’s trucks ran on gasoline and diesel fuel. But for 66 trucks at Budweiser’s Houston brewery, the 53-foot trailers loaded with 50,000 pounds are now going to be hauled by trailers running on compressed natural gas.
Anheuser-Busch actually has plans to convert its entire fleet to natural gas, according to James Sembrot, senior transportation director. “It’s significant that A-B feels comfortable swapping for an entire fleet that runs on CNG,” Christopher Helman wrote in Forbes. According to Sembrot, “the intention of shifting to natgas…is to reduce carbon emissions and fuel costs, while doing something green(ish).”
“The Houston brewery is among the biggest of the 14 that A-B operates nationwide. The closest breweries to this one are in Fort Collins, Colo., and St. Louis. Each truck rolls virtually around the clock — traveling in an average of 140,000 miles in a single year hauling beer to wholesalers. They move 17 million barrels of beer each year.” That’s a lot of beer running on natural gas.
Actually, it’s not Anheuser-Busch that is taking the initiative on Budweiser. The natural gas vehicles are being made available through Ryder, the nation’s largest trucking company since merging with Budget Truck Rental in 2002. Budget now has 2,800 businesses and 132,000 trucks around the country. Although only a small percentage run on natural gas, the company is dedicated to converting its fleet with all due dispatch, and the savings may prove to be extraordinary. According to Helman, “Sembrot tells me that the old trucks were getting 6.2 miles per gallon of diesel and running 140,000 miles per year. That equates to 1.45 million gallons of diesel to go 9.2 million miles. At about $3.80 per gallon, that’s roughly $5.5 million in total diesel costs per year. If they save about 30 percent per ‘gallon equivalent’ when buying CNG, that’s a savings of about $1.65 million per year.” That’s a lot of money save for switching to natural gas.
But it’s not just Budweiser and Ryder and a few forward-looking companies that are pushing ahead with natural-gas vehicles. The whole state of Texas seems to have gotten the bug. The Lone Star State now has 106 CNG filling stations, the most in the country. Forty are them are open to the public, while the others are fleet vehicles where vehicles from Anheuser-Busch and Ryder can fill up. Actually, far ahead of these innovators are FedEx and UPS, which have not converted their fleets for many years. And hovering in the background is T. Boone Pickens and his “hydrogen highway,” which is installing huge natural gas depots at key truck stops along the Interstate system. Much of this is aimed at Texas and the first complete link has joined San Diego to Austin in a seamless string of stations that will allow tractor-trailers to make the whole trip on natural gas.
All this has done wonders for Texas tax collections. At the start of the year, the Texas Controller’ Office was anticipating revenues less than $ million from excise taxes. Yet by July 31, 2014, collections were 220 times of that anticipated, and the Texas Controller’s office had collected $2,178,199. “These collections are more than double the estimated amount,” said David Porter, Texas Railroad Commissioner. “At 15 cents per gallon equivalent, $2 of motor fuels tax equals sales of 14,521,326 gallon equivalents of natural gas.”
Texas may be famous for fracking and producing more oil than Iraq, but they do not hesitate to look for new uses for gas and oil as well.
Photo by by Paul Keleher from Mass, US.
Bring back Woodstock and passion, and bring on replacement fuels
The ‘60s and early ‘70s were exhilarating at times and depressing at other times. America seemed angry and divided about the Vietnam War, the struggle over civil rights and equal rights for women. Many of those who were against the war and supported civil rights for minorities and equal rights for women were passionate about their views and saw themselves as change agents in an America that they viewed as perfectible but not perfect. They debated, they marched, they shouted, they irritated, and they (at times) exceeded legal boundaries. Some even took personal risks by becoming Freedom Riders in the south. By the early ‘70s, they had made a positive difference. They had become legends in their own time, capped off by Woodstock — an exotic, culture-changing, music rebellion concert. America would never again be the same!
I ask myself why the effort to break up the oil industry’s monopoly at the gas pump has won intellectual interest among some, but not the passion and the emotion of the ‘60s. No one is riding in a vehicle column through the nation, stopping at gas stations to plead for an opportunity for consumers to choose among alternative or replacement fuels. No one is shouting en masse about the extensive environmental harm and economic loss caused by our reliance on gasoline. Very few are concerned with the widening income gap and increasing poverty in America. Where is the concern about the negative impact that gas prices have on the purchasing power of the poor?
Surprisingly, very few Americans seem worried that most of the wars we are fighting either overtly or covertly involve (to some degree) our or our allies’ dependence on oil and, sometimes, lead to our becoming allied with some unsavory folks. I keep remembering a relatively recent conversation I had with a special services soldier who quite clearly indicated that he and his colleagues believed the U.S. was in Iraq not because of the quest for democracy or freedom, but because of the West’s need for oil. He indicated that it was b.s. — all this talk about building democracy. Whether it’s Iraq, Syria, or Egypt, Americans themselves are having growing doubts about why we have been, are now, or might be in the future, involved in Middle Eastern wars. Many, if not most, hope that their kids are not the first in and the last out.
What is it going to take to stimulate the adrenaline of Americans when it comes to the oil industry’s ability to limit competition at the gas pump through price management, franchise agreements, and political muscle in Congress? I suspect the draft helped energize the public’s antipathy toward the Vietnam War, but for the most part, the anti-Vietnam movement secured the intense support of only a minority of Americans. Indeed, polls at the time indicated that both the women’s and the civil rights movements also had less than majority support. Yet, in all three instances, the overlapping minorities among the population wielded a big political voice, bigger than their numbers.
Why? I suspect media-savvy, bright, and committed leadership had much to do with it. Further, they were helped by the tragic assassinations of President Kennedy; his brother, U.S. Attorney General Robert Kennedy; and Martin Luther King, Jr. Growing public distrust of politicians caused by the gap between the facts on the ground and press releases concerning Vietnam increased the willingness of the American public to support the marchers. Polls began to shift on the war, civil rights, and equality for women. All three issues won increasing numbers and granted legitimacy to efforts to end the war and to assist the “have nots” and the “have less” among us. Given the federal budget authorizations and appropriations, an argument could be made that the halcyon days of the Great Society actually occurred during the first years of President Nixon. This is not heresy. Look at the budget details from 1965 through the early ‘70s.
Can we replicate the passion associated with the Vietnam War, civil rights and women’s rights movements and focus it on more democracy and freedom for consumers concerning choice of fuels? Probably not! The issues involved are difficult to grasp for the public. It is unlikely that families will sit down at the dinner table and stimulate conversation on the benefits and costs of replacement fuels or flex-fuel vehicles. Americans are not going to “March on Exxon” as they did on the Pentagon or gather at the National Mall in D.C. in the hundreds of thousands as they did for civil rights.
The term “silent majority” has been used without a hard and sustained predictable meaning in the last four or five decades. It’s a phrase that needs amplification and definition today. It could become the missing public change agent concerning replacement fuels. Coalition building among supportive pro-environmentalists, businesses, consumers, and anti-poverty groups could lead to the development of multitasked, innovative, and interactive national education program with a broad reach (e.g., town meetings, the newspaper and website articles, webinars, Twitter, movies, YouTube, etc.). Its success could convert a now-silent majority or near majority into a thoughtful, articulate majority focused on breaking up the monopoly at the pump. Success would be reflected in poll numbers supportive of federal, state, and local leaders who are willing to push for open fuel markets and increased FFVs. There would be a coalition of the willing; that is, an increasing number of Americans who would provide backbone to public policymakers who, in turn, would commit to challenging the oil companies’ understandable desire to sustain restricted fuel markets and the status quo favoring gasoline over environmentally better, safer, and cheaper replacement fuels. Their support would be conveyed through voting, and the use of innovative communication technology, rather than marching. The results would be illustrated by new, important, expanded democratically made choices by you and me, regarding fuel and vehicles — and maybe a new Woodstock composed of music celebrating America’s new freedoms. I didn’t go to the last one, but will go to the next one celebrating expanded choice for consumers, a healthier economy, and an improved environment.
Three ways that oil matters for the crisis in Iraq
For months now, Sunni militants from the Islamic State (better known as ISIS) have been seizing control of large swathes of Iraq. ISIS is now threatening a major oil-producing region of Iraq. But it wasn’t until they encroached into semi-autonomous Kurdish territory and near the Kurdish capital of Erbil — an oil boomtown full of Western companies like Chevron and ExxonMobil — that the Obama administration decided to authorize airstrikes against ISIS
A return to making love, not war – Iraq and replacement fuels
Early on I wrote a column about an unanticipated Thanksgiving dinner conversation with a special operations soldier who had served in Iraq. His comment, in response to a question I asked about whether he and his buddies knew why they were sent to Iraq, was brief and blunt: “oil and U.S. security.” He would have none of what he thought was b.s. about “freedom and democracy” or “weapons of mass destruction.” Before I asked the question I actually already knew what his answer would be, but a glass of wine, a wonderful piece of turkey and good company suggested that my inquiry would lead to an opening for a longer repartee on the Middle East and U.S. policy. It did, and again oil and oil politics were the dominant theme.
I suspect that many of the writers of today’s headlines and op-ed articles anticipated Republican Eric Cantor would win. They are now arguing, in sometimes misleading reference terms concerning democracy, inter-sectarian harmony and morality, for a more aggressive U.S. policy toward the invasion by Sunni radicals of parts of what once on a map called the nation of Iraq.
But the real issue for many “experts,” I again suspect, is oil — a fear, whether factual or not, that if Iraq collapses, the world oil supply (already close to equilibrium concerning demand and supply) will relatively quickly reflect shortages and much higher prices per barrel of oil ($150 a barrel) and oil’s product, gasoline ($5 and more).
Should we be sending kids to fight for our apparent God-given right to Middle Eastern oil? Although I think a lot about the ethics of public decision making, I am not an ethicist. But as long as there are alternatives to supply, my hard-nosed policy advice would be against war or the steps that might lead to war. Iraq has not been the noble state that welcomed America in to rescue it ostensibly from Saddam Hussein. Its form of democracy has been limited, corrupt and sectarian.
What should our calculations be, concerning alternative supplies of oil? First, we ought to really think through whether a full or partial shutdown of Iraqi oil wells will mean a damn. Iraq alone supplies a small share of U.S. oil imports. Most of the often-shrill economic coverage of the radical Sunni invasion and its potential impact on U.S. oil seems to relate more to perceptions, not empirical evidence, about shortages and prices. Commentators “perceive” what the oil markets might or will do — really what oil speculators and investors will or will not do — based on what is currently happening in Iraq, not on facts on the ground. Neil Cavuto of Fox Business said, “Oil is a commodity, a global commodity, and like any stock in almost any market, it often trades on issues having little to do with basic fundamentals, and more to do with simple fear.”
Assuming, however, there is a real worldwide shortage of oil as a result of a closure of Iraqi wells, or that fear drives the prices up so much that there is a strain to the economy, the Saudis, probably, among all the OPEC nations, are the only ones with sufficient oil in the ground to make an immediate difference concerning supply. But will they? They have shown some flexibility in the past to U.S. petitioning. They have also, at times, despite their security relationship to the U.S., turned us down. This time around the Saudis could well be more than a bit sensitive, particularly if it looks like the radical Sunnis might win. The Kingdom is vulnerable with respect to a radical brand of Sunniism. I bet they also fear a potential Shiite effort to push the radicals back, particularly one led by Iran. Life is never simple for the House of Saud.
Okay, where are we? Oil is sold in an international marketplace. No matter which side you are on regarding the Keystone XL pipeline, if approved and completed, it will not have a major impact on U.S. gas supply or prices. Ask your friendly oil refinery or oil company executive where he or she believes Keystone-supplied oil will be going. Most of the assumed supply will be traded internationally for the highest global price. The predicted increased supply of U.S.-produced gasoline will probably help diminish price increases slightly, but don’t make a bet on how much. Today, a price of a gallon of regular unleaded gasoline is well over $4 in California and U.S. production is at a very high level.
What would likely help keep gasoline prices from spiking significantly and, at the same time, lessen the amplitude of the cycles is a commitment to competition in the fuel marketplace. Let Adam Smith reign! Allow safe, cheaper, environmentally better replacement fuels, particularly natural gas-based ethanol (and someday soon, methanol) to compete with gasoline. Encourage the conversion of older vehicles to flex-fuel vehicles! Push for renewable fuels and related vehicles that appeal to a larger market than at present, given costs and design constraints! Reduce our dependence on imported oil! Make love, not war! Drive (excuse the pun) for strategic solutions!
A big flaring opportunity in North Dakota
Recently I wrote about how oil companies are flaring off $100 million worth of gas a month in the Bakken formation and what a huge waste or resources that represents.
Well, it didn’t take long for something to happen. A group of five law firms representing Bakken property owners sued 10 oil companies to end the practice. Their logic? It doesn’t involve environmental pollution or global warming. Instead, they’re arguing that the oil companies are depriving them of hundreds of millions in royalties by flaring off all that gas.
The case makes perfect sense. Gas is a valuable resource and the property owners are being deprived of huge amounts of money by wasting it. The case also avoids the complications that would come if the suit had been brought by the Sierra Club or Natural Resources Defense Council on environmental grounds. That would have involved all kinds of testimony about whether the flaring is really having an impact on the weather and what the level of damages might be. Instead, this is a straightforward case of dollars and cents. The property owners are being deprived of huge royalties. The oil companies have to compensate.
But beyond that, the lawsuit also offers a glittering opportunity to put methanol and its potential role in the transportation economy in the spotlight. So far, nobody’s talking about it much, but the conversion of natural gas into methanol could play a huge part in resolving this case.
The Bakken has developed so fast that the producers have not even been able to build oil pipelines into the area yet. Instead, the oil is being shipped by truck and rail. Burlington Northern has extended its lines into the region and most of the oil is now finding its way into major pipelines. As a result, Bakken production has leaped to 850,000 barrels a day, catapulting North Dakota into the number two position as an oil-producing state, behind Texas.
But the gas is a different thing. It can’t be stored in large quantities and pipelines are a long way from being extended and probably not worth it. Oil is now give times more valuable than gas at the wellhead, which gives drillers an enormous incentive to go after the oil and forget about the gas, hence the flaring. Thanks largely to North Dakota, we have moved into fifth place for flaring, behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. The amount of gas flared around the world equals 20% of U.S. consumption. When we’ve moved ahead of Hugo Chavez, it’s time to do something about it.
So far, the proposed solutions have involved compressing natural gas or synthesizing it into more complex liquids. “The industry is considering and adopting various plans to flare less gas, including using the gas as fuel for their rigs and compressing gas into tanks that can be transported by truck,” reports The New York Times. “A longer-range possibility would be the development of projects that could produce diesel out of gas at or near well sites.” Hess, which already has a network of pipelines in the area, is rushing to complete a processing plant at Tioga that will turn gas into diesel and other more complex fluids.
But a better solution would be portable, on-site processing plants that can convert methane to liquid methanol, a far simpler process. Gas Technologies, a Michigan company, has just developed a conversion device that sits on the back of a trailer and can be hauled from well to well. “We have a patented process that reduces capital costs up to 70%,” said CEO Walter Breidenstein. “If we’re using free flare gas, we can reduce the cost of producing methanol another 40-5%.” Other companies are working on similar technologies for converting natural gas to methanol on-site.
All this would help bring attention to the role that methanol could play in replacing oil in our transportation economy. California had 15,000 methanol cars on the road in 2000 and found drivers were extremely happy with them. Methanol also fits easily into our current infrastructure for gasoline. But California gave up on the project because gas supplies seemed to be dwindling and the price was too high. Now we are flaring off 25% of the nation’s consumption in one state and methanol could easily be produced for $1.50 a gallon. It’s time to re-evaluate.
Of course, Walter Breidenstein will probably find that flared gas will not be offered for free. Those Bakken property owners still want their royalties. But the North Dakota lawsuit proves a spur for on-site methanol conversion and great opportunity to highlight the role methanol could play in our transportation economy.
