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Oil is cheap, so why is gasoline sky-high in some places?

Even with a surge the past two days, oil prices have been on the downward slide the past 14 months, dropping from about $115 a barrel to around $40. But that hasn’t translated to savings at the pump for all drivers.

In some areas of the United States, gas prices have remained stubbornly flat during the oil plunge, or have inexplicably risen. Fuel Freedom Policy Manager Gal Sitty has put together this informative graph that tracks the price of oil (an amalgam of Brent crude, the international benchmark, and West Texas Intermediate, the U.S. standard) compared with the average price of gasoline in three big states: California, New York and Ohio.

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Experts have no shortage of explanations for these anomalies. They usually sound like this: Something-refineries-inaudible. Cue Charlie Brown’s teacher talking wah-wah speak.

It’s true that a unit at the BP refinery in Whiting, Indiana, one of the largest refineries in the Midwest, is back online after breaking down Aug. 8. Media outlets report that gas prices in the region already have begun falling again, but they’re sure not doing so as quickly as they shot up. And it doesn’t explain that gentle slope of a line for New York above.

In California, where gas prices pushed toward $5 in July after a sudden, insufficiently explained shortage, prices remain high, purportedly owing to the Exxon Mobil refinery in Torrance still being below capacity six months after a fire. As Sue Carpenter, automotive writer at the Orange County Register, explains:

Crude oil typically accounts for just 46 percent of the cost of a gallon of gasoline, according to U.S. Energy Information Administration. Taxes account for 16 percent, 13 percent is marketing and distribution, and 25 percent is refining.

In California, though, crude oil is just 34 percent of the cost of a gallon of gas, and refining is 35 percent, according to the California Energy Commission.

Still, it’s curious that just as California motorists were getting hammered, oil refineries weren’t sharing the pain: Refineries in the state collected $1.61 per gallon in July, the highest since the state began keeping records in 1999.

It’s clear that there isn’t enough refinery capacity in the U.S. (Raise your hand if you’d like one built in your back yard. There are people in Whiting who still remember what happened there 70 years and a day ago.) But even if refinery disruptions are partially to blame, it’s only further evidence that we’re too beholden to a volatile global oil market, and we’re dependent on an aging, infrastructure for refining.

The only way to make the fuel pricing structure sustainably affordable is to introduce fuel choice so gasoline has to compete with cheaper, cleaner alternatives like ethanol and methanol.

Until that happens, wild price swings and supply disruptions will be the norm in America.

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methanol car

Why aren’t we using methanol?

The more you look at the contemporary scene with gasoline and imported oil, the more you have to wonder why we’re not switching some of our fuel needs to methanol.

Look at what’s happening: Oil has become so plentiful that we’re reverting to the old situation of the 1950s, when the big concern among oil people was that some new discovery was going to be made in some far corner of the world and there would be a new “glut” that would cause the bottom to fall out of the market. It was during this era that we placed a 20 percent cap on our oil imports. The concern was that there was so much cheap oil in the world that the American oil industry would be decimated.

All that changed in 1970 when American production finally leveled off — right about the time geoscientist M. King Hubbert had predicted “Hubbert’s Peak” would occur. The import ban proved easy to circumvent, and before we knew, it we were importing 36 percent of our oil, most of it from the Persian Gulf. OPEC, first convened in Baghdad by Saddam Hussein in 1960, suddenly became more than a debating society and realized it had real market leverage. Instead of begging the oil companies for higher royalties, the OPEC nations suddenly realized they could raise their price and even withhold supplies. The era of the Energy Crisis had begun.

Congress did all the wrong things in responding. It extended President Nixon’s price controls on one commodity, oil, creating a domestic shortage — too much consumption, not enough production. We made up for this by importing more oil, in which the price controls didn’t apply. While President Carter mandated a “moral equivalent of war” and wore cardigan sweaters, the price controls had the exact opposite effect: Our imports swelled from 36 percent to 50 percent in 1980, and we were sitting ducks when the outbreak of the Iran-Iraq War suddenly cut short supplies. The result was the Second Gas Shortage.

President Reagan put an end to all this by striking down the oil-price controls his first week in office. Drillers went wild in Texas, and the Saudis flooded the market in trying to maintain market share. Soon prices had collapsed back to 1972 levels, and the “oil shortage” was pretty much forgotten.

Meanwhile, similar developments were taking place in natural gas. This commodity had been subject to federal price controls since the 1930s. Basically, it was an attempt by the Northern consuming states to rob Texas and Louisiana of their natural resources. In 1977 we actually experienced a “natural gas shortage” that caused factories and schools all over the North to close down in mid-winter, while Texas and Louisiana were burning natural gas for electricity — then considered horribly wasteful — because the price controls did not apply intrastate. This “crisis” was solved more slowly as natural-gas price controls were not phased out until 1988. Once again, supplies gushed forth. (We did learn a lesson. Nobody has talked about price controls on oil and natural gas since.)

Even with the market freely operating, however, the natural supplies of both oil and natural gas seemed to be diminishing, so that by 2005 we were running short of gas and back to importing more than half our oil. Then George Mitchell’s fracking revolution began. Suddenly, America was the world’s leading producer and oil and gas were once again in abundance.

Yet as far as freeing ourselves from further dependence on foreign oil, the results have been disappointing. Even though we are again producing 10 million barrels of oil a day, we are still dependent on imports for 30 percent of our oil, about one-quarter of this from the Persian Gulf. Low prices have stimulated consumption. People are going back to buying bigger cars and our gasoline use is hitting new records. Sales of electric cars and other alternative vehicles have nearly collapsed. Whatever impulse there is toward conservation is highly dependent on price.

Anything that requires a new infrastructure — electric cars, hydrogen vehicles, compressed natural gas and propane — will have trouble getting beyond a niche market. It’s simply too troublesome and expensive to get people to convert. But corn ethanol and methanol both slot easily into our current system of gas pumps and can compete.

The trouble with corn ethanol is that we are rapidly exhausting the potential supplies. We now use 40 percent of the corn crop to replace 3 percent of our gasoline. Cellulosic ethanol may expand supplies, but it is still basically experimental.

That leaves one fuel that could potentially replace vast amounts of our imported oil — methanol made from natural gas. We have enough natural gas supplies from fracking to make this a game-changer.

The great irony is that China sees this opportunity and is already seizing it. The Chinese are busy constructing two huge methanol conversion plants in Texas and Louisiana in order to take advantage of the abundant supplies coming out of the region. The Chinese have a million methanol cars on the road and will be carrying these supplies back to China to power their growing transport sector.

Yet the EPA continues to refuse to allow methanol to be used in car engines, mainly because of the reputation earned as a poisonous “wood alcohol” during Prohibition.

As Anne Korin of the Institute for the Analysis of Global Security once said: “I think methanol fares poorly in Washington precisely because it doesn’t need any subsidies or government assistance in making it economical. For that reason you have no big constituency behind it and no member of Congress crusading on its behalf.” The entire farm belt is working to support ethanol, but there is no “methanol state” or corresponding congressman working in its favor. For that reason it languishes.

For almost 50 years the Indianapolis 500 cars have run on methanol. Yet it is still forbidden in our commercial transport sector. Isn’t it time that somebody considered the general good and started crusading on behalf of methanol?

(Photo by Vivid Racing, posted to Flickr)

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science

Help us drop some more knowledge on America

Fuel Freedom Foundation has a lot of irons in the fire. Sure, we spread the word about the benefits of fuel choice on our witty, informative social-media channels, our awesome 2014 movie PUMP (Jason Bateman! OMG!!), and our exhaustively comprehensive but hugely entertaining website.

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The 2009 Chevy Malibu, being tested at our Colorado lab.

But we’ve also been busy testing a car in Colorado in an effort to prove to the EPA that it’s possible to convert a gasoline-only car to run on E85 ethanol blend, with only an update to the vehicle’s on-board computer.

We also underwrite research at major universities and think tanks on a variety of issues related to our overall goal of creating fuel choice at the pump. For instance, Prof. James D. Hamilton at the University of California at San Diego wrote a paper showing that 10 of the last U.S. recessions since World War II were preceded by a spike in oil prices. He added that “there is a significant likelihood of repeating that experience within the next 5 years.” Um, that paper was written in 2012, y’all.

Showing that car conversions are feasible is a crucial goal, because millions of American cars might be eligible. There are about 17 million flex-fuel vehicles on the road, capable of running on any mixture of ethanol and gasoline. Millions of other FFV “twins” are around, built at the factory to run on E85 but just needing the software to be optimized to do so. And as Miles Light, an economist at the University of Colorado’s Leeds School of Business, wrote in a paper:

46.9 million conventional fuel vehicles can potentially be converted for $150–$250 each. In all, this represents 77.75 million light duty vehicles, or 31.8% of the national light duty fleet, that would potentially purchase natural gas liquid fuel, if prices were attractive.

Ethanol isn’t the only alcohol fuel that could help us reduce our dependence on oil. A forthcoming study by the MIT Energy Initiative says methanol can improve engine efficiency. An early version of the study states:

Higher engine performance (mostly described in terms of efficiency in this report) can be achieved by intrinsic properties of the fuels, as described above, with no changes to the operation of the vehicle. Or it can be obtained by using different software in the computer, adjusting the parameters (such as spark timing and valve timing), which requires re-calibration of the engine.

Fuel Freedom can’t make fuel choice happen without you. Sign up on our Take Action page to join the fight and receive updates on our progress. And if you’re so inclined, you can donate to our cause so we can keep going with our research and car-testing initiatives.

Americans deserve to drive for less!

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