We owe it to our veterans to work toward oil independence
This is the week we show our respect and gratitude to veterans for their service to our country. But that sentiment doesn’t have to be reserved just for Veterans Day.
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Could the Qatar clash push gasoline back above $4?
Could the Middle East’s dispute involving Qatar and several of its neighbors lead to higher prices at a pump near you? Absolutely. Read more →
U.S. answer to Mideast violence must include reducing oil dependence
Over the last month, the following incidents have taken place in the Middle East:
- On July 4, a car bomb exploded in a crowded market in Baghdad, killing nine people and injuring 24. Although no one took credit for the attack, suspicion fell on ISIS, which had been responsible for previous bombings in Baghdad. The incident was described as one of the deadliest in recent memory.
- On July 12, a series of car bombs and suicide attacks killed 35 people and injured more than 100, mainly in Shi’ite neighborhoods. In the deadliest attack in the northern Shaab neighborhood, a car bomb exploded and then a suicide bomber detonated another explosion once police and crowds had gathered at the scene of the first explosion. Once again, ISIS was believed to be responsible. The incident was described as the deadliest in recent memory.
- On July 18, a truck loaded with explosives was detonated in a busy Baghdad market, killing 120 and wounding 130. The explosion occurred while the local populace was celebrating the festival of Eid al-Fitr, which marks the end of the monthlong Ramadan holiday. The explosion destroyed 50 stores and 75 cars, and leveled two buildings. It was said to be the worst incident so far this year.
- A month earlier, terrorists struck in France, Tunisia and Kuwait on the same day, June 26. No one knows whether the events were coordinated or just occurred by coincidence. In Kuwait, an explosion at a Shi’ite mosque killed 25 worshippers and destroyed the mosque. In Tunisia on the same day, a lone gunman wielding an assault rifle killed 38 people, mostly tourists, on a public beach. ISIS claimed credit for both incidents, although it did not say they had been coordinated. In France, a lone terrorist made it past security at an American-owned chemical factory, set off a gas explosion, and then decapitated a company executive and posted his head on a gate next to two Muslim flags. At the beginning of the holy month, Abu Mohammed al-Adnani, a spokesman for ISIS, had exhorted his followers: “Muslims, embark and hasten toward jihad. O mujahedeen everywhere, rush and go to make Ramadan a month of disasters for the infidels.”
Many American think all this violence started with the U.S. invasion of Iraq in 2003. In fact, it’s been going on since the 7th century. The original argument began with the succession to Muhammad’s leadership when he died in 632 A.D. There were two claimants to his legacy. The first was the Umayyad Caliph, made up of the followers of Muhammad’s entourage in Medina and Baghdad. The second was Hussein, the grandson of Muhammad, who claimed to be his legitimate heir.
In 680, Caliph Muawiyah I of the Umayyad died and tried to pass his rule on to his son, Yazid, despite a written agreement with Hussein to honor his claim to the throne. Yazid demanded that Hussein acknowledge his rulership, and Hussein refused. Instead, he mounted an army and headed toward Baghdad, where Yazid was seated. During the march, however, Hussein’s supporters dwindled, and when he arrived at Karbala, about 50 miles south of Baghdad, he only had 75 followers left. There he was met by an army of 1,000 men sent forth from Baghdad by Yazid.
Hussein deliberated for a week before deciding once again to refuse Yazid’s leadership and join him in battle. By this time, Yazid’s army had swelled to 6,000. Hussein went to battle with about 75. Hussein’s army was slaughtered, and he was himself beheaded and his head sent to Baghdad. Hussein’s followers set up a rival caliphate in Medina, however, and the schism between the Sunni Umayyad Empire and the rival Shi’ites began and continues to this day.
The Shi’ia, who eventually established their dominion in Persia (Iran), still celebrate the holiday of Ashura, in which they flagellate themselves because they were not there to help Hussein at the Battle of Karbala. As one scholar has put it, the Shi’ia are “born martyrs.” Iran is the one country you can imagine starting a nuclear war, even if it meant nuclear suicide.
All this would be only of antiquarian interest if it were not that more than half the world’s oil comes from the Persian Gulf. And all that oil is continually riding on the chance that the two sides will not disrupt the flow of oil — or destroy whole oil fields — in their endless, ongoing battles. The stakes are only getting higher. Last week, ISIS rebels in the Sinai Peninsula claimed to have hit an Egyptian naval vessel with a guided missile offshore in the Mediterranean. How long will it be before rival factions are firing guided missiles at oil tankers sailing through the Strait of Hormuz?
It is impossible to choose sides in the Middle East. For instance, ever since the 9/11 attack, the United States has considered al-Qaeda to be its prime adversary in the world. Yet last week, Americans found themselves on the same side as al-Qaeda in backing Saudi Arabia’s efforts to expel the Shi’ite Houthi rebels from Yemen. Yet at the very same time, we were negotiating a nuclear agreement with Iran that is widely perceived as supporting the Shi’ite faction in the Middle East, in defiance of Sunni Saudi Arabia. The Saudis have said they may seek a nuclear weapon themselves if Iran is able to secure one. Imagine a nuclear-armed Iran and Saudi Arabia facing each other across the Persian Gulf while our oil tankers try to escape into the Indian Ocean.
The only reasonable strategy here is to reduce our dependence on Persian Gulf oil. We still import 20 percent of our oil from the Persian Gulf, with 13 percent coming from Saudi Arabia. This is down from over 30 percent a decade ago, but we can still go further. America’s amazing improvement in oil production has played a part, but we are still dependent on oil for 80 percent of our transport sector. Substituting other kinds of fuels to power our vehicles is the obvious answer.
The Middle East tinder box isn’t going to go away during our lifetime. The obvious solution is to disassociate ourselves as much as possible. Freeing ourselves from our dependence on oil for our transport sector is the first and foremost step forward.
What is Sykes-Picot, and why does it lead to dangerous oil dependence?
The Middle East is a mess. ISIS continues to be a very real threat to its neighbors and to the West. Yet only the United States seems pressured both internally and externally to put boots on the ground. Iraq’s boots appear to be shredded, rendering its troops incapable of fighting the good fight. The country’s Shiite leadership is unable or unwilling to forge strong ties with its moderate Sunni population and create a stronger military force.
Turkey, once considered seriously for European Union membership and a member of NATO, threatens to invade northern Syria and Iraq to protect its border — not from ISIS, but from the most effective U.S. ally in the area, the Kurds. Indeed, the Kurds in northern Iraq, now being armed by the U.S., are the only boots on the ground that appear to be able to go head-to-head against ISIS.
It gets even more bizarre: The U.S. and five other world powers appear close to making a deal to slow down Iran’s path to nuclear weapons. Iran hints at the possibility that if sanctions are ended, it could become a trusted ally of the U.S. and join it with troops in fighting ISIS (perhaps even a commitment to help end the Syrian debacle). The U.S., fearing Iran’s real aim is to gain power (hegemony) in the area, likely will turn down Iran’s offer. That decision, while understandable, would in turn increase pressure on the U.S. to send in troops to contain ISIS.
Let’s keep going. Israel and Saudi Arabia, not exactly friends, likely will oppose any concord between the U.S. and Iran, based on the March framework document, fearing that the negotiated trade-offs will hurt their long-term security. In this context, Israel, probably and understandably, prefers to have President Assad in Syria near its border on the Golan Heights than ISIS, despite the fact that Assad is also supported by Iran and Iran’s proxy, Hezbollah. While some in the White House apparently are ambivalent about the strategy, the U.S. has begun arming so-called moderate rebels in Syria, some of whom are aligned with al-Qaeda spin offs, to fight ISIS, knowing in advance that many of the groups will use the weapons to fight Assad. In this context, because Assad is against ISIS, the U.S. has seemed in recent months to have abandoned any meaningful effort to depose him.
Are you confused? Don’t go away yet! The U.S. alliance against ISIS includes countries that are not beacons of democracy, the rule of law, or freedom for all their people. But they do have oil, or the wealth to secure oil. Qatar, Bahrain, the Emirates, the Egyptians and the Saudis – our friends – have treated minorities and women as second-class citizens. All of them have archaic, sometimes cruel, justice systems. Charges have been made that some of them fund terrorism directly or through fundamentalist religious groups. They do not even meet the basic threshold of human rights standards.
Our Middle East allies also have illustrated unpredictable foreign policy commitments, sometimes inimical to U.S. interests and, in some, instability rests just below the surface.
U.S. policies at the present time are less than coherent. To begin to set a more strategic set of policies toward the Middle East, the nation needs to ask itself why it became so involved in the first place. Simplicity here is a virtue. Oil remains one common thread seeming to link most U.S. initiatives.
Let’s go back to early last century. History books will tell you that Britain and France, in 1916, secretly negotiated the Sykes-Picot Agreement. It carved up the Ottoman Empire into nation-states that purposely blunted the sectarian and nationalistic visions of the area’s residents. Britain’s and France’s efforts were driven to a large degree by a desire to capture and access oil reserves. Deals were cut with some pliant Arab leaders, and spheres of influence were established. Promises were made and soon forgotten. Tensions were always visible.
At the time, the U.S. was generally critical of Britain and France for drawing these boundaries. But the boundaries were agreed upon by the League of Nations.
Fast-forward to today: Historical, religious and nationalistic divisions within each nation, and between Middle Eastern nations, remain deep. They are often exacerbated by growing disappointment and anger, particularly among the young, concerning economic, social and civic opportunities that seem lost because of corruption and mismanagement. To the extent that oil is abundant, authoritarian regimes use oil money to buy peace among their populations and sometimes subsidize their neighbors to mute the possibilities of importing the Arab Spring.
Here, the U.S. is no stranger to Middle East skullduggery. Around the turn of the century, American oil companies began wheeling and dealing for desert land, presumed to be rich with oil. During and after World War II, the U.S. government made stability in the Middle East — and American need for Middle East oil and safe oil transit from Middle East nations to its allies and itself — a foreign policy priority, sometimes defined in terms of military action and government replacement. It wasn’t always pretty.
So what are we to do? I will leave the development of foreign policy to the White House and the U.S. State Department, except for one key element – dependency on oil. Oil is traded on a global market. Even if U.S. oil shale continues to expand and reduces our need for Middle East oil, U.S. oil will continue to be traded on the world markets. Oil producers and distributors are not eleemosynary. They are compelled by shareholders to make the largest dollar return possible. Even with oil now selling at a relatively low price, the U.S. still gets about 20 percent of its oil imports from the Middle East, and OPEC nations provide about one-third of our gross crude oil imports. If you add our total imports from the Middle East to the imports of our allies, imports from OPEC are much higher. I bet a red light goes off in the Pentagon whenever there are threats to oil shipping-areas like the Strait of Hormuz and the Persian Gulf.
President Obama has said that we need to wean ourselves off oil and its derivative, gasoline. It’s time we develop a national strategy to wean, and wean in a big way. Borrowing some words from The New York Times on another issue, “It has been said that America is a country that does the right thing, after trying everything else first.” Well, we really haven’t tried much weaning, only rhetoric. Maybe we can make a great leap forward (sorry, Mao) and reach an agreement on an alternative fuel strategy. Let’s increase the use of existing fuels like ethanol now and move to open competitive markets at fuel stations.
When ready for prime market time, let’s foster the sale of natural gas-based ethanol, a range of biofuels, electricity and hydrogen-based fuels. Using alternative fuels will reduce the negative impact of Sykes-Picot on the United States. It will also lower, if not eliminate, the need to engage in conflicts to assure the flow of oil. Nothing is perfect, but increased use of alternative fuels will not only be good for our military budget and take U.S. soldiers out of harm’s way, it will be good for the environment. It will reduce GHG emissions, and likely help expand the job market. May Sykes-Picot rest in peace! Peace!
(Map credit: Stars & Stripes)
Canada, oh Canada, will your tar-sands oil help or hurt US fuel objectives?
I just finished a recent Forbes article by Jude Clemente, “Canada is North America’s Great Oil Security Blanket.” Gosh, it’s good to know that Canada can supply 10 million barrels a day for the next 675 years. Just think of the biblical proportions of Canada’s reserves. Methuselah lived only 969 years! I feel safer already.
I am (fairly) comfortable that the French won’t take over Quebec and act out residual imperial desires and that the British won’t try to recapture their former colonies. So, sleep easy and leave a note in the morning to your children, their children and their children’s children, ad nauseam. Future generations of U.S. residents won’t have to worry about the definitions of peak oil or real oil shortages, and we will always have fossil fuel in our future. Our very valued friend to the north can and will produce whatever oil the U.S. requires for centuries.
Aren’t we lucky?! Our decedents will be able to depend on what the author calls “ethical Canadian oil.” Why? He argues that “Canada is a democracy and a free market sought by investors that desire less risk.” Wow…freedom to choose and capitalism; John Rawls and Adam Smith. I am crying with joy. But my emotional high lasts for only a few minutes.
Do we need to substitute Middle East imports for Canadian imports, even though Canada is a trusted ally? Are Canadian oil reserves a real, long-term, strategic benefit to the U.S. and are they ethical (a funny term used in the context of big oil’s historical behavior, speculation with respect to investment in oil and the perils of surface mining)? According to many analysts, oil from tar sands is among the most polluting and GHG emission causing oil in the ground. Aren’t you happy? In light of reserves, we can tether ourselves to fossil fuels for hundreds of years and a range of environmental problems, including, but not limited to, air pollution, landscape destruction, toxic water resulting from tailing ponds and excessive water use. Many scientists warn of increased rates of cancer and other diseases. While the tar sand industry, to its credit, has tried to limit the problems, according to the Scientific American article by David Biello, “tar sands may be among the least climate- [and health-] friendly oil produced at present.” By the way, conversion to gasoline will likely result in higher prices for the least advantaged among us, not exactly Rawlsian ethics.
We are in a difficult position, policy wise. Sure, we can establish long-term institutional relationships with Canada and its provinces that will assure U.S. on-demand access for Canadian oil sands. To do this would be comforting to vested interests and some leaders who still believe that oil is the key to America’s economic future. But business, academic, nonprofit, community as well as government leaders are increasingly searching for alternatives that will be better for the economy, the environment and national security. Weaning the U.S. off of oil, as the president has sought, will require, at least for the transportation sector, substituting a “drill, baby, drill” mentality for a strategy that includes increased use of alternative fuels, open fuel markets and flex-fuel vehicles.
Alternative fuels are not perfect, but for the most part, they are much better than gasoline in light of national energy and fuel objectives. Many replacement fuels, like natural gas and natural gas-based ethanol, cannot compete easily because of government regulations (e.g., RFS, etc.) and oil company efforts, despite large subsidies to limit their purchase by consumers (e.g., lobbying against open competitive markets, franchise agreements, price setting, etc.). Most alternatives appear to have sufficient reserves to provide the consumer with cheaper and better fuel than gasoline for a long time. For example, natural gas seems to have more than a proven 100-year supply, and that’s without further exploration.
The policy framework is easier to define than implement given America’s interest group politics. It would go something like this: As soon as they are ready for prime time and reflect competitive prices, design and miles per tank, increasing numbers of electric and perhaps hydrogen-fueled cars will appeal to a much wider band of U.S. consumers than they do now. The nation should support initiatives to improve marketability of both thorough research and development. Until then, the good or the better should not be frustrated by the perfect or an unreal idealization of the perfect. Please remember that even electric cars spew greenhouse gas emissions when they are powered by utilities that are fired up by coal, and that the most immediately available source of hydrogen-based fuel is natural gas. Currently, there are no defined predictable supply chains for hydrogen fuel. Perhaps, more important, neither electricity nor hydrogen fuel cells can be used in the 300,000,000 existing cars and their internal combustion engines.
So what’s a country to do, particularly one like the U.S., which is assumedly interested in reducing GHG emissions, protecting the environment, growing the economy and decreasing dependence on foreign oil? Paraphrasing, the poet Robert Frost, let’s take the road less traveled. Let’s develop and implement a strategic, alternative-fuels approach that incorporates expanding consumer choices regarding corn and natural gas-based ethanol, a range of bio fuels and more electric and hydrogen fuel cars. Let’s match alternative fuels with initiatives to increase Detroit’s production of new FFVs and the capacity (through software adjustments and conversion kits) for consumers to convert their existing cars to FFVs. To succeed, we should take a collective Alka-Seltzer and build a diverse strong fuels coalition that will encourage the U.S. to develop a comprehensive, alternative fuel strategy. The coalition, once formed, should place its bet on faith in the public interest and good analysis to gain citizen and congressional support. I bet the nation is ready for success — just remember how Linus of the famous Peanuts comic strip ultimately gave up his security blanket.
Photo Credit: http://priceofoil.org/
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
What does loving America have to do with the whims and opportunity costing of the oil industry?
The Greeks are going broke…slowly! The Russians are bipolar with respect to Ukraine! Rudy Giuliani has asked the columnist Ann Landers (she was once a distant relative of the author) about the meaning of love! President Obama, understandably, finds more pleasure in the holes on a golf course than the deep political holes he must jump over in governing, given the absence of bipartisanship.
But there is good news! Many ethanol producers and advocacy groups, with enough love for America to encompass this past Valentine’s Day and the next (and of course, with concern for profits), have acknowledged that a vibrant, vigorous, loving market for E85 is possible, if E85 costs are at least 20 percent below E10 (regular gasoline) — a percentage necessary to accommodate the fact that E10 gas gets more mileage per gallon than E85. Consumers may soon have a choice at more than a few pumps.
In recent years, the E85 supply chain has been able to come close, in many states, to a competitive cost differential with respect to E10. Indeed, in some states, particularly states with an abundance of corn (for now, ethanol’s principal feedstock), have come close to or exceeded market-based required price differentials. Current low gas prices resulting from the decline of oil costs per barrel have thrown price comparisons between E85 and E10 through a bit of a loop. But the likelihood is that oil and gasoline prices will rise over the next year or two because of cutbacks in the rate of growth of production, tension in the Middle East, growth of consumer demand and changes in currency value. Assuming supply and demand factors follow historical patterns and government policies concerning, the use of RNS credits and blending requirements regarding ethanol are not changed significantly, E85 should become more competitive on paper at least pricewise with gasoline.
Ah! But life is not always easy for diverse ethanol fuel providers — particularly those who yearn to increase production so E85 can go head-to-head with E10 gasoline. Maybe we can help them.
Psychiatrists, sociologists and poll purveyors have not yet subjected us to their profound articles concerning the possible effect of low gas prices on consumers, particularly low-income consumers. Maybe, just maybe, a first-time, large grass-roots consumer-based group composed of citizens who love America will arise from the good vibes and better household budgets caused by lower gas prices. Maybe, just maybe, they will ask continuous questions of their congresspersons, who also love America, querying why fuel prices have to return to the old gasoline-based normal. Similarly, aided by their friendly and smart economists, maybe, just maybe, they will be able to provide data and analysis to show that if alternative lower-cost based fuels compete on an even playing field with gasoline and substitute for gasoline in increasing amounts, fuel prices at the pump will likely reflect a new lower-cost based normal favorable to consumers. It’s time to recognize that weakening the oil industry’s monopolistic conditions now governing the fuel market would go a long way toward facilitating competition and lowering prices for both gasoline and alternative fuels. It, along with some certainty concerning the future of the renewable fuels program, would also stimulate investor interest in sorely needed new fuel stations that would facilitate easier consumer access to ethanol.
Who is for an effective Open Fuel Standard Program? People who love America! It’s the American way! Competition, not greed, is good! Given the oil industry’s ability to significantly influence, if not dominate, the fuel market, it isn’t fair (and maybe even legal) for oil companies to legally require franchisees to sell only their brand of gasoline at the pump or to put onerous requirements on the franchisees should they want to add an E85 pump or even an electric charger. It is also not right (or likely legal) for an oil company and or franchisee to put an arbitrarily high price on E85 in order to drive (excuse the pun) consumers to lower priced gasoline?
Although price is the key barrier, now affecting the competition between E85 and E10, it is not the only one. In this context, ethanol’s supply chain participants, including corn growers, and (hopefully soon) natural gas providers, need to review alternate, efficient and cost-effective ways to produce, blend, distribute and sell their product. More integration, cognizant of competitive price points and consistent with present laws and regulations, including environmental laws and regulations, is important.
The ethanol industry and its supporters have done only a fair to middling job of responding to the oil folks and their supporters who claim that E15 will hurt automobile engines and E85 may negatively affect newer FFVs and older internal combustion engines converted to FFVs. Further, their marketing programs and the marketing programs of flex-fuel advocates have not focused clearly on the benefits of ethanol beyond price. Ethanol is not a perfect fuel but, on most public policy scales, it is better than gasoline. It reflects environmental, economic and security benefits, such as reduced pollutants and GHG emissions, reduced dependency on foreign oil and increased job potential. They are worth touting in a well-thought-out, comprehensive marketing initiative, without the need to use hyperbole.
America and Americans have done well when monopolistic conditions in industrial sectors have lessened or have been ended by law or practice (e.g., food, airlines, communication, etc.). If you love America, don’t leave the transportation and fuel sector to the whims and opportunity costing of the oil industry.
The laws of gravity, gasoline and alternative replacement fuels
What goes up in the physical environment, generally (at least until recently), must come down, according to Newton’s law of universal gravitation and Einstein’s theory of relativity. But does what goes down often keep going down? No, not when it’s primary a financial market measurement and the indices reflect a company or companies with a reasonable profile and future.
What goes down in the marketplace often comes up again — not always, but maybe, sometimes — and with varying degrees of predictability? Don’t be confused! The variables often aren’t subject to the laws of physics. The phrase, “it depends,” is often used by purported financial analysts to explain stock, hedge fund and bond trends and their predictions. Indeed, a whole new industry of cable economic shouters has grown up to supposedly help us understand uncertainty. Generally, their misinterpreted brilliance shows after the fact (the markets close) and their weaknesses reflected in their attempts to predict and project trends accurately in the future.
Happily, the ongoing decline of oil and gas prices has been seen as generally good for the overall economy, stimulating consumer purchasing and investing. Regrettably, the decline is becoming a lodestone tied to the necks of an increasing numbers of workers and communities affected by layoffs in some shale oil areas where production has started to slow down and where some small drilling, as well as service firms, have either gone out of business or have pulled back significantly. Texas is suffering the most. The state is down 211 rigs, about 23 percent of its 906 total rigs. The decline in production is not uniform because newer wells drill far more efficiently than older ones. Overall, however, several major petroleum and oil field service companies in Texas have cut budgets and employees.
I surmise that the number of psychotherapists in the nation has increased in areas where investors in energy, particularly oil and gasoline stocks, hedge funds and derivatives ply their trade, hopes and dreams. Little wonder, after often intense coverage by some of the decline, the media’s coverage, by many newspapers and TV outlets, of the modest increase in the price per barrel of oil and the minuscule increase in the price of gasoline per gallon reads like a secular holiday greeting. Happy days are here again, at least for the oil industry and their colleagues!
But the skeptics have not been silent. This week’s headlines based on stories from many analysts read like a real downer, particularly if you were in the market. Listen, my children, and you shall hear little cheer to sustain yesterday’s investment optimism. For example, as one journalist put it, “Sorry, but the oil rout isn’t over yet,” or another, “Report: U.S. production growth could stop this year,” or a third, “Careful what you wish for: Oil-price recovery may sting.” It’s a puzzlement that only a Freudian therapist can address if you have enough money to pay him or her.
Fact: Very few analysts, even the best, can now honestly claim with certainty that they know where the price of oil and gas will be a year from now and beyond. And they are probably overwhelmed daily by their egos, by their practice of magic and by (a few in the groups) their seemingly habitual exaggeration and what feels at times like prevarication.
There likely will be frequent, short-term blips in the economics of oil and gas until non-market behavioral variables concerning what the Saudis will do or what the American oil companies will do about production to secure market share and other objectives are settled. Further, tension in the Middle East, if it escalates, may well disrupt oil supply while other global, as well as internal U.S. factors, could well affect the value of the dollar and convert it into significant price changes. America’s oil and gas investors, big or small, should probably learn to count to ten and take a month or two off in Sedona, Ariz. It’s really nice there.
Current uncertainty concerning the economics of oil and gas should not make consumers or policymakers lethargic. It’s not time to take Ambien. While I am not certain when or by how much, what has gone down will likely begin to go up, relatively soon.
Regrettably, the world is still dependent on fossil fuels and market, as well as broad economic, social and political conditions, should relatively soon, begin to boost prices. If we are serious about providing consumers with a better long-term deal regarding gas prices, reducing monopoly conditions created by government policies and oil companies should be granted priority. Ending government subsidies for oil in an era of budget deficits would be a good start.
Low gas prices have diminished investor and provider interest in developing alternative replacement fuels. But this is short term. Fuels, like E85, once gas prices begin to rise, will once again become very competitive and consumer friendly. Because the extended use of renewable fuels that satisfy broad market needs — from low-income to high-income households and from short to long trips — is still probably at least 5-10 years way, a national and local leadership commitment to alternative fuels is important if the nation and the communities in it are to meet environmental, economic and social welfare goals.
The policy and behavior issues relate to perfectibility, not perfection. Ethanol is not a perfect fuel. But it is better than gasoline — much better. Arguing for reliance now on electric cars or hydro fuels makes for easy rhetoric and receipt of awards at dinners, but the impact on the environment, for example, and GHG emissions will be long in coming in light of the small share electric vehicles will have for some time among older cars. Let’s push for renewables and facilitate an early choice for alternative replacement fuels including ethanol.
Image from jimdakers.com/2013/10/15/are-you-in-motion/
“Natural Gas: The Fracking Fallacy” — a debate over the recent article in Nature
T’was the week before Christmas, a night during Chanukah and a couple of weeks before Kwanzaa, when, all through the nation, many readers more interested in America’s energy supply than in the fate of Sony’s “The Interview,” were stirring before their non-polluting fireplaces (I wish). They were trying to grasp and relish the unique rhetorical battle between The University of Texas (UT), the EIA and the recent December article in Nature, titled “Natural Gas: The Fracking Fallacy,” by Mason Inman.
Let me summarize the written charges and counter charges between a respected journal, university and government agency concerning the article. It was unusual, at times personal and often seemingly impolite.
Unusual, since a high-ranking federal official in the EIA responded directly to the article in Nature, a well-thought of journal with an important audience, but relatively minimal circulation. His response was, assumedly, based on a still-unfinished study by a group of UT scholars going through an academic peer review process. The response was not genteel; indeed, it was quite rough and tough.
Clearly, the stakes were high, both in terms of ego and substance. As described in Nature, the emerging study was very critical of EIA forecasts of natural gas reserves. Assumedly EIA officials were afraid the article, which they believed contained multiple errors and could sully the agency’s reputation. On the other hand, if it was correct, the UT authors would be converted into courageous, 21st century versions of Diogenes, searching for energy truths. The article would win something like The Pulitzer, EIA would be reprimanded by Congress and the UT folks would secure a raise and become big money consultants to a scared oil and gas industry.
Just what did the Nature article say? Succinctly: The EIA has screwed up. Its forecasts over-estimate America’s natural gas reserves by a significant amount. It granted too much weight to the impact of fracking and not enough precision to its analysis of shale play areas as well as provide in-depth resolution and examination of the sub areas in major shale plays. Further, in a coup de grace, the author of the Nature piece apparently, based on his read of the UT study, faults the EIA for “requiring” or generally placing more wells in non-sweet-spot areas, therefore calculating more wells than will be developed by producers in light of high costs and relatively low yields. Succinctly, the EIA is much too optimistic about natural gas production through 2040. UT, according to Nature, suggests that growth will rise slowly until early in the next decade and then begin to decline afterwards through at least 2030 and probably beyond.
Neither Wall Street nor producers have reacted in a major way to the Nature article and the still (apparently) incomplete UT analysis. No jumping out of windows! No pulling out hairs! Whatever contraction is now being considered by the industry results from consideration of natural gas prices, the value of the dollar, consumer demand, the slow growth of the economy and surpluses.
Several so-called experts have responded to the study in the Journal piece. Tad Patzek, head of the UT Austin department of petroleum and geosystems, engineers and “a member of the team,” according to the Journal, indicated that the results are “bad news.” The push to extract shale gas quickly and export, given UT’s numbers, suggests that “we are setting ourselves up for a major fiasco.” Economist and Professor Paul Stevens from Chatham House, an international think tank, opines “if it begins to look as if it’s going to end in tears in the U.S., that would certainly have an impact on the enthusiasm (for exports) in different parts of the word.”
Now, generally, a bit over the top, provocative article in a journal like Nature commending someone else’s work would have the author of the article and UT principal investigators jumping with joy. The UT researchers would have visions of more grants and, if relevant, tenure at the University. The author would ask for possible long-term or permanent employment at Nature or, gosh, maybe even the NY Times. Alas, not to happen! The UT investigators joined with the EIA in rather angry, institutional and personal responses to the Journal. Both the EIA and UT accused Nature of intentionally “misconstruing data and “inaccurate…distorted reporting.”
Clearly, from the non-scholarly language, both institutions and their very senior involved personnel didn’t like the article or accompanying editorial in Nature. EIA’s Deputy Administrator said that the battle of forecasts between the EIA and UT, pictured in the Journal, was imagined and took both EIA’s and UT’s initiatives out of context. He went on to indicate that both EIA’s and UT efforts are complementary, and faulted Nature for not realizing that EIA’s work reflected national projections and UT’s only four plays. Importantly, the Deputy suggested that beyond area size and method of counting productivity, lots of other factors like well spacing, drilling costs, prices and shared infrastructure effect production. They were not mentioned as context or variables in the article.
The principal investigators from UT indicated that positing a conflict between the EIA and themselves was just wrong. “The EIA result is, in fact, one possible outcome of our model,” they said. The Journal author “misleads readers by suggesting faults in the EIA results without providing discussion on the importance of input assumptions and output scenarios. “Further, the EIA results were not forecasts but reference case projections. The author used the Texas study, knowing it was not yet finished, both as to design and peer review. Adding assumed insult to injury, it quoted a person from UT, Professor Patzek, more times than any other. Yet, he was only involved minimally in the study and he, according to the EIA, has been and is a supporter of peak oil concepts, thus subject to intellectual conflict of interests.
Nature, after receiving the criticism from UT and EIA, stood its ground. It asserted that it combined data and commentary from the study with interviews of UT personal associated with the study. It asked for but only received one scenario on gas plays by EIA — the reference case. It was not the sinner but the sinned against.
Wow! The public dialogue between UT, the EIA and Nature related to the article was intense and, as noted earlier, unusual in the rarefied academically and politically correct atmosphere of a university, a federal agency and a “scientific” journal. But, to the participants’ credit, their willingness to tough it out served to highlight the difficulty in making forecasts of shale gas reserves, in light of the multitude of land use, geotechnical, economic, environmental, community and market variables involved. While it is not necessary or easy to choose winners or losers in the dialogue, because of its “mince no words” character, it, hopefully, will permit the country, as a whole, to ultimately win and develop a methodology to estimate reserves in a strategic manner. This would be in the public interest as the nation and its private sector considers expanding the use of natural gas in transportation, converting remaining coal-fired utilities to environmentally more friendly gas-powered ones and relaxing rules regulating natural gas exports. We remain relying on guesstimates concerning both supply and demand projections. Not a good place to be in when the stakes are relatively high with respect to the health and well-being of the nation.
On a personal note, the author of the article in Nature blamed, in part, the EIA’s inadequate budget for what he suggested were the inadequacies of the EIA’s analysis. Surprise, given what the media has often reported as the budget imperialism of senior federal officials, the Deputy Administrator of EIA, in effect, said hell no, we had and have the funds needed to produce a solid set of analyses and numbers, and we did. Whether we agree with his judgments or not, I found his stance on his budget refreshing and counterintuitive.
Four new anticipated novels about the decline of oil and gas prices
“We are drowning in information but starved for knowledge,” said John Naisbitt, American author and public speaker. Because of this fact, intuition and instinct, rather than rational thinking, often guides leadership behavior. Guess right, based on what your intuitive self or instinct tells you concerning your iterative policy decisions — particularly the big ones — and the payoff for you and the nation may well be significant. Guess wrong, and the nation could be hurt in various ways and you might not be around for a long time, or get buried in an office close to a windowless washroom. Charles Lindblom, noted political scientist, probably said it correctly when he noted that in complex environments we often make policy by “muddling through.”
Confusion reigns and analyses are opaque and subject to quick amendment concerning the current, relatively rapid decline in oil and gasoline prices. Indeed, key government institutions such as the EIA (Energy Information Administration) and the IEA (International Energy Agency) appear to change their predictions of prices of both, almost on a daily basis. Oil and gas production, as well as price evaluations and predictions resulting from today’s imprecise methodologies and our inability to track cause-and-effect relationships, convert into intriguing fodder for novels. They do not often lend themselves to strategic policy direction on the part of both public and private sector. Sometimes, they do seem like the stuff of future novels, part fiction, and, perhaps, part facts.
Ah … the best potential novels on the decline of oil and gas, particularly ones based on foreign intrigue, will likely provide wonderful bedtime reading, even without the imputed sex and content of the old Harlequin book covers and story lines. Sometimes their plots will differ, allowing many hours of inspirational reading.
Here are some proposed titles and briefs on the general theme lines for four future novels:
An Unholy Alliance: The Saudis and Qatar have joined together in a new alliance of the willing, after secret conversations (likely in a room under a sand dune with air conditioning built by Halliburton, in an excavated shale play in the U.S., a secret U.S. spaceship, or Prince Bandar’s new jet). They have agreed to resist pressure from their colleagues in OPEC and keep both oil production and prices low. By doing so, they and their OPEC friends would negatively affect the Russian and Iranian economy and limit ISIS’s ability to convert oil into dollars. Why not? The Russians and the Shiite-dominated Iranians have supported Syria’s Assad and threated the stability of Iraq. Qatar and the Saudis support the moderate Syrian rebels (if we can find them) but not ISIS, and are afraid that Iran wants to develop hegemony over Iraq and the region, if they end up with the bomb. Further, ISIS, even though it’s against Assad, is not composed of the good kind of Sunnis, and has learned a bit from the Saudis about evil doings. If ISIS succeeds in enlarging the caliphate, it will threaten their kingdoms and the Middle East. According to a mole in the conversations, Russia was really thrown into the mix because, sometimes, it doesn’t hurt to show that you might be helping the West while paying attention to market share.
OPEC in Fantasy Land: Most OPEC members see U.S. oil under their bed at night and have recurring nightmares. “Why,” they asked, “can’t we go back to the future; the good old days when OPEC controlled or significantly influenced oil production and prices in the world?” Several members argued for a counter intuitive agreement.
Let’s surprise the world and go against our historical behavior. Let’s keep prices low, even drive them lower. It will be tough on some of us, whose budgets and economy depend on high oil prices per barrel, but perhaps our “partner” nations who have significant cash reserves, like my brothers (the hero of this novel started to say sisters, but just couldn’t do it) in the Kingdom, can help out.
Driving prices lower, agreed the Saudis, will increase our collective market share (really referring to Saudi Arabia), and may permanently mute any significant competition from countries such as Russia, Mexico, Iraq, Venezuela, and others. But, most importantly, it will probably undercut U.S. producers and lead to a cutback in U.S. production. After all, U.S. production costs are generally higher than ours. Although some delegates questioned comparative production cost numbers and the assumption that the U.S. and its consumer-driven politics will fold, the passion of the Saudis will win the day. OPEC will decide to continue at present production levels and become the Johnny Manziels of oil. Money, money, money? Conspiracy, conspiracy, conspiracy!
Blame it on the Big Guys: The U.S. will not escape from being labeled as the prime culprit in some upcoming novels on oil. The intuitive judgments will go something like this: Don’t believe what you hear! U.S. producers, particularly the big guys, while worried about the fall in oil and gas prices, on balance, believe both will have intermediate and long-term benefits. They have had it their way for a long time and intuitively see a rainbow around every tax subsidy corner.
Why? Are they mad? No? Their gut, again, tells them that what goes down must come up, and they are betting for a slow upward trend next on the following year. Meanwhile, technology has constrained drilling costs. Most feel they can weather the reduced prices per barrel and per gallon. But unlike the Saudis and other OPEC members, they are not under the literal gun to meet national budget estimates concerning revenue. Like the Saudis, however, with export flexibility in sight from Congress, many producers see future market share as a major benefit.
Split Dr. Jekyll and Mr. Hyde personalities exist among the U.S. producers. Jekyll, reflecting the dominant, intuitive feeling, supports low prices. The Saudis and OPEC can be beaten at their own game. We have more staying power and can, once and for all time, reduce the historic power of both concerning oil. While we are at it, big oil can help the government put economic and political pressure on Russia, Iran and ISIS, simultaneously. Wow, we may be able to get a grant, change our image, a Medal of Freedom and be included in sermons on weekends!
Hyde, who rarely shows up at the oil company table until duty calls, now joins the group. He offers what he believes is sage, intuitive advice. He is the oldest among the group and plays the “you’re too young to know card” a bit, much to the chagrin of his younger colleagues. He expresses some rosy instincts about the oil market but acknowledges the likelihood that the future is uncertain and, no matter what, price cycles will continue. He acknowledges that there might be a temporary reduction of the political pressure to open up the fuel markets and to develop alternative fuels because of present relatively low prices. However, based on talking to his muses — both liberals and free market conservatives — and reading the New York Times, he suggests that it might not be a bad idea to explore joining with the alternative fuel folks. Indeed, Hyde indicates that he favors adding alternative fuel production to the production menu of many oil companies. If this occurred, oil companies could hedge bets against future price gyrations and maybe even win back some public support in the process. The industry also might be able to articulate their overblown claim that the “drill, baby, drill” mantra will make the U.S. oil independent. (At this point, the background music in the room becomes quite romantic, and angelic figures appear!) Hyde doubt that going after global market share would bring significant or major early rewards because of current regulations concerning exports and may interfere with the health of the industry in the future as well as get in the way of the country’s still-evolving foreign policy objectives.
Tough sell, however! Contrary to Hyde’s desires, Jekyll carries the day and “kill the bastards” (assumedly the Saudis) becomes the marching orders or mantra. Let’s go get ‘em. Market share belongs to America. Let’s go see our favorite congressperson. We helped him or her get elected; now is the time for him or her to help us eliminate export barriers. A U.S. flag emerges in the future novel. Everyone stands. The oil groupies are in tears. Everybody is emotional. Even Hyde breaks down and, unabashedly, cries.
David and Goliath: Israel has also become a lead or almost lead character in many potential novels on oil. According to its story line, because of Israel’s need for certainty concerning U.S. defense commitments, it has convinced the “best in the west” to avoid a significant reduction in drilling for and the production of oil. Israel advises the U.S. to extend its security-related oil reserves! Glut and surplus are undefined terms. Compete with the Saudis. Drive the price of oil lower and weaken your and our enemies, particularly Iran and Russia. The U.S. should play a new and more intense oil market role. For some, an alliance among U.S.-Israel and other western nations to keep oil and gas prices low is not unimaginable and, indeed, seems quite possible. What better way to anesthetize Iran and Russia? Better than war! An Iran and a Russia unable to unload their oil at what it believes are prices sufficient to support their national budgets would be weakened nations, unable to sustain themselves and meet assumed dual objectives: defense and butter. Finally, what more “peaceful” way to deal with Hezbollah and Hamas, to some extent, than to cut off Iran’s ability to lend them support?
Each of the future novels summarized above clearly suggests some reality driven by what we know. But overall, each one has a multitude of equally intuitive critics with different facts, hypotheses, intuition and instincts. As indicated earlier, it is too bad we cannot generate better more stable analyses and predictions. For now, however, just realize how complex it is to rest policy as well as behavior on, many times, faulty projections and intuition or instinct. Borrowing a quote by the noted comic and philosopher, George Carlin, “tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.” Similarly, restating but changing and adding words, a quote from the Leonard Bernstein of science, Carl Sagan, that the nuclear arms race (if it does occurs in the Middle East) will be like many “sworn enemies waist-deep in gasoline,” the majority with many matches and one or two with only a few matches.
Novels and Alternative Fuels:
Where does this all leave us with respect to alternative fuels and open fuel markets? Too many producers and their think tank friends believe that low oil and gas prices will reduce the likelihood that alternative fuels will become a real challenge to them in the near future. They, instinctively, opine that investors, without patient money, will not risk funding the development of alternative fuels because prices of oil and gas are so low. Further, their “house” economists argue that consumers will be less prone to switch from gasoline to alternative replacement fuels in light of small or non-existent price differentials between the two.
The truth is that we just don’t know yet how the market for alternative fuels and its potential investors will respond in the short term to the oil and gas price crash. Similarly, we don’t know how long relatively low prices at the pump will last. We do know that necessity has been and, indeed, is now the mother (or father) of some very important U.S. innovations and investor cash. In this context, it is conceivable that some among the oil industry may well add alternative fuels to their portfolio to mute boom, almost boom and almost bust or bust periods that have affected the industry from time immemorial. Put another way, protecting the bottom line and sustaining predictable growth may well, in the future, mean investing in alternative fuels.
Low gas prices presently will likely be followed by higher prices. This is not a projection. History tells us this: importantly, lower gas prices now may well build a passionate coalition of consumers ready to, figuratively, march, if gas prices begin to significantly trend upward. The extra money available to consumers because “filling ‘er up” costs much less now, could well become part of household, political DNA. Keeping fuel prices in line for most consumers, long term, will require competition from alternative fuels — electricity, natural gas, natural gas-based ethanol, methanol, bio fuels, etc. Finally, while our better community-based selves may be dulled now by lower gas prices, most Americans will probably accept a better fuel mousetrap than gasoline because of their commitment to the long-term health and welfare of the nation. But the costs must be competitive with gasoline, and the benefits must be real concerning GHG reduction, an enhanced environment and less oil imports. My intuition and instincts (combined with numerous studies) tell me they will be! Happy Holidays!
