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Arctic Leaf

Life is becoming tough for oil companies and oil nations

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Wow. Over the last few days, the nation has seen the possibilities inherent in a transportation-related energy and environmental policy. No, Washington has not become more functional. It’s still a mess! Happily, Congress is out! (They weren’t doing much.) While they’re still being paid, we can at least turn down the thermostat in both the Senate and House Chambers. No new holidays have been created, and no new articles are being put in the Quarterly that cater to requests from constituents. Leaving town is consistent with one part of the Hippocratic Oath that guides doctors and at least vacations for congressman and women … do no harm!

The light in the energy-policy tunnel, or the canary in the policy mineshaft, results from the seeming collapse of the oil market. The price of Brent crude oil has fallen more than 20 percent since June, and on Friday it rose a little to $86.16 a barrel. The four-month drop in oil prices, caused mostly by an oil glut, falling demand and speculation related to both, likely will continue the recent trend toward lower gas prices at the pump, at least for the next few months. The U.S. average is now near $3.16 a gallon, reflecting a drop of about 15 percent since early summer.

The unseen hand of the marketplace — in this case, the actually relatively transparent hand of the marketplace — may provide a substitute for Congressional inaction concerning the presently complicated and sometimes weak policies that ostensibly protect sensitive global and U.S. land and water from harm. At $82 a barrel, oil producers and their investor colleagues have little incentive to invest heavily in tight shale oil. It just costs too much to get to and take out of the ground (or water). If the negative “opportunity costing” concerning decisions about future exploration and rig development become tougher, folks concerned with the environmental well-being of the Arctic Circle and the Monterrey Shale, etc. may end up smiling. They will see less drilling, fewer rigs, less GHG emissions and less non-GHG pollutants!

Apart from environmental benefits, falling oil prices will cause not-so-friendly and even sometimes-friendly Middle East nations to make difficult choices. They are reflected in the current dialogue within OPEC. Should OPEC and its member states sanction the production of more oil and contribute to the global surplus or lessen oil production targets to secure higher prices?

Both decisions, once made, have high risks. Raising prices by lowering production could lead to less market share and ultimately less revenue. Keeping prices low (and lower if the surplus continues to grow and demand continues to fall) could also mean less revenue and an earlier arrival of the time when production costs are near to, or exceed, returns for hard-to-get-at oil. Some Middle Eastern nations may not have a choice. Easy-to-drill oil is becoming increasingly hard to find, even in the once-productive oil-rich desert, and production costs are increasing, as they are around the world. It will be difficult to keep prices low. Yet if countries raise prices, they lose market share. Perhaps another compelling fact of life that Middle Eastern nations must look at is the increase in domestic needs brought about by the Arab Spring and the yearning for a better life among their citizens. Indeed, in this context, both lower prices and higher prices may limit their competitive abilities and result in declining revenue for national budgets. It will present them with a conundrum. Translated into political realities, countries in the Middle East may have less to spend on social welfare programs, exacerbating tension that already exists in the Middle East.

Low prices for oil, resulting from market variables, could well also provide another important international impact: Russia, already hit by sanctions, faces increased budget constraints because of the fall in oil prices. According to The Wall Street Journal, “Economists say falling oil prices could kill off Russia’s flagging economic growth, forecast at no more than 0.5% this year.” Apparently, some Russian economists see $90 as their economic tipping point.

Short-term projections of U.S. oil production suggest a continued (but more modest) decline of oil imports and dependency. But will U.S. oil surpluses and lower costs transfer into oil independence? No! The oil industry is pushing hard for, and is likely to secure, an increased capacity to expand crude oil exports from the federal government. However, trafficking in oil is, and will remain, a two-way street. Price, as well as profits, will be the determining variable. Imports now contribute about one-third of the oil used in the country. The number will hover around 30 percent at least for the near future.

Who knows? We might wake up one morning to find out from public television that we are selling oil to the oil-needy Chinese, while still buying it from countries in the Middle East and maybe even Russia.

There is another possible scenario (we cannot say probable yet) at least to consider in thinking about oil’s future. Because of the likelihood of increasing economic tension between objectives related to drilling for hard-to-get-at oil and its cost, we may go to sleep one night in the not-too-distant future, after hearing again on public television (of course) that oil companies are moving in a big way into the replacement fuel business and lessening their focus on oil. Assets will be sold and bought, followed by media attention suggesting that a major structural shift is occurring in the oil industry. Let’s anticipate what oil CEOs might say: “It’s tough to make the balance sheets work. Drilling for tight oil, really most of the oil left, is just too damn expensive in light of the uncertainty of prices and demand. While still only a small percentage of the overall fuel market, replacement fuels, including natural gas-based ethanol and renewable fuels, seem to be catching on. Detroit, our earlier partner in crime (not literally, of course) in restricting consumer choices to gasoline, hasn’t helped either, recently. It is producing more and more flex-fuel vehicles. Besides continuing to make money, we would like to get off the most disliked industry lists in America.”

Stranger things have happened!

Fuel Freedom Staff

NYT: Some Saudis say kingdom needs to cut production

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The New York Times has an instructive story about the tenuous situation Saudi Arabia is in as oil-producing nations deal with the sudden, precipitous drop in global crude prices. The kingdom so far seems to be willing to ride out the price drop. But other influencers inside and outside the country say it needs to cut production to prop up prices.

“This week, the billionaire investor Prince Alwaleed bin Talal released an open letter to the Saudi oil minister, Ali al-Naimi, criticizing him for saying that lower oil prices were no cause for alarm,” the story says. “In the letter, Prince Alwaleed called the price drop a ‘catastrophe that cannot go unmentioned’ and suggested it could harm the kingdom’s budget.”

(Photo: Saudi oil minister Ali al-Naimi. Credit: Shutterstock)

Arctic Leaf

A return to making love, not war – Iraq and replacement fuels

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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!

Arctic Leaf

Japan bets big on hydrogen fuel cells

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Remember when Japan’s Ministry of Economy, Trade and Industry (METI) used to sit atop the Japanese industrial complex, steering it like some giant Godzilla hovering over the entire world?

Those were the days when Japan’s government-industry partnership was supposed to represent the future, when Michael Crichton wrote a novel about how Japan would soon devour America, when pundits and scholars were warning that we had better do the same if we hoped to survive – before, that is, the whole thing collapsed and Japan went into a 20-year funk from which it has never really recovered.

Well those days may be returning in one small part as METI prepares to direct at least half the Japanese auto industry into the production of hydrogen-powered fuel-cell cars.

“Japanese Government Bets the Farm on Fuel Cell Vehicles” ran one headline earlier this month and indeed there’s plenty at stake for everyone. The tip-off came at the end of May when Jim Lentz, CEO of Toyota’s North American operations, told Automotive News that electric vehicles are only “short-range vehicles that take you that extra mile…But for long-range travel, we feel there are better alternatives, such as hybrids and plug-in hybrids, and, tomorrow, fuel cells.” The target here, of course, is Tesla, where Elon Musk appears to be making the first inroads against gasoline-powered vehicles with his $35,000 Model E, aimed at the average car buyer. Toyota was originally in on that deal and was scheduled to supply the batteries until it pulled out this spring, ceding the job to Panasonic.

But all that was only a preview of what was to come. In early June, METI announced it would orchestrate a government-private initiative to help Toyota and Honda market fuel-cell vehicles in Japan and then across the globe. Of course that leaves out the other half of Japan’s auto industry, Nissan and Mitsubishi, pursuing their version of the EV, but maybe the Japanese are learning to hedge their bets.

The hydrogen initiative will put the fuel-cell vehicle front-and-center in the race to transition to other forms of propulsion and reduce the world’s dependence on OPEC oil. Actually, hydrogen cars have been in the offering for more than twenty years. In the 1990s soft-energy guru Amory Lovins put forth his Hypercar, a carbon-fiber vehicle powered by hydrogen fuel cells. In 2005, California Gov. Arnold Schwarzenegger inaugurated the “Hydrogen Highway,” a proposed network of hydrogen filling stations that was supposed to blanket the Golden State. Unfortunately, only ten have been built so far, and there are still no more than a handful of FCVs (hydrogen fuel cell vehicles) on the road. Mercedes, BMW, Audi and VW all have small lines but none are marketed very aggressively in the United States.

This time, however, there may be a serious breakthrough. After all, Toyota, Honda and METI are not just in the business of putting out press releases. Toyota will begin production of its first mass-market model in December and Honda will follow with a 5-passenger sedan next year. Prices will start in the stratosphere — close to $100,000 — but both companies are hoping to bring them down to $30,000 by the 2020s. Meanwhile, GM is making noises about a fuel-cell model in 2016 and South Korea’s Hyundai is already unloading its hydrogen-powered Tucson on the docks of California.

What will METI’s role be? The supervising government ministry promises to relax safety standards, allowing on-board storage of hydrogen at 825 atmospheres instead of the current 750. This will increase the car’s range by 20 percent and bring it into the 350-mile territory of the internal combustion engine. Like the ICE, hydrogen cars can “gas up” in minutes, giving them a huge leg up on EVs, which can take anywhere from 20 minutes with superchargers to eight hours with household plugs. METI has also promised to loosen import controls so that foreign manufacturers such as Mercedes-Benz can find their way into Japan. And, of course, it will seek reciprocal agreements so Toyota and Honda can market their models across the globe.

So will the one-two punch of government-and-industry-working-together be able to break the ice for hydrogen vehicles? California seems to be a particularly ripe market. Toyota is already the best-selling car in the state and the California Energy Commission is promising to expand the Hydrogen Highway to 70 stations by 2016. Still, there will be stiff competition from Elon Musk if and when his proposed Gigafactory starts turning out batteries by the millions. Partisans of EVs and fuel-cell vehicles are already taking sides.

In the end, however, the most likely winners will be consumers who will now have a legitimate choice between hydrogen vehicles and EVs. It may be a decade or more before either of these technologies makes a significant dent in our oil consumption, but in the end it will be foreign oil providers that will be feeling the pain.

Arctic Leaf

Making the Case for Mars and Methanol

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Robert Zubrin is one of those oddball geniuses who prowl around the peripheries of important national issues making suggestions that may seem completely off the wall but on closer inspection are revealed to have penetrating insight.

I first came across him a couple of years ago while writing about space exploration. Zubrin is perhaps the world’s leading advocate of manned trips to Mars. He’s written five books about making the trip to Mars, including How to Live on Mars (2008), which detailed how to establish a permanent colony on the red plant. None of this is going to happen soon, of course, and even though Zubrin is a highly trained aerospace engineer, it’s easy enough to dismiss him as a fatuous dreamer.

Except for one thing: he has also become the most knowledgeable and well versed advocate of substituting methanol from natural gas for imported oil as a way of breaking the back of OPEC.

Zubrin actually wrote his first highly informed book on the subject – Energy Victory – in 2008, before the fracking revolution began producing prodigious amounts of natural gas. At the time he was suggesting we use our abundant coal resources as the feedstock. Now that George Mitchell’s revolution has pumped up gas production to 24 times the level of 2007, the case is even stronger.

Zubrin has just published a 5,700-word article in the current issue of New Atlantis. I won’t do more than summarize it here, but I would recommend tying it up in a bow and giving it to everyone you know as a Valentine’s Day present. Zubrin wraps up all the major arguments for methanol and even manages to illuminate some obscure details about the Environmental Protection Agency’s policy toward methanol that eluded some of us for some time. Here are his major talking points:

  • OPEC still essentially controls the world price of oil. Even though non-OPEC production has increased 60 percent since 1973, 60 percent of the oil traded around the world is exported from OPEC countries and 80 percent commercially viable reserves are still owned by OPEC members. The price of oil is still set in the Persian Gulf.
  • This oligopolistic control has a huge impact on the American economy. Ten of the last 11 postwar recessions were preceded by sharp increases in oil prices. The recent upsurge in shale oil production won’t help much. The Energy Information Administration expects it to level off after 2016. By 2040 we will still be importing 32 percent of our oil.
  • Methanol made from natural gas is the only commodity that can realistically replace oil. “Methanol is not some futuristic dream touted by researchers seeking funding,” writes Zubrin. “Rather, it is an established chemical commodity, with a global annual production capacity of almost 33 billion gallons. It has recently been selling for around $1.50 a gallon.” Methanol’s energy content is only about 60 percent of gasoline, but the bottom line is that “pure methanol can get a car 30 percent farther down the road than a dollar of gasoline.”
  • Methanol has numerous environmental advantages. In fact, when California put 15,000 methanol cars on the road in the 1990s, it was for air pollution purposes, rather than cutting imports or reducing prices to motorists. Methanol burns cleaner, produces virtually no particulate matter or smog components, has none of gasoline’s carcinogenic aromatic compounds and reduces carbon emissions.  On pollution grounds alone, it would be worth making the transformation.

So why don’t we do it?  As Peter Drucker always said, in order to replace a well established technology, an upstart replacement must be 10 times as efficient to clear the institutional barriers. That’s a tall order. But as Zubrin details, there are some specifics that stand out:

  • In terms of sheer market capitalization, the oil industry far surpasses the auto industry. Thus, even though the auto industry might benefit from opening up to new fuels, the oil companies’ interest in maintaining the status quo overwhelms them. Zubrin documents how institutional investors that own large shares of the auto companies are even more heavily invested in oil. Several OPEC sovereign wealth funds also own huge slices of the auto companies. The Qatar Investment Authority owns 17 percent of Volkswagen, which has the highest auto company revenues in the world.  Its vice chairman sits on Volkswagen’s board.
  • The Environmental Protection Agency, through overregulatory zeal, has somehow ended up as one of the major impediments to methanol conversion, even though there would be vast environmental benefits. Although older cars can easily be converted to run on methanol at a cost of less than $200, the EPA no longer permits it. “Since 2002, the only way for a vehicle modification to be deemed lawful is if it receives certification ahead of time from the EPA or the California air-quality board. . . In 2009, the EPA specified massive fines that it may level against any individual or business that modifies a vehicles without advance certification, even if there is clear and compelling proof that no emissions increase had resulted, or even been risked, by such changes. In fact, even the use of unapproved engine parts identical to the certified brands would be considered an emissions violation . . . These fines are set at thousands of dollars for individuals and hundreds of thousands, or even millions, for manufacturers. For example, if a mechanic running his own small business converting cars to flex-fuel in his garage modified just a dozen cars, he would face a crippling fine of more than $105,000.”

In 2011 on National Review Online, Zubrin offered to bet anyone $10,000 he could modify his 2007 Chevy Cobalt (apparently in violation of EPA regulations) to run on 100 percent methanol and get 24 miles per gallon. He did it by replacing the fuel pump seal with a 41-cents replacement made from a synthetic rubber that resists methanol erosion. He also had to adjust the ignition timing for methanol’s higher octane. He would have won the bet but no one took him up.

As a way of moving the ball forward, Zubrin advocates the Open Fuel Standard Act, which has been sitting around in Congress since 2008. The present version would clear up some of the EPA’s restrictions and require at least 30 percent of each carmaker’s new vehicles be flex-fuel by 2016, moving up to 50 percent by 2107. The modification would only add about $200 to the price of the car.

Zubrin is one of those American treasures, an independent thinker operating outside the world of “policymaking” who dares think differently and big. His ideas for colonizing Mars may never get off the drawing boards.  But his proposal for substituting methanol as a domestic alternative to imported oil certainly deserves the greatest attention.

Arctic Leaf

What Happened to Saudization? Bipolar Fuel Projections!

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Just a few short months ago, newspapers, led by the WSJ, trumpeted, many on their front pages, the Saudization of America and the end of America’s and OECD’s reliance on Middle East oil. Do you remember?   Well maybe you don’t have to– at least after 2025. The IEA’s World Energy Outlook for 2013, published Nov 12, indicates that the “Middle East, the only large source of low-cost oil, remains at the center of the longer-term oil outlook.” Within about 10 years or so, it will provide the largest share of the world’s expanded oil supply.

I realize the fragility of projections and have in the past criticized the IEA and the EIA and other makers of global energy projections. At times, projection makers are more artists than scientists. The good artists, sometimes, come close to what actually happens. The not so good ones either get lucky or appear to mute their “over or under” reality numbers. They either provide ranges, permitting them to say they were right in the future, or they complain, perhaps over a good bottle of wine, about the complexity of the variables.

I believe it is important to read the IEA report because it lends a bit of skepticism to the idea that America and its friends are entering the golden era of energy abundance. Indeed, The New York Times on Nov 13 ran the IEA story under the headline, “Shale’s Effect on Oil Supply Is Forecast to Be Brief.”

Here is what the IEA said in their Executive Summary:

“The role of OPEC countries in quenching the world’s thirst for oil is reduced temporarily over the next 10 years by rising output from the U.S., from oil sands in Canada, from deep water production in Brazil and from natural gas liquids from all around the world.  However, by mid-2020, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall national oil companies and their host governments control some 80 percent of the world’s proven-plus-probable oil reserves.”

America’s likely surplus combined with a slowdown in the increase of demand will not affect costs of oil and gasoline in a major way.  Escalating demand for both will be reflected in Asia and will place a floor under prices. America’s oil companies function in a global market and are not governed to a great extent by the laws of supply and demand in this country.  They will sell to the highest bidder worldwide.

IEA indicates that “the need to compensate for declining output from existing oil fields is the major driver for upstream oil investment to 2035…conventional crude output from existing fields is set to fall by more than 40 mb/d by 2035.Of the 790 billion barrels of total production required to meet our projections for demand to 2035, more than half is needed just to offset declining production. According to the NY Times, IEA conclusions are generally shared by the EIA; that is, today’s rapid oil production from shale will continue for a relatively short time and then slow rapidly. IEA indicated the slowdown will occur in the mid-twenties, EIA by the late teens.

IEA’s and EIA’s analysis should not generate a bipolar response or create a need for a regimen of pills to cure projection related manic depression. It’s only a projection. Take a deep breath and count to ten.  Next year it will likely change because of “complex variables ” including but not limited to changing world demand, Middle East tension, new technology and the use of alternative fuels.

Until we get better at projection, let’s applaud IEA and EIA’s professionals.  At a minimum, they are honestly and artistically responding to lots of unknowns.  Paraphrasing the comedian Ilka Chase (and changing a word or two) projectionist’s minds are cleaner because they change them so often…

Just kidding!

Their efforts should at least reinforce the need to think through transportation fuel strategies and act with all reasonable speed on what I would consider, at least, low hanging fruit. For example, a coordinated campaign by the public, nonprofit and private sector to encourage the federal government to approve methanol as a fuel would be a good first step.  Federal acquiescence, if combined with simultaneous certification of low cost kits to convert existing vehicles to flex fuel cars could provide the framework for an effective transitional fuel strategy.

It, likely, will take from five to ten years before electric and or hydrogen powered vehicles will be able to reach the budgets and driving needs of most low, and moderate income Americans.  Even when renewable fuel powered new vehicles reach a mass market, the technology will not be able to change the gasoline dependent older vehicles. In this context, alternative transitional fuels could, with the addition of an increased number of conveniently located fuel stations and stimulated by new demand, offer competition to oil company restricted gas-only stations and consumers a choice of fuels.  America would be better off economically and environmentally.  Consumers would secure a more predictable, probably lower price for fuel at competitive pumps and charging stations.  The nation would be less dependent on imported oil.

Arctic Leaf

It’s not the oil we import that makes us vulnerable, it’s the price

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The United States Energy Security Council has written a brilliant report explaining why neither increased production nor improved conservation will solve our oil problems or free us from dependence on world events.

The Council numbers 32 luminaries from across the political spectrum, including such diverse figures as former National Security Advisors Hon. Robert McFarlane and Hon. William P. Clark, former Secretary of State Hon. George P. Shultz, Gen. Wesley Clark, T. Boone Pickens and former Sen. Gary Hart. The study, “Fuel Choice for American Prosperity,” was published this month.

The report wades right in, pointing out that even though our domestic production has increased and imports are declining, we are still paying as much or more for imported oil than we did in the past. The report states, “Since 2003 United States domestic oil production has risen sharply to the point the International Energy Agency projects that the United States is well on the way to surpassing Saudi Arabia and Russia as the world’s top oil producer by 2017. Additionally fuel efficiency of cars and truck is at an all-time high. As a result of these efforts, U.S. imports of petroleum and its products declined to under 36% of America’s consumption down from some 60% in 2005.”

Good news, right? Well, unfortunately not so fast. The report adds, “None of this has had any noticeable downward pressure on global oil prices. Over the past decade the price of crude quadrupled; the value of America’s foreign oil expenditures doubled and the share of oil imports in the overall trade deficit grew from one third to about 5%. Most importantly, the price of a gallon of regular gasoline has doubled. Despite the slowdown in demand, in 2012 American motorists paid more for fuel than in any other year before.”

How can it be that all this wonderful effort at improving production still has not made a dent in what Americans pay to fill up their cars? The problem, the study says, is that OPEC still has enough monopolistic market leverage to keep the price of oil where it wants. “While non-OPEC supply has been increasing and while the world economy is growing by leaps and bounds, OPEC, which holds some three quarters of the world’s economically recoverable oil reserves and has the lowest per barrel discovery and lifting costs in the world, has failed to increase its production capacity on par with the rise in global demand. Over the past four decades, world GDP grew fourteen-fold; the number of cars quadrupled,; global crude consumption doubled. Yet OPEC today produces about 30 million barrels of oil a day (MBD) – the same as it produced forty years ago.”

This means that even though we’re doing very well in ramping up supply and reducing demand, the overall distribution of reserves around the world still weighs so heavily against us that we’re basically spinning our wheels as far as what we pay for oil is concerned. The Council sums it up succinctly: “What the U.S. imports from the Persian Gulf is the price of oil much more so than the black liquid itself.”

So, what can we do? The Council says we have to change our thinking and come up with an altogether new approach: “If we are to achieve true energy security and insulate ourselves from countries that whether by design or by inertia effectively use oil as a economic weapon against us and our allies, America must adopt a new paradigm – one that places oil in competition with other energy commodities in the sector from which its strategic importance stems: the transportation fuel market.”

In other words, quite simply, we have to find something else to run our cars. “Although this may appear to be a daunting task, our country — and the globe — is abundant in energy resources that are cost-competitive with petroleum.”

In fact, there are numerous alternatives available. We have natural gas that can be used in a variety of ways, we have biofuels and we have electricity; all of which exist in abundant supply. What prevents us from using many of these alternatives is a regulatory regime and political inertia that prevents them from being employed. “Cutting into oil’s transportation fuel dominance has only been a peripheral political objective over the past forty years with inconsistent support or anemic funding from one Administration to the next. Competing technologies and fuels to the internal combustion engine and to gasoline and diesel have often been viewed as political pet projects by the opposing party. . . . What we must do is relatively simple: level the playing field and end the decades-old regulatory advantage that petroleum fuels have enjoyed in the transportation fuel market. By pursuing a free market-oriented policy that has as its primary objective a competitive market in which fuels made from various energy commodities can be arbitraged against petroleum fuels, the United States can lead the world in placing the best price damper of them all – competition – on oil.”

The Council is particularly critical of the “multiplier” system that has allowed the Environmental Protection Agency to become the arbiter of which alternative vehicles win favorable regulatory approval. The Corporate Average Fuel Efficiency (CAFE) standards have now been set so high — 54.5 mpg by 2025 — that no one realistically expects them to be achieved. But automakers can win “multipliers” by manufacturing alternative-fuel vehicles that are counted as more than one car, thus lowering the fleet average. The value of this multiplier, however, is determined solely by the EPA.

But as the study points out, the EPA has a conflicting mandate. On the one hand, it is supposed to be cutting gasoline consumption but on the other it is concerned with cutting pollution and carbon emissions. (Just why the EPA and not the Department of Energy is administering the CAFE program is a question worth asking.) So the EPA tends to favor cars that do not necessarily improve energy consumption, but cut emissions. Thus, it awards a two times multiplier to electric vehicles and fuel cell cars by only 1.3 times for plug-in hybrids and compressed natural gas. Meanwhile, flex-fuel vehicles, which could do most for reducing oil consumption, get no multiplier at all.

The Energy Security Council has many other good recommendations to make as well. I’ll deal with them at length in a later column. But for now, the takeaway is this: Greater production and improved efficiency will only get us so far. The real key to lowering gas prices and freeing ourselves from foreign dependence is to develop alternatives to the gasoline-powered engine.

Arctic Leaf

And that’s the way it is or isn’t — stable oil and gas markets

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“And that’s the way it is” was used by my favorite news anchor, Walter Cronkite, to sign off on his highly respected network news show. And that’s the way the content he generally delivered generally was — clear, factual, helpful. I have tried to apply Cronkitism to today’s media analyses and commentary on oil production and oil prices. The new assumed “way it is” regrettably sometimes seems like the way the journalist or his boss — whether print, TV or cable — wants it to be or hopes it will be. Frequently, partial sets of facts are marshaled to ostensibly determine clear cause and effect relationships but end up confusing issues and generating questions as to the author or speakers mastery of content and conclusions.

What’s a Cronkitist to do? I often look to The New York Times for the wisdom grail. Generally, it works. But, I must confess that a recent piece in the Times by outstanding journalist, Clifford Kraus, titled “Is Stability the New Normal?” Oct. 9 bothered me. I found its thesis that a new stability has arrived with respect to oil prices and by implication gas prices at the pump a bit too simple.

The author indicates that “predictions about oil and gas prices are precarious when there are so many political and security hazards. But it is likely that the world has already entered a period of relatively predictable crude prices…there are reasons to believe the inevitable tensions in oil-producing countries will be manageable over at least the next few years, because the world now has sturdier shock absorbers than at any time over at least the past decade.”

What are these absorbers? First, more oil production in the U.S., Canada, Iraq and Saudi Arabia, to balance the loss of exports from countries like Iran, Libya and, I assume, Venezuela and possibly Nigeria. Second, the continued spread of oil shale development throughout the world, including many non-Middle East or OPEC countries. Third, increased auto efficiency, conservation and lower demand for gas in the U.S. Finally, near the end of the article and not really seemingly central to the author’s stability argument natural gas becomes in part a hypothetical “if.” He notes that American demand for gasoline could drop below a half a billion barrels a day from already below peak consumption, if natural cheap gas replaces more oil as a transportation fuel. (At least he mentioned natural gas as a transportation fuel. Most media reports fail to tie natural gas to transportation) break open the champagne! Nirvana is near! Michael Lynch, a senior official at Strategic Energy & Economic Research Inc., is quoted in the article, saying, “Stable oil prices could reduce future inflation rates and particularly curb transportation costs, helping to steady prices of food and construction materials that travel long distances…Lower inflation can also help reduce interest rates. By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment and thus economic growth.”

In the words of Oscar Hammerstein II, I want to be a cockeyed optimist…but something tells me to be at least a bit wary of a too-good-to-be-true scenario, one premised on a historically new relatively high price of oil per barrel (bbl.), just under $100 (the price is now about $105) and gas prices likely only modestly lower than they are now (the U.S. average is close to $3.50 a gallon)

So why be wary and worry?

1. The Times accepts the rapid significant growth in oil shale development and production too easily. Maybe they are right! Perhaps the oil shale train has left the station. But the growth of environmental opposition, particularly opposition to fracking, will likely slow it down until regulations perceived as reasonable by the industry and environmentalists are put in the books. Further, the often very early large expectations with respect to new pools of oil in places like the Monterey Shale, featured in media releases, have not panned out after later sophisticated analyses. Finally, the price of hard to get at oil may come in so high as to limit producer enthusiasm for new drilling.

2. The Times correctly suggests that the relationship between oil prices and gasoline costs may be less than thought conventionally. Lower oil costs in the U.S. do not necessarily trigger lower gasoline costs, and higher gasoline costs are not necessarily the result of higher oil costs per barrel

The Times credits the recent visible break in the relationship primarily to an abundance of oil linked to oil shale production in the U.S. and in many other countries and to falling demand for oil throughout the world, including China, to the lack of economic growth and higher efficiency of vehicles.

It’s more complicated. For example, price setting is affected in a major way by speculation in the financial community, and by oil producers and refiners who govern production and distribution availability. Respected analysts and political leaders suggest that companies base their decisions concerning price at least in part on market and profit assumptions. Fair. But, oil’s major derivative gasoline does not function in a free market, rather, it is a market controlled by oil companies. There is little competition from alternative fuels. Unfair and inefficient.

3. The quest for oil independence and the related justification for drilling lead the media to suggest and the public to believe that there is an equivalency between increased production of oil and closing the gap between what we consume and produce as a nation. Yes, we have reduced the gap — both demands have fallen and production has increased. But it is still around 6.0 to 6.5 million barrels per day. Yet, we continue to export nearly half of what we produce every day or nearly 4 million barrels. Our good friends, China and Venezuela, get 4% and 3% respectively. Companies may sing “God Bless America” while extracting, refining, exporting and importing oil, but theologically based patriotism doesn’t govern the oil market. Sorry, but global prices and profits have precedence. Remember the adage — “the business of business is business.”

4. A recently released Fuel Freedom Foundation paper suggests that energy independence is a misnomer. Based on its review of EIA data and projections through 2035, negative energy balances exist that never drop below a $300 billion deficit. If EIA data is to be believed, energy independence, Saudi America and control of our energy future are developments that will not occur anytime soon.

I am disappointed that natural gas as an alternative fuel seems more like an afterthought coming at the end of Kraus’s long piece. I am glad the author mentioned it but it seems at least a bit forced. The commentary was limited to natural gas and not its derivatives, ethanol and methanol, or, for that matter, other alternative fuels. Put another way, it seemed to assume a still very restricted fuel market. Opening up consumer choices at the pump is a key factor in stabilizing oil and gas markets. It also is a key factor achieving reduced prices at the pump for low and moderate income families; the former spending from 14-17% of their limited income on gasoline.