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Religion, structural changes in the oil Industry and the price of oil and gasoline

Oil barrelAmericans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!

But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?

If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.

Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.

Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.

Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.

Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!

10 reasons why falling oil prices is good for the U.S. and replacement fuels

While they might not make the Late Show with David Letterman, here are ten reasons why the fall in oil and gas prices, if it is sustained for a while, is, on balance, good for the U.S. and replacement fuels.

  1. U.S. consumers are getting a price break. While the numbers differ by researchers, most indicate that on average they have saved near $80 billion. According to The Wall Street Journal, every one cent drop in gasoline adds approximately a billion dollars to nationwide household consumption.
  2. Low- and moderate-income households will have extra money for basic goods and services, including housing, health care and transportation to work.
  3. Increased consumer spending will be good for the economy and overall job growth. Because of the slowdown in production and the loss of jobs in the oil shale areas and Alaska, the net positive impact on GNP will be relatively small, higher at first as consumers make larger purchases, and then lower as oil field economic declines are reflected in GNP.
  4. Low prices for oil and gas will impede drilling in tight oil areas and give the nation time to develop much-needed regulations to protect environmentally sensitive areas. Oil is now under $80 a barrel. The price is getting close to the cost of drilling. Comments from producers and oil experts seem to suggest that $70-75 per barrel would begin to generate negative risk analyses.
  5. Low prices for oil and gas will make it tough on Russia to avoid the impact of U.S. and EU sanctions. Russia needs to export oil and gas to secure revenue to meet budget constraints. Its drilling and distribution costs will remain higher than current low global and U.S. prices.
  6. Low prices of oil and gas will reduce U.S. need to import oil and help improve U.S. balance of payments. Imports now are about 30 percent of oil used in the nation.
  7. Low prices of oil and gas will further reduce dependence on Middle East oil and enhance U.S. security as well as reduce the need to rely on military intervention. While the Saudis and allies in OPEC may try to undercut the price of oil per barrel in the U.S., it is not likely that they can sustain a lower cost and meet domestic budget needs.
  8. Low prices of oil and gas will create tension within OPEC. Some nations desiring to improve market share may desire to keep oil prices low to sustain market share, others may want to increase prices and production to sustain, if not increase, revenue.
  9. Low prices of oil and gas will spur growth in developing economies.
  10. Low prices for oil and gas will likely secure oil company interests in alternative fuels. It may also compel coalitions of environmentalists and others concerned with emissions and other pollutants to push for open fuel markets and natural gas based ethanol, methanol and cellulosic-based fuels as well as a range of renewable fuels.

We haven’t reached fuel Nirvana. The differential between gasoline and corn-based E85 has lessened in most areas of the nation and now appears less than the 20-23 percent needed to get consumers to think about switching to alternative fuels like E85. But cheaper replacement fuels appear on the horizon (e.g., natural gas-based ethanol) and competition in the supply chain likely will reduce their prices. Significantly, in terms of alternative replacement fuels, oil and gas prices are likely to increase relatively soon, because of: continuing tensions in the Middle East, a change of heart on the part of the Saudis concerning maintaining low prices, the increased cost of drilling for tight oil and slow improvements in the U.S. economy resulting in increased demand. The recent decline in hybrid, plug-in and electric car sales in the U.S. follows historical patterns. Cheap gas or perceived cheap gas causes some Americans to switch to larger vehicles (e.g., SUVs) and, understandably, for some, to temporarily forget environmental objectives. But, paraphrasing and editing Gov. Schwarzenegger’s admonition or warning in one of his films, unfortunately high gas prices “will be back…” and early responders to the decline of gasoline prices may end up with hard-to-sell, older, gas-guzzling dinosaurs — unless, of course, they are flex-fuel vehicles.

It’s the oil price and cost, baby

I began what turned out to be a highly ranked leadership program for public officials at the University of Colorado in the early ’80s, as dean of the Graduate School of Public Affairs. I did the same for private-sector folks when I moved to Irvine, Calif., to run a leadership program involving Israeli startup CEOs for the Merage Foundations. Despite the different profiles of participants, one of the compelling themes that seemed pervasive to both — for- profits in Israel and governments everywhere — was and remains building the capacity of leaders to give brief, focused oral presentations or elevator pitches (or, as one presenter once said, “how to seduce someone between the first and fifth floor”). A seduction lesson in oil economics in a thousand words or three minutes’ reading time!

Now that I got your attention! Sex always does it! During the last few days, I read some straightforward, short, informative articles on oil company and environmentalist group perceptions concerning the relationship between the price of oil per barrel and the cost of drilling. Their respective pieces could be converted into simple written or oral elevator pitches that provided strategic background information to the public and political leaders — information often not found in the news media — press, television, cable and social media — concerning oil company or environmentalist decision-making.

This is good news. Most of the academic and, until recently, media coverage of the decline of oil and gasoline prices generally focuses on the dollar or percentage drop in the price of oil and gasoline from a precise date … 3 months, 6 months, a year, many years ago, etc. And, at least by implication in many of its stories, writers assume decision-making is premised on uniform costs of drilling.

But recently, several brief articles in The Wall Street Journal, MarketWatch, OilPrice.com, etc., made it clear that the cost of drilling is not uniform. For example, there is a large variation internal to some countries depending on location and geography and an often larger variation between and among oil-producing nations. Oil hovers around $80 a barrel now, but the cost of drilling varies considerably. In Saudi Arabia, it is $30 per barrel or less on average; in the Arctic, $78; in Canada’s oil sands $74; and in the U.S, $62.

If you’re responsible for an oil company or oil nation budget, a positive cash flow and a profit, you are likely to be concerned by increasingly unfavorable opportunity cost concerning costs of drilling and returns per barrel. In light of current and possibly even lower prices, both companies and nations might begin to think about the following options: cutting back on production and waiting out the decline, pushing to expand oil exports by lowering costs in the hopes of getting a better than domestic price and/or higher market share, lessening your investment in oil and moving toward a more balanced portfolio by producing alternative fuels. If you believe the present price decline is temporary, and that technology will improve drilling cost/price per barrel ratios, you might consider continuing to explore developing wells.

Up to now, the Saudis have acted somewhat counterintuitively. They have created dual prices. Overall, they have sustained relatively high levels of production. For America, they have lowered prices to hold onto or build market share and undercut prices related to U.S. oil shale. For Asia, they have increased prices, hoping that demand, primarily from China and India, and solid production levels in the Kingdom, will not result in a visible drop in market share.

However, the Saudis know that oil revenue has to meet budget needs, including social welfare requirements resulting in part from the Arab Spring. How long they can hold onto lower prices is, in part, an internal political and budget issue, since oil provides a disproportionate share of the country’s public revenue. But, unlike the U.S. and many other nations, where drilling for tight oil is expensive, the Saudis have favorable ratio between production costs and the price of oil. Again, remember the cost of production in the U.S., on average, is about 100 percent above what it is in Saudi Arabia and some other OPEC nations. Deserts may not provide a “wow” place for all Middle East residents or some tourists looking for a place to relax and admire diverse landscapes, but, at the present time, they provide a source of relatively cheap oil. Further, they permit OPEC and the Saudis to play a more important global role in setting prices of oil and its derivative gasoline than their population numbers and their nonoil resources would predict. Lowering prices and keeping production relatively high in the Middle East is probably good for the world’s consumers. But as environmentalists have noted , both could slow oil shale development in the U.S. and with it the slowdown of fracking. Both could also interest oil companies in development of alternative fuels.

Oil-rich nations in the Middle East and OPEC, which control production, will soon think about whether to lower production to sustain revenues. In the next few months, I suspect they will decide to risk losing market share and increase per barrel oil prices. U.S policy and programs should be recalibrated to end the nation’s and West’s often metabolic response to what the Saudis do or what OPEC does. Support for alternative replacement fuels is warranted and will reduce consumer costs over the long haul and help the environment. It will also decrease America’s dependence on Middle East oil and reduce the need to “think” war as a necessary option when developing America’s foreign policy concerning the Middle East.

BusinessWeek: Oil prices might have further to fall

A story in BusinessWeek highlights a Goldman Sachs report from this week hinting that U.S. drillers might want to let up a bit, in the face of still-plummeting worldwide prices.

The shale boom in the U.S. isn’t likely to pull back until oil gets so cheap that people can’t make money drilling for it. There are a lot of estimates of the break-even price for U.S. shale producers. Some think it’s around $80 a barrel, others think it’s closer to $60, and it’s obviously not going to be the same for everyone. The number changes depending on where you’re drilling and how good you are.

NYT: Some Saudis say kingdom needs to cut production

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)

Ruminations on oil donations, foreign nations and replacement fuels

The “Old Gray Lady,” The New York Times, did it again….its recent article indicating the extent of government funds from foreign countries supporting so-called independent think tanks and universities in the U.S. was enlightening and was also clearly in the public interest. Most of us policy wonks suspected or knew what the Times indicated on September 7. “More than a dozen prominent Washington research groups have received tens of millions of dollars from foreign governments in recent years while pushing United States government officials to adopt policies that often reflect the donors’ priorities…” The money is transforming the once-staid, think-tank world into a muscular arm of foreign government’s lobbying in Washington. And it has set off troubling questions about intellectual freedom — some scholars say they have been pressured to reach conclusions friendly to the government that is financing the research.” In this context, NATO, European, Middle East and Asian nations (e.g., Norway, Germany, Qatar, Saudi Arabia, United Arab Emirates, Japan, etc.) have been visible funders according to the Times and other media..

Before readers become holier than thou about the perception of perversion in foreign governments that link their support to what they want done regarding research and lobbying (implicit, if not explicit), they should know that the grant system in the U.S., in general, is not free of, at times, donor efforts to influence and/or sometimes pressure, whether it involves foreign governments, all levels of government in the U.S, business or foundation grants. Both have been and will remain the way of doing business.

I suspect attempts to influence or pressure research institutions or scholars are sometimes worse in social science research than in the sciences or engineering, where data, analysis and results can often claim at least some visible and quantifiable correlation or causation relationships. A donor’s ideological commitments also may predetermine and lessen the need for donors to try to negotiate the outcomes of grants or gifts. Not many liberal academics will apply for research money from the Koch Family Foundations, not many conservatives will likely go to the George Soros Open Society Foundations (OSF) for money.

Life is complicated for donors and recipients. Free speech and the free flow of ideas are embedded in the U.S. creed and the nation’s constitution. Truth in advertising in research grants and their products, a mythological spin-off, is often muted by the overwhelming influence and importance of money and the need for it, in light of fund shortages. However, the American public, for the most part, cannot easily separate the respected status of the Brookings Institution, the University of California, the Center For Global Development, the Center for Strategic and International Studies, etc. from their willingness to accept what seem clearly donor advocacy grants and subsequently to participate in what appears, to many, to be advocacy research and lobbying. The involved leaders, not always the researchers, of recipient institutions will deny the fact that research money sometimes comes with a price concerning legal, moral and often spoken words in grantor testimonials or contracts concerning obligations to search for the truth and increase wisdom concerning policy and program options.

Oil and oil-related companies and Middle Eastern nations seem now to be among the biggest givers and perhaps receive the biggest “take back” benefits. They fund schools and centers as well as analyses in and at major universities and independent think tanks, both within and outside universities. They have also funded “independent” scholars, chairs and specific RFPs (Request for Proposals) describing general and sometimes relatively specific areas of energy or transportation and fuel-related research. Significant oil and foreign money for policy-related research is also funded through third-party groups, which often mask the source of donations. Donors, understandably, expect benefits from supported research — at least consistency with and, in some cases, advocacy for their economic, social welfare and environmental objectives.

Perhaps one of the more egregious relationships concerning policy or program research involved the Coordinating Research Council (CRC), generally a mouthpiece of and also funded by the oil and automotive industry. Its relatively recent study debunking of E15 reflected the views of their sponsors — again the oil and auto industries. It indicated that E15 significantly harmed engines of many vehicle classes. The study was legitimately criticized by the EPA and others concerning methodology and content. Indeed, it and its implications concerning use of E15, was refuted in part or whole by the EPA’s more extensive analyses, by the National Renewable Energy Laboratory (NREL) and by other respected groups and individuals, some even associated with the auto industry. CRC’s efforts stimulated analyses and similar findings by groups like AAA— again based on even weaker methodology and unknown funding (likely mostly membership dues). Critics have pointed to AAA’s tenuous policy links to members and its long-time support by and of the auto and oil industries. Remember, more cars result in more gasoline use and increased ownership secures more AAA memberships.

Forget the legitimacy or illegitimacy of the proponents and critics of research concerning E15, or for that matter E85. At most times, policy choices and behavior are not based on perfection concerning data and analysis.

What concerns me the most is the predominance of oil and its friends’ money and the lack of transparency concerning funding sources and grant and gift requirements or constraints — both informal and formal.

Like the Times, I am also concerned about the dividing line between education and lobbying concerning grants and gifts provided by oil companies and, foreign nations. Lobbyists are required to register as such. Most think tanks and universities do not see themselves as lobbyists and do not register.

Industry, some foundation and even government-supported research grants sometime come with strings attached. Even if they didn’t, the results of paid research into complex issues are generally not conclusive and can be helpful in stimulating dialogue, if it’s matched by research initiatives funded by donors with different perceptions. Bad, or mediocre research funded by advocates, like speech, shouldn’t be countered by censorship, but by efforts to execute better research and by initiatives to provide to policymakers and the public with countervailing views and analysis to generate dialogue and debate.

I am not a purist. There is no chance in hell that the basic system of what I call advocacy grants and gifts now in existence will end. But public policymakers should insist on transparency as to funding sources and research methodology. Key advocacy studies likely to affect public sentiment and decision maker views concerning replacement fuels and gasoline should be granted, at least some form of even informal refereed reviews. If I could figure out an easy way to do it, I would define alternatives that would provide some reasonable equivalency concerning research funding. They would assure Americans that all key replacement fuel options are examined fully and are compared to gasoline. The research on replacement fuels should not be submerged by foreign nation or internal U.S. oil interest funding. But I don’t get paid enough nor am I smart enough to think this one through, at least until the next column. Maybe you can help me? Paraphrasing my favorite oil scholar, Socrates, unexamined studies funded without independent review, only by the oil industry or its Middle East friends and colleagues, are often not worth having or debating. Peace.

What Happened to Saudization? Bipolar Fuel Projections!

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.

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

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.

A big flaring opportunity in North Dakota

Recently I wrote about how oil companies are flaring off $100 million worth of gas a month in the Bakken formation and what a huge waste or resources that represents.

Well, it didn’t take long for something to happen. A group of five law firms representing Bakken property owners sued 10 oil companies to end the practice. Their logic? It doesn’t involve environmental pollution or global warming. Instead, they’re arguing that the oil companies are depriving them of hundreds of millions in royalties by flaring off all that gas.

The case makes perfect sense. Gas is a valuable resource and the property owners are being deprived of huge amounts of money by wasting it. The case also avoids the complications that would come if the suit had been brought by the Sierra Club or Natural Resources Defense Council on environmental grounds. That would have involved all kinds of testimony about whether the flaring is really having an impact on the weather and what the level of damages might be. Instead, this is a straightforward case of dollars and cents. The property owners are being deprived of huge royalties. The oil companies have to compensate.

But beyond that, the lawsuit also offers a glittering opportunity to put methanol and its potential role in the transportation economy in the spotlight. So far, nobody’s talking about it much, but the conversion of natural gas into methanol could play a huge part in resolving this case.

The Bakken has developed so fast that the producers have not even been able to build oil pipelines into the area yet. Instead, the oil is being shipped by truck and rail. Burlington Northern has extended its lines into the region and most of the oil is now finding its way into major pipelines. As a result, Bakken production has leaped to 850,000 barrels a day, catapulting North Dakota into the number two position as an oil-producing state, behind Texas.

But the gas is a different thing. It can’t be stored in large quantities and pipelines are a long way from being extended and probably not worth it. Oil is now give times more valuable than gas at the wellhead, which gives drillers an enormous incentive to go after the oil and forget about the gas, hence the flaring. Thanks largely to North Dakota, we have moved into fifth place for flaring, behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. The amount of gas flared around the world equals 20% of U.S. consumption. When we’ve moved ahead of Hugo Chavez, it’s time to do something about it.

So far, the proposed solutions have involved compressing natural gas or synthesizing it into more complex liquids. “The industry is considering and adopting various plans to flare less gas, including using the gas as fuel for their rigs and compressing gas into tanks that can be transported by truck,” reports The New York Times. “A longer-range possibility would be the development of projects that could produce diesel out of gas at or near well sites.” Hess, which already has a network of pipelines in the area, is rushing to complete a processing plant at Tioga that will turn gas into diesel and other more complex fluids.

But a better solution would be portable, on-site processing plants that can convert methane to liquid methanol, a far simpler process. Gas Technologies, a Michigan company, has just developed a conversion device that sits on the back of a trailer and can be hauled from well to well. “We have a patented process that reduces capital costs up to 70%,” said CEO Walter Breidenstein. “If we’re using free flare gas, we can reduce the cost of producing methanol another 40-5%.” Other companies are working on similar technologies for converting natural gas to methanol on-site.

All this would help bring attention to the role that methanol could play in replacing oil in our transportation economy. California had 15,000 methanol cars on the road in 2000 and found drivers were extremely happy with them. Methanol also fits easily into our current infrastructure for gasoline. But California gave up on the project because gas supplies seemed to be dwindling and the price was too high. Now we are flaring off 25% of the nation’s consumption in one state and methanol could easily be produced for $1.50 a gallon. It’s time to re-evaluate.

Of course, Walter Breidenstein will probably find that flared gas will not be offered for free. Those Bakken property owners still want their royalties. But the North Dakota lawsuit proves a spur for on-site methanol conversion and great opportunity to highlight the role methanol could play in our transportation economy.