Two Dollar Gas?

Achieving $2 Gas
It’s possible, with the right policy.

Republican presidential contender Michele Bachman has said that if she is elected, gas prices will fall to $2 per gallon. Such promises have understandably been greeted with considerable skepticism. But $2 gas is exactly what America needs. The question is, how can we get it?

We can’t do it just by expanded domestic drilling. In order for gasoline prices to fall to $2 per gallon, oil prices must be cut to $50 per barrel. And oil prices are set globally, with the dominating influence being the OPEC oil cartel. Since 1973, this cartel, which controls 80 percent of the earth’s commercially viable oil reserves, has refused to expand production, thus keeping petroleum prices artificially high. While, with a more pro-business government, the United States might conceivably be able to expand its production by a million or two barrels per day, OPEC could easily counter by cutting its production to match, or more likely, by simply continuing its non-expansion policy and letting increased Chinese demand take care of the slack.

If we are ever to get $2 gas, the power of OPEC to control oil prices needs to be broken. The United States Congress could do this with a stroke of the pen, simply by passing the bipartisan Open Fuel Standard bill (H.R. 1687). This act would effectively destroy OPEC by requiring that all new cars sold in the USA be fully flex fuel, able to run equally well on gasoline, ethanol, and — most important — methanol. This latter capability is critical because methanol can be, and is, made cheaply in large quantities from coal, natural gas, or any kind of biomass without exception. The United States has only 4 billion tons of oil reserves, but we have 270 billion tons of coal, vast amounts of natural gas, and an enormous capacity to produce biomass. By requiring that all cars sold here (and thus all cars made worldwide) be compatible with methanol, the act would force oil to compete with a fuel whose sources are not controlled by the cartel, and that we and our allies possess in abundance.

Methanol has only about half the energy per gallon as gasoline, but is 105 octane, which means it can be burned more efficiently. Taken together, these two factors make methanol’s current spot price of $1.38 per gallon roughly competitive with $2 gasoline.

Of course, the passage of the OFS bill would not cause gasoline prices to crash instantly. While it would no doubt hit oil futures hard, and thus cut the speculative premium on petroleum prices, the most immediate result of allowing methanol to compete against gasoline in the vehicle-fuel market would be to send methanol prices up, perhaps by as much as 60 percent. This situation would not, however, last for long. Methanol can be made and sold profitably today for $1.38 per gallon. At a 60 percent markup, its manufacture would be super-profitable, and massive amounts of capital would rush in to expand production. This would drive the price of methanol down, dragging gasoline and oil down prices with it, until methanol reached a price point where its production offered no greater profit than that prevailing in the economy at large. The fact that methanol would reach this price — what Adam Smith would term its natural price — follows from the fact that the sources to make methanol are plentiful and diverse, so that no cartel can artificially limit its production.

This underscores the key issue. There is not a free market in oil. Adjusted for inflation, the price of oil has increased eightfold since 1973, but OPEC production has not increased at all. In a free market, such a price increase would spur increased investment, with subsequent expanded production driving the price right back down again. That is why the inflation-adjusted price of coal, and nearly every other industrial commodity, has not risen in four decades. But because of the cartel, oil production has not responded to price increases in the way that it should in a properly functioning capitalist economy. In order for the free-enterprise system to do its work and deliver the cheap fuel the world needs, the ability of this cartel to limit the world’s liquid-fuel supplies needs to be broken. The Open Fuel Standard bill would accomplish that.

High oil prices are wrecking our economy. Since the United States imports 5 billion barrels of oil per year, the current price of nearly $90 per barrel will hit us for $450 billion this year alone, a huge tax on our economy. As a result, millions of jobs and thousands of businesses are being lost. If this wealth-draining process is allowed to continue, fiscal necessity will require us to withdraw the military forces protecting our national interests abroad, without a shot being fired.

Instead of seeking to exploit this catastrophe by placing its blame on their opponents, or posing with empty promises of salvation contingent upon their promotion to higher office, politicians need to take action. Two-dollar gas is not just a nice idea for inclusion in a campaign speech. It’s a critical necessity for economic recovery.

Either we break the cartel, or the cartel breaks us. The Open Fuel Standard bill needs to be passed.

— Robert Zubrin is a member of the Board of Advisors of Americans for Energy and author of Energy Victory: Winning the War on Terror by Breaking Free of Oil.

Why Are Oil Prices Rising?

All this stuff about Egypt and Libya causing our oil prices to rise is just another scare du jour. We are being ripped off yet again by greedy stock traders.

Do you see Egypt or Libya on the list below? I don't either.

Below this list you will see an article explaining that our oil reserves are growing rapidly yet oil and gasoline prices continue to rise at an alarming rate.

How long will we just sit here and take it?


Crude Oil and Total Petroleum Imports Top 15 Countries

December 2010 Import Highlights: Released February 25, 2011
Monthly data on the origins of crude oil imports in December 2010 has been released and it shows that four countries exported more than 1,000 thousand barrels per day to the United States (see table below). The top five exporting countries accounted for 72 percent of United States crude oil imports in December while the top ten sources accounted for approximately 88 percent of all U.S. crude oil imports. The top five sources of US crude oil imports for December were Canada (2,064 thousand barrels per day), Mexico (1,223 thousand barrels per day), Saudi Arabia (1,076 thousand barrels per day), Nigeria (1,024 thousand barrels per day), and Venezuela (825 thousand barrels per day). The rest of the top ten sources, in order, were Iraq (336 thousand barrels per day), Angola (307 thousand barrels per day), Brazil (271 thousand barrels per day), Algeria (262 thousand barrels per day), and Colombia (220 thousand barrels per day). Total crude oil imports averaged 8,631 thousand barrels per day in December, which is an increase of 23 thousand barrels per day from November 2010.

Canada remained the largest exporter of total petroleum in December, exporting 2,713 thousand barrels per day to the United States, which is an increase from last month (2,510 thousand barrels per day). The second largest exporter of total petroleum was Mexico with 1,365 thousand barrels per day.

Crude Oil Imports (Top 15 Countries)
(Thousand Barrels per Day)

Country Dec-10 Nov-10 YTD 2010 Dec-09 YTD 2009

CANADA 2,064 1,975 1,972 2,104 1,943
MEXICO 1,223 1,229 1,140 1,063 1,092
SAUDI ARABIA 1,076 1,119 1,080 870 980
NIGERIA 1,024 806 986 1,020 776
VENEZUELA 825 884 912 772 951
IRAQ 336 340 414 325 449
ANGOLA 307 263 380 266 448
BRAZIL 271 188 254 181 295
ALGERIA 262 379 325 336 281
COLOMBIA 220 489 338 179 251
ECUADOR 192 188 195 86 181
RUSSIA 158 85 252 168 230
KUWAIT 125 170 195 160 180
UNITED KINGDOM 124 80 120 67 103
ARGENTINA 85 35 29 33 53

Total Imports of Petroleum (Top 15 Countries)
(Thousand Barrels per Day)

Country Dec-10 Nov-10 YTD 2010 Dec-09 YTD 2009
CANADA 2,713 2,510 2,532 2,710 2,479
MEXICO 1,365 1,363 1,280 1,204 1,210
SAUDI ARABIA 1,087 1,141 1,094 877 1,004
NIGERIA 1,070 860 1,025 1,029 809
VENEZUELA 917 942 987 849 1,063
RUSSIA 514 553 611 385 563
ALGERIA 484 572 507 544 493
IRAQ 336 340 414 325 450
ANGOLA 319 276 390 278 460
BRAZIL 295 198 271 184 309
UNITED KINGDOM 236 187 256 199 245
COLOMBIA 231 492 365 231 276
ECUADOR 192 194 197 86 185
VIRGIN ISLANDS 191 234 255 289 277
KUWAIT 125 170 197 160 182

February 25
M.D. Harmon: U.S. oil, gas reserves surpass average OPEC nation
Yet, our own government won't let us use them and thus drives up the price we pay for everything.

Suppose that you built a new home out in the country, far from municipal services.

But when you tried to hire a contractor to drill a well, a town inspector came by to say wells were illegal in your community, so you had to meet your needs for water by going down to the store to buy it in bottles.

Of course, using bottled water to drink, wash, bathe and do dishes with is very expensive, and you found it was very difficult to keep enough on hand for all your daily needs.

So you called up your selectman to ask if the town would make an exception for you.

"No way!" was the reply. "That would despoil precious natural resources. That water belongs right where it is, underground, and it would be wrong for you to use it for your selfish needs to stay alive -- and clean."

So, you had to go on using bottled water other people produced, paying the bottlers with your hard-earned dollars -- even, let us imagine, after you found out some of them were owned by international criminal syndicates -- and were never allowed to take advantage of the resources that flowed abundantly right under your feet.

Sound ridiculous? Sure it does, but it also is a fair approximation of the current administration's attitude toward tapping our own extensive oil and natural gas resources.

Instead, our government prefers to make us buy them from foreign nations, some of which use the revenue to oppose us.

Of some interest in that context, the European news agency Reuters reported the following news on Feb. 16:

"The U.S. economy will lose $2.4 trillion over the next two decades if the federal government does not allow oil and natural gas drilling in restricted onshore lands and in offshore areas previously closed to energy companies, according to a new study released on Feb. 14."

The report, prepared for the National Association of Regulatory Utility Commissioners, said "U.S. imports of crude oil, petroleum products and natural gas would increase by $1.6 trillion over the period without access to the energy resources."

Reuters said that U.S. payments to the Organization of the Petroleum Exporting Countries (OPEC) would total $607 billion over that period for an extra 4.1 billion barrels of crude, according to the report.

Separate congressional and presidential bans on drilling in most U.S. waters beyond the western and central Gulf of Mexico ended in 2008, and the Interior Department is now considering whether to expand exploration in only a small part of the formerly closed areas, the news agency said.

"It's clear from this report that the status quo on energy production simply won't suffice," said David Parker, president of the American Gas Association. "We encourage lawmakers to heed the results of this study and take a closer look at the energy-rich areas in our country that are currently off limits."

Reuters said the study also raised the estimated U.S. oil and gas resources that are available in all areas based on advanced drilling technology and easier development of energy supplies trapped in shale rock. It reported that U.S. resources of crude oil were increased by 43 billion barrels to 229 billion and natural gas was raised by 286 trillion cubic feet to 2,034 trillion cubic feet.

By comparison, the United States imported about 143 million barrels of oil from Saudi Arabia in 2010, about 5 percent of our annual consumption, according to the U.S. Energy Information Administration.

Domestic oil accounts for only 40 percent of our total usage, meaning that most of the money we spend on oil goes abroad.

In that context, consider that 229 billion barrels of domestic reserves is more oil than the average OPEC nation has.

Yet, like a homeowner who can only buy someone else's bottled water, we can't drill for what we have right under our feet.

So, when you notice the price of gas going up -- and it will, and nobody knows by how much -- remember that the last "OPEC oil crisis" ended when President Ronald Reagan announced that he was loosening restrictions on offshore oil drilling. Suddenly the price fell from more than $100 a barrel (in 1980s prices) to about $30, even before new drilling had commenced. Imagine what actually encouraging more drilling now would accomplish.

Actually, we don't have to imagine it. We just have to realize that the cost of transportation affects the price of almost everything we use.

Any material good we require that is shipped by freighter, truck or plane includes in its cost to us the price of the gasoline or other fuel used to transport it. In addition, many products are either petroleum-based or require petroleum products to produce them.

Because oil prices are set on the world market, a boost in the price of crude due to unrest in the Middle East affects them all -- and no one can escape the impact. However, we can minimize it by using the resources that we have in abundance.

Don't you think it's odd that the same people who say we need to "wean ourselves" from dependence on foreign oil are the same ones who are blocking us from doing so?

Of course, they say wind and solar power will meet our needs, but we don't use oil to generate electricity. We use it to create and move things, and no windmill or solar panel will affect that for decades to come.

The crisis is upon us, and it's far past the time to tell the government to get out of the way.

Unless, that is, you like paying foreigners for something you have in abundance -- but which ideologues won't let you use.