Saudi pushers, energy rehab
Sep 1st, 2009 by MESH
From Gal Luft
Saudi Prince Turki al-Faisal, former ambassador to the United States, has a suggestion for America: drop this nonsense called energy independence. In a strongly-worded essay in Foreign Policy magazine, which coincides with the 150th anniversary of Edwin Drake’s discovery of oil in the United States, Turki lambastes American politicians for invoking energy independence, which “is now as essential as baby-kissing,” accusing them of “demagoguery.” For him, energy independence is “political posturing at its worst—a concept that is unrealistic, misguided, and ultimately harmful to energy-producing and consuming countries alike.” “Like it or not,” Turki concludes, “the fates of the United States and Saudi Arabia are connected and will remain so for decades to come.” (He said much the same in this clip from last May; if you don’t see it, click here.)
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We’ve heard these lines before each time the United States made progress toward lessening its dependence on oil. In February, for example, Ali al-Naimi, the Saudi oil minister, warned of a “nightmare scenario” if consuming countries made progress in the development of alternative fuels. A decade ago, his predecessor, Sheikh Ahmed Zaki Yamani, called technology “the real enemy for OPEC.” This is understandable. After all, no pusher wants to see his client circling around a rehab clinic. For Saudi Arabia, a world where oil plays a marginal role is the nightmarish materialization of the Saudi saying, “My father rode a camel, I drive a car, my son flies a jet plane, his son will ride a camel.”
More troubling is the parade of prominent Americans who deride the notion of energy independence, viewing it as jingoistic, unsophisticated, naive and misleading. One cannot doubt the patriotism of former CIA director John Deutch, who said “energy independence is not a constructive idea,” or former secretary of defense and energy James Schlesinger, who called it a “forlorn hope,” or Pulitzer Prize winner Daniel Yergin who referred to it as “pipe dream,” or Andy Grove, former chairman of Intel, who called the concept “a faulty goal,” or even the members of the Council on Foreign Relations energy security task force who went so far as to accuse those promoting energy independence of “doing the nation a disservice.” But just like Prince Turki, all of those distinguished Americans misunderstand what energy independence really is. As a result, they underestimate our ability to get there.
Contrary to popular conception, energy independence does not mean self-sufficiency. It doesn’t mean not importing any oil or walling ourselves off from the global market. Energy independence is not a function of the amount of oil we consume or import. Rather, energy independence means turning oil from a strategic commodity second to none—one that underlies the global economy and determines the course of world affairs—into just another commodity to trade.
Oil’s strategic status stems from its virtual monopoly over fuel for transportation, which in turn underlies our entire way of life. Worldwide, 95 percent of our transportation energy is petroleum-based. Our cars, trucks planes and ships can run on nothing but petroleum. This is why the much-touted policies that aim to either increase oil supply through domestic drilling or decrease its use by boosting fuel efficiency, while helpful, are insufficient as they do not address the factor that gives oil its strategic status: the petroleum-only vehicle.
Energy independence thus requires breaking the virtual monopoly of oil over transportation fuels, and this can only be done via competition in the transportation fuel sector. (Think about our electricity sector, where a variety of competing energy sources—coal, natural gas, nuclear, solar and wind—can contribute to the grid.) If our cars and trucks were able to run on other fuels in addition to those refined from petroleum, Saudi Arabia’s oil would have to compete over the drivers’ wallet against utility companies, alternative liquid fuels producers and natural gas suppliers. But as long as our cars are gasoline-only, oil remains the only game in town, which is exactly what Saudi Arabia wants.
A few types of vehicle technologies allow us to break oil’s monopoly. The first, and most affordable, is the flex-fuel vehicle that can run on any combination of gasoline and alcohol (alcohol does not mean just ethanol, and ethanol does not mean just corn). It costs an extra $100 per new car to make a regular car flex-fuel. All it takes is a fuel sensor and a corrosion-resistant fuel line. An Open Fuel Standard ensuring that every new car sold in the United States be flex-fuel would not only give rise to an industry of alternative fuels and the associated refueling infrastructure, but it would also drive foreign automakers to add fuel flexibility to all of their models, effectively making it an international standard.
Electricity is another transportation fuel that can compete against oil. It is cheap, largely clean, domestically produced and can be made from multiple sources. Its refueling infrastructure is widely available. All that is needed for an electric car to connect to the grid is an extension cord. Most automakers have already committed to produce models of limited-range pure electric vehicles (EV) or plug-in hybrid electric vehicles (PHEV). The latter allow drivers to travel on stored electric power for the first 20-40 miles, after which the car keeps running on the liquid fuel in the tank, providing the standard 200-400 mile range. For the 50 percent of Americans who drive 25 miles per day or less, shifting from barrels to electrons would make the visit to the local gas station a rarity. If all of those Americans owned PHEVs, a population the size of New York, Florida and Pennsylvania combined would be off oil most days of the year. A PHEV would normally drive 100-150 miles per gallon of gasoline. If it is also made as flex-fuel and fueled with a blend of 80 percent alcohol and 20 percent gasoline, oil economy could reach over 500 miles per gallon of gasoline.
These technologies are either at or few years away from commercialization. If we only understood energy independence properly and took the relevant measures to open the transportation fuel market to competition, oil would be far less central to the world economy than it is today. If we ensure that new cars are platforms on which fuels can compete rather than perpetuate the petroleum standard, then Prince Turki’s descendants, on the 200th anniversary of Drake’s discovery, will be more likely to ride camels than private jets. No wonder he wants us to think otherwise.
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6 Responses to “Saudi pushers, energy rehab”
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Gal Luft’s excellent post prompts two comments. First, the present global pattern of oil production and consumption underlies the most serious foreign policy problems the United States faces. Huge revenues accrue to the autocratic leaders of oil exporting countries—Chavez of Venezuela, Ahmadinejad and the mullahs of Iran, Putin of Russia—who use them to support policies that are consistently unhelpful to, and sometimes extremely dangerous for, the United States. Some of the oil wealth the Gulf sheikhdoms collect finds its way into the coffers of terrorist groups. Thus it is that the United States is waging a war against terrorism and funding both sides. The single measure that would do most to enhance the security of the United States, in my judgement, is to help to reduce substantially the revenues that oil producers collect by reducing substantially the American consumption of imported oil.
Second, an indispensable method for doing so is to raise the price of gasoline in the United States, which would promote both conservation and the expanded use of non-oil-based technologies for transportation, of the kind that Gal Luft describes. Nothing would do more for American foreign policy than a higher gasoline tax. Here the American political system has failed miserably. Elected officials never advocate such taxes, because they believe—alas, probably correctly—that to do so is to commit political suicide. The Western Europeans and Japanese are generally anything but zealous and energetic in their defense of Western values and interests, but, with their much higher gasoline taxes, on this crucial issue they perform far better than the United States does.
Michael Mandelbaum is a member of MESH.
Two points are absolutely fundamental here—and have been ever since the first oil shock in 1973-74. Without these, much of the rest of energy security debate is of limited relevance. First, not energy independence, but reduced vulnerability is key. This means reduction in America’s relative dependence on imported oil and greater efficiency in how we consume oil. Alas, whereas the United States imported one-third of its oil in 1973, the figure now is closer to two-thirds. Second, and as Michael Mandelbaum rightly observes, raising the price of gasoline is crucial. Exhortation, incentives, and moral suasion only go so far. Without clear and sustained price signals, fundamental change in oil consumption will be slow and reversible. Without a serious, long term increase in tax policy—or an exceptional act of political courage and leadership—which congress typically sees as the third rail of politics, it may require an unprecedented crisis before this problem is seriously addressed.
Robert J. Lieber is professor of government and international affairs at Georgetown University.
Robert Lieber, in discussing American “vulnerability” in filling U.S. oil needs, stresses the high level of dependence on importation; currently two-thirds of U.S. needs are imported. But all sources of oil are not the same, and this should be taken into account in considering various kinds of vulnerability.
In 2008, the United States imported 9.8m barrels of crude a day; 5.4m of that came from OPEC. But 4.4m came from non-OPEC sources, the great bulk from Canada (which supplied more crude to the United States than Saudi Arabia did) and Mexico.
Would it not be realistic to consider Canada and Mexico potentially more secure and more reliable sources for crude than, say, OPEC? And if so, would not one strategy to improve U.S. oil security be to encourage Canadian and Mexican oil production, and to increase imports from those countries at the expense of OPEC? Such measures would not preclude increased efficiency in oil use, the development of alternative fuels, and so on.
This rather prosaic and obvious suggestion appears to be lost on the Obama administration, which instead seems keen to lead an environmentalist crusade against Canadian oil, which, while slightly dirtier at source, is equivalent to other sources by the time it reaches the pump.
Philip Carl Salzman is a member of MESH.
Robert Lieber is correct that energy vulnerability, not energy independence, is our real concern, but he uses the wrong measure of vulnerability. The correct measure of vulnerability is the worldwide balance between current oil production capacity and current oil demand. It is this balance that determines world oil price. Oil storage can also potentially reduce vulnerability, and the OECD nations already have large amounts of oil in storage.
The United States is hurt when the price of oil goes too high, regardless of what share of our consumption is imported. It is high oil prices, caused by production capacity being too little above oil demand, that gives oil suppliers power. If it is a buyers’ market, as it often has been, and as recently as a decade or so ago, oil suppliers do not have political power—although some of them have more money than we would prefer.
The worldwide balance between supply and demand is improved when anyone reduces demand, or when anyone increases production.
At least for the next several decades there is ample oil in the ground—in various forms—so that production capacity can be comfortably above demand if sufficient investment is made.
Oil prices could be high if total consumption ten years from now were lower than today, the same as today, or higher than today. And those prices could also be low if consumption then were higher, lower or the same. It is not the level of consumption that counts, it is the ratio of production capacity to consumption that matters. And production capacity is within our collective power to determine; it depends on investment in production equipment and facilities—and on overcoming various political barriers to production.
Max Singer is an independent consultant on public policy and a senior fellow at Hudson Institute.
In looking at U.S. energy vulnerability, I certainly agree that we should import more from Canada and Mexico. Indeed, the Obama administration, despite environmental pressure, is moving to increase imports from Canada. The problem is with Mexico. Mexican oil production is dropping rapidly, but Mexican law all but prevents foreign investment in the Mexican oil industry, which is dominated by the Mexican National Oil Company, PEMEX. PEMEX’s CEO was just fired by Mexican President Calderon and was replaced by a University of Chicago-trained economist, but it is likely to take a long time before the notoriously inefficient PEMEX bureaucracy is transformed and the company is revitalized. Until Mexican law is changed—and Calderon has been trying, so far unsuccessfully, to change the law—the United States can’t depend, long-term, on oil imports from Mexico.
Robert O. Freedman is a member of MESH.
The comments on my post only reaffirm my original point: the policy debate is overly dominated by much-touted policies that aim to either increase oil supply through domestic drilling in North America (see Salzman and Singer’s comments) or decrease its use by boosting fuel efficiency or artificially raising the price of gasoline (see Mandelbaum and Lieber’s). Such policies, while helpful in preventing dollars from migrating to the Middle East, are ineffective when it comes to breaking oil’s monopoly in transportation fuels, as they do not address the factor that gives oil its strategic status: the petroleum-only vehicle.
Experience of the past three decades clearly shows that whenever non-OPEC producers like the United States increase their production, OPEC decreases supply accordingly, keeping the overall amount of oil in the market the same. In other words, when we drill more, OPEC drills less.
What happens when we use less oil due to gasoline taxes or mandatory fuel efficiency standards? We just had a good demonstration on this last year. In 2008, gasoline prices soared to nearly $5 a gallon. Think of it as a $3 gasoline tax, which is much more than we would be able to impose today through legislation. As a result U.S. gasoline demand dropped by nearly 10 percent. This was as if the U.S. fleet increased fuel efficiency by 2.5 mpg overnight. Improving fuel economy by that much could have saved the United States almost one million barrels per day.
What was OPEC’s response? Between October and December that year, OPEC dropped production by roughly 4 mbd, which is more than the amount of oil that was actually saved due to reduced consumer demand.
Strategically, domestic drilling and increased fuel efficiency are two sides of the same coin. The axiom to remember is: when non-OPEC countries drill more, OPEC drills less, and when we use less, OPEC also drills less.
Playing in the same playing field with the likes of Hugo Chavez, Saudi King Abdullah, Mahmoud Ahmadinejad and Vladimir Putin is playing a game we can never win. They have most of the world’s oil; we have—drill everywhere—barely three percent of conventional oil reserves. The sooner we adjust our thinking and focus on game-changing, transformational solutions, instead of inconsequential, time-buying policies, the sooner we can reach true and lasting energy independence.
Gal Luft is a member of MESH.