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Oil Spill Response Worsens OPEC/Oil Dependence Dilemma

The three-month oil spill in the Gulf of Mexico has been a stark reminder of one of the intangible costs of the transportation sector’s near total dependence on oil. But if there was some hope that from this disaster would emerge policies that aim at strengthening America’s energy security now it is clear that nothing close to that is going to happen. To the contrary, official response to the spill has only weakened our energy security. An impulsive moratorium banning exploratory drilling in the Gulf of Mexico, home to about 30 percent of U.S. domestic output, was announced, and two drilling rigs have already set sail, heading to foreign waters where busy drilling schedule is already awaiting them. Drilling rigs are in great demand and once they leave the Gulf of Mexico they are not likely to be back for years.

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In response to the spill Senate Majority Leader Sen. Harry Reid (D-NV) introduced a bill comprised of a mishmash of policies that mostly have nothing to do with oil. A few days after its introduction Senator Reid pulled the bill in the face of strong opposition, and Congress broke for recess. Reid’s pledge to continue the fight in September shouldn’t get us overly excited. In the weeks running up to the elections our elected officials will be busy undermining their political opponents, not OPEC.But it is exactly OPEC, a cartel that for decades has constricted supply and manipulated prices, that should be the target of our politicians. Despite controlling 78% of world reserves, OPEC countries account for only 40% of global supply. This reflects a deliberate effort to constrain production in order to drive prices up. Indeed, today the cartel produces less oil than it did 38 years ago, before the Arab Oil Embargo. Next month OPEC will celebrate its 50th birthday. Its history reveals a troubling pattern: when non-OPEC producers, U.S. included, increase their production, the cartel decreases its production accordingly to keep the amount of oil in the market unchanged. In other words: when we drill more, OPEC drills less. Thus domestic drilling in and in itself – no matter the level – is easy for the cartel to respond to and is thus a tactical, rather than strategic effort. It serves to reduce the trade deficit, but does not reduce the power of the oil cartel.opec

To defang OPEC we must change the playing field altogether.

During the 111th Congress more than 20 million new cars rolled onto America’s roads, almost all of which can run on nothing but oil fuels. Each of those cars has an average street life of 15 years. This means that under the current Congress the number of cars that don’t enable fuel competition has grown, not shrunk, and with it the relative importance of the holders of most of the world’s oil reserves. So if Congress is to seriously address our vulnerability to the cartel’s manipulation of the petroleum market, the first thing it should attempt to do is to ensure new vehicles enable fuel competition.

This can be done through a simple technical fix which costs automakers less than $100 per car, and ensures that cars powered by internal combustion engines can run on any combination of gasoline and a variety of alcohol fuels such as methanol (made from coal, natural gas and biomass) or ethanol. The spot price for methanol from natural gas, currently under a dollar a gallon, is competitive on a per-mile basis with gasoline.

An open fuel standard ensuring new cars have this feature is the quickest way to introduce choice and competition to a transportation fuel sector now 95% dominated by oil and hence weaken the oil cartel and shield the U.S. economy from forthcoming oil shocks.

Neglecting to pass an open fuel standard and thus maintaining oil’s virtual monopoly over transportation fuel, and with it the strategic importance of the commodity and the power of the oil cartel, is the best birthday gift the U.S. Congress could give OPEC.


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