Oil isn't Cocoa: Our Dependence On the Middle East Needs to be Addressed

Several weeks ago riots rocked Ivory Coast after its longtime leader Laurent Gbagbo was removed from power. For chocolate lovers Ivory Coast is an important country as it produces one third of the world’s cocoa. Indeed, cocoa prices spiked as the country descended into violence and uncertainty. Most Americans paid little attention to the turmoil in the “Saudi Arabia of cocoa”. The reason is that, as important chocolate is in our lives, it is one of numerous food items on our diet. So if a cup of cocoa becomes too expensive we can easily settle for coffee or tea instead.

Oil isn’t cocoa. Unlike cocoa which competes against numerous other drinkable liquids in a wide open beverage marketplace, oil has a virtual monopoly over the transportation fuel market. Our vulnerability with regards to oil does not stem from the fact that we import so much of it but rather from the fact that it holds this monopoly.

Since transportation underlies the global economy, those who control oil have decisive power over the world economy. This is why trouble in the Middle East makes us all so jittery.

Almost 80% of conventional world oil reserves are controlled by the oil cartel OPEC. Three quarters of world oil reserves are in countries in which radical Islam is on the rise. After several weeks of turmoil in the region where most of the world’s oil is concentrated it premature to judge whether the Middle East is undergoing a sea change, entering a phase of perpetual instability or whether what we are witnessing will go down in history as a footnote, after which the current set of petro-dictators, minus Hosni Mubarak and Zine Ben Ali, will regain their power and tighten their grip over their angry populations.

Either way this winter of discontent should serve as another reminder of the insanity of allowing automakers to, in effect, collude with the OPEC oil cartel, by not opening the 12 million new vehicles that annually roll onto US roads to fuel competition. Every one of those cars has an average street life of seventeen years, which means that the minute it leaves the lot, we are extending our vulnerability to the world’s petrocracies by two more decades. The US is blessed with huge reserves of coal, natural gas and biomass but the gasoline-only car does not permit any of those to compete. It drinks only oil.

Even if the US – or North America – was able to miraculously become self-sufficient in oil, an utterly implausible scenario even if oil shale and tar sands are taken into account, this would not protect us from economically devastating price shocks each time the Middle East combusts. Oil is a fungible commodity with a global price – think of the oil market as a swimming pool, where producers pour oil in and consumers take oil out. That’s why in 2008, when Britain supplied almost all of its own oil, it suffered from the spike in oil price just as severely as we did, resulting in trucker protests due to the high cost of diesel.

Studies show that since 1945 every recession except for one was preceded by an oil shock. Robert Zubrin recently published revealing data about the link between the inflation-adjusted price of oil and the level of unemployment. His data shows that every oil price hike for the past four decades was followed shortly afterwards by a dramatic rise in American unemployment.

“The oil shock of 2008 didn’t just throw 5 million Americans out of work, it made many of them default on their home payments, and thus destroyed the value of the mortgage-backed securities held by America’s banks,” Zubrin wrote. “This, in turn, threatened a general collapse of the financial system, with a bailout bill for $800 billion sent to the taxpayers as a result.” Now oil is again at $100 a barrel, and Iran, the current president of OPEC, has already announced that it has no intention of convening the cartel a minute before oil reaches $120. If we are to allow the gasoline-only vehicle to prevail, expect this minute to come soon.

Ask yourself if any of the following is going to happen in the next five years:

• Sunni and Shiites will escalate their rivalry.
• Iran will become a nuclear power followed by other Sunni countries.
• An Islamist party will take over at least one major oil producing country.

If one or more of those is in the cards the US should brace itself for a great deal of pain at the pump and an era of economic turmoil and successive recessions. This is why Congress’ top priority should be to shield the economy from upcoming oil shocks. The simplest way of doing so is to open the fuel market to competition by requiring that new automobiles are able to run on other fuels in addition to gasoline. The current global spot for the alcohol fuel methanol made from natural gas is $1.28 per gallon, without any subsidy, equivalent in energy terms to gasoline at $2.33 per gallon. Methanol from coal is also very economic. Indeed, there are fuels that are not only cheaper than gasoline on a per mile comparison but can also be made from America’s domestic resources. Why shouldn’t our cars be able to run on them?

Automakers would have to tweak the engines of the vehicles they sell to make them flex-fuel so that they can run on just about any blend of liquid fuels — gasoline, ethanol and methanol. The technology already exists, and the process is cheap, under a hundred dollars per vehicle. Tax payer funded Detroit will cry about ‘government interference,’ but in fact this interference will break the monopoly of oil at the fuel station and reduce our vulnerability to turmoil in oil exporting countries and the machinations of the OPEC oil cartel.