President Obama had good reasons to welcome spring with a high profile energy policy address. The first anniversary of the explosion of the Deepwater Horizon drilling rig is just three weeks away. The President surely knows that this anniversary will give his opponents an opportunity to remind Americans of the unnecessary moratorium on offshore drilling. The President also knows that there is roughly a two to three months delay period before gasoline prices respond to increases in the price of crude oil. The recent spike in oil prices occurred about two months ago as riots began to spread throughout the Middle East so gas prices are expected to rise further. Anticipating these scenarios, the Obama team took preemptive action, launching a yawn evoking Blueprint for a Secure Energy Future. The 44-page document and the executive summary the president delivered before his Georgetown University audience has everything for everyone, from the drill-baby-drillers, biofuels producers, efficiency proponents and even T. Boone Pickens.
The President’s strategy of throwing bones to every base may be good politics but the content of his energy program is a testimony that while he understands the dangers of over reliance on oil, whose reserves are dominated by nasty regimes, he does not really grasp the true nature of the problem. His pledge to cut oil imports by one-third by 2025 is not much different from the type of hollow presidential energy rhetoric starting with Richard Nixon’s 1974 promise: “At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need.”
Like every presidential energy speech, Obama’s speech focuses on freeing ourselves from oil imports. Eighty percent of the world’s conventional oil reserves are controlled by the OPEC cartel. The past four decades show that whenever America either drills more or uses less, OPEC responds with quota cuts, essentially leaving the same amount of oil in the market and hence itself in control of the price of oil.
The security and economic vulnerabilities posed by oil dependence are not due to the number of barrels we import. Remember, in 2008, last time oil prices spiked, Britain’s truckers staged protests over high diesel costs even though the country was barely reliant on oil imports at that point. Oil is a fungible commodity with a global price. Our real problem is that oil is a strategic commodity due to its virtual monopoly over transportation fuel. As long as cars are closed to anything but fuel refined from oil neither solutions that expand supply nor those that shrink demand will suffice to ensure our security and prosperity. The cartel knows how to respond to those tactics.
What was missing from Obama’s message is a commitment to let the market take down the cartel and reduce the strategic importance of oil by opening vehicles to fuel competition, so drivers can on the fly decide to purchase a different fuel at the pump if it is less expensive on a per mile basis. The President should have called for an Open Fuel Standard ensuring that cars sold in the U.S. enable fuel competition. With a tweak which costs roughly $100 per vehicle new cars can be opened to run not only on gasoline but also on methanol – which is made from coal, natural gas or biomass – all natural resources with which the U.S. is well endowed as well as on ethanol. The current global spot for methanol made from natural gas is $1.25 per gallon, without any subsidy. Methanol contains about half the energy of gasoline per gallon, so this is equivalent in energy terms to gasoline at $2.50 per gallon. Add taxes and distribution and its still less than current gasoline prices. 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. Unfortunately, by ignoring the urgent need for fuel flexibility and a competitive market Obama’s new energy plan does not offer most Americans with the opportunity to take advantage of them. To be sure, the President highlighted electric vehicles and rightly so. In many respects – say, acceleration – their performance is superior to that of gasoline cars, but electric cars are costly for now and mass market penetration will take many years. We should not neglect liquid fuel choice in the meantime.