The Battle for the Ukraine
|James Woolsey And Anne Korin||May 15th 2014|
Wall Street Journal
How can we reduce prices when the bulk of the world's low-marginal-cost oil supplies are held by the OPEC cartel, which has not increased production in 40 years? By opening the door to arbitrage among different energy commodities in the market for transportation fuel. Two thirds of the oil consumed in the U.S., and the bulk of the growth in oil consumed in the developing world, is for transportation. Conversely, more than 95% of transportation fuel is petroleum-based. Due to its high price, in every sector where oil has faced competition from other energy sources it has lost market share. Consider that only 1% of U.S. electricity is now generated from oil, compared with 17% in 1973; and only 1% of U.S. oil demand is attributable to electricity generation, compared with 8.5% in 1973.
Opening cars to competitive fuel sources—so consumers can make an at-the-pump choice among different fuels by comparing cost per mile—would open the door to transportation fuel arbitrage. If investors expect new cars will be open to fuel competition (and that used cars can be easily and cheaply converted), they will expand production capacity for the particular non-petroleum fuels they expect will be profitable. And with a sufficient expansion of supply this competition would serve to lower oil's importance and its price.
Thanks to low U.S. natural gas prices, methanol, an alcohol fuel made from natural gas, is one of the most economically attractive competitors for gasoline. Flexible fuel vehicles that can run on a variety of alcohol fuels made from natural gas, biomass, coal or even recycled carbon dioxide, as well as on gasoline, cost auto makers less than $100—half the cost of a seat belt—extra to make, as compared with gasoline-only cars, according to the MIT Sloan Automotive Lab's research.
These fuels require no subsidies and neither do the vehicles. The U.S. Energy Security Council has proposed no-subsidy, no-mandate regulatory reform that would serve to speed the way to fuel competition. A key recommendation would allow auto makers the option of meeting part of their existing fuel-economy obligations by ensuring that most of the new cars they produce in a given model year allow fuel competition of some sort. Vehicle fleet turnover takes time, so fuel competition would not have an immediate impact on Russia, or on other oil exporters. But neither would sanctions. The construction of terminals needed to facilitate exports of U.S. liquefied natural gas, or LNG, to Europe will take a long time and an exporter with a choice of markets—in the absence of inducements such as long-term contracts—may find it more lucrative to sell LNG to Asia, where prices are higher. But transportation fuel competition would be politically and economically welcome because consumers world-wide would see a drop in the cost of driving.
Oil would slowly but relentlessly lose its place in the global balance of power, and the countries that rely upon high oil prices as the centerpiece of their national budgets would need to restructure fundamentally their geopolitical ambitions toward the rest of the world.