By Laura Meckler
The Wall Street Journal
April 2, 2007
President Bush, domestic auto makers, farmers and others tout ethanol as a home-grown alternative to imported oil. Across the Midwest, plants that make the fuel out of corn are multiplying at a torrid pace. Yet so far, only a tiny fraction of U.S. service stations let a driver fill up with ethanol. There are a number of reasons, but one big one is resistance from oil companies.
Although some oil executives voice enthusiasm for alternative fuels, oil-company policies make it harder for many service stations to stock a fuel called E85, a blend of 85% ethanol and 15% gasoline.
These policies are hardly the only barrier to wider use of the ethanol fuel. Demand is limited by the small number of vehicles that can burn it -- only about 5% of those on the road in America. It can be slightly costlier to burn E85, even though it costs less per gallon, because a car doesn't go as far on a gallon of the ethanol fuel as on gasoline. These demand restraints would limit service-station owners' enthusiasm for spending on the equipment needed to offer E85 even if the policies of the oil companies were not a factor.
But those policies add a significant extra obstacle. Oil companies lose sales every time a driver chooses E85, and they employ a variety of tactics that help keep the fuel out of stations that bear the company name. For instance, franchises sometimes are required to purchase all the fuel they sell from the oil company. Since oil companies generally don't sell E85, the stations can't either, unless the company grants an exception and lets them buy from another supplier.
Contracts sometimes limit advertising of E85 and restrict the use of credit cards to pay for it. Some require that any E85 pump be on a separate island, not under the main canopy.
Oil companies say they will allow stations to sell E85, but they must have certain rules for the protection of customers and protection of their brand. They call the restrictions reasonable and in some cases necessary to make sure drivers don't fill up with E85 if their vehicle can't burn it.
Most of the U.S.'s 170,000 fuel stations aren't owned by oil companies but are either franchised from them or independent. Less than 1% stock E85. Some experts say that to really take hold and be seen as a viable alternative to gasoline, the fuel would have to be available at, roughly, 10% of stations.
Targeting Stations
Those pushing for ethanol are targeting two very different types of fuel stations: those run by big retailers like Kroger Co. and Wal-Mart Stores Inc., and independent ones owned by small businesses. These represent the biggest and smallest of businesses, but have one thing in common: They aren't under the thumb of the oil industry.
Nearly half of the gasoline sold in the U.S. does have some ethanol in it. Oil companies routinely use it as an additive, typically at 10% ethanol to 90% gasoline, because the corn-based fuel burns cleaner. The blending enables companies to meet government smog-reduction rules. They also add ethanol because of a federal mandate on the industry as a whole, requiring that it use a certain amount of "renewable" fuels in its products.
Among those pressing for wider use of E85 are domestic auto makers, especially Ford Motor Co. and General Motors Corp. Ethanol is one energy initiative where they're out in front of Japanese car makers. While Toyota Motor Corp. and Honda Motor Co. are known for their gasoline-electric hybrids, Detroit, which has been heavily criticized for its sales of gas guzzlers, is far ahead in making "flexible-fuel" vehicles that can burn either gasoline or ethanol.
In Dwight, Ill., Becker's BP on Interstate 55 is one of just a few dozen major-brand gasoline retailers in the U.S. that sell E85. Owner Phil Becker says the governor wanted the state's vehicles to use E85 and targeted his station as a popular stop for state workers. He says BP PLC let him get the fuel from a non-BP supplier, and the Illinois Corn Growers Association gave him $100,000 for new tanks and pumps that BP required.
"Because I've got E85 and we've advertised it, we've had four or five farmers that traded their trucks to get E85 vehicles," Mr. Becker says.
Exxon Mobil Corp.'s standard contract with Exxon stations bars them from buying fuel from anybody but itself, and it doesn't sell E85. A spokeswoman for Exxon Mobil says it makes exceptions case by case.
Even if one is granted, the station must follow rules including one that says E85 must be dispensed from its own unit, not part of an existing multihose dispenser. "This minimizes customer confusion around vehicle compatibility issues and maintains product quality integrity," says the spokeswoman, Prem Nair.
A ConocoPhillips memo to franchisees says the company doesn't allow E85 sales on the primary island, under the covered canopy where gasoline is sold. Stations must find another spot. As a result, it isn't quite as simple for a driver to decide on the spur of the moment to fill up with E85. ConocoPhillips declines to comment.
A Chevron Corp. agreement with franchisees also appears to discourage selling E85 under the main canopy. It says dealers offering alternative fuels cannot "deceive the public as to the source of the product," a phrase that some gas-station interests interpret to mean that E85 can't be sold under the main canopy. Chevron says it recommends, but doesn't require, that E85 pumps be outside the canopy.
Chevron says it requires Chevron- and Texaco-branded stations to keep "E85" off their primary signs listing fuel prices. To show the fuel's price, and alert approaching drivers that E85 is for sale, the stations have to erect a separate sign.
More Expensive
Another Chevron recommendation makes it much more expensive for a station to offer E85 at all. Stations usually have three tanks, for the three gasoline grades, regular, mid-grade and premium. The easiest way to offer E85 in addition to these three is to convert the mid-grade tank to E85. Such a station can still offer mid-grade gasoline, because a "blender pump" can mix some regular with some premium, and mid-grade will come out of the hose.
But Chevron's agreement with station owners recommends they install new pumps and tanks at their own expense if they want to stock E85. Doing so can cost more than $200,000 per station, according to a fuel-station trade group in Washington state called Automotive United Trades Organization. Chevron says it requires special tanks only if they're needed for safety.
Oil companies also require stations to stock all three grades, meaning stations may not simply replace a low-selling mid-grade with E85.
At BP, guidelines for stations that carry the company name bar any mention of E85 on signs on gasoline dispensers, perimeter signs or light poles. The stations also can't let buyers use pay-at-the-pump credit-card machines.
Selling E85 is "not impossible -- it's just that they really kind of hassle you to not put it in," says Ron Lamberty, who owns two stations in South Dakota, one a BP station. Mr. Lamberty doesn't sell E85, even though he is director of market development for the American Coalition for Ethanol. He says he is looking into adding the fuel to his BP station in Sioux Falls.
Mr. Lamberty mocks BP's "Beyond Petroleum" slogan: "It's 'beyond petroleum' but not so far beyond petroleum that it would contain anything but petroleum," he says.
BP says its guidelines are in place so customers realize the mostly ethanol fuel isn't a BP product. The company also bars stations from selling it under another brand name, such as VE85, the brand of a maker in Brookings, S.D., called VeraSun Energy Corp.
A BP spokesman, Scott Dean, says, "When you've got 97% of your customers unable to use the product, you want to be very, very sure it is very clearly advertised." He says BP bought 718 million gallons of ethanol last year to blend into U.S. gasoline in small amounts. "BP is one of the largest if not the largest purveyor of biofuels in the U.S. and the world," Mr. Dean says.
E85 also faces barriers having nothing to do with Big Oil, like the limited number of cars that can burn it. Domestic auto makers have vowed to double production of flex-fuel vehicles to about two million a year by 2010 and to make half of their new vehicles sold in America E85-capable by 2012.
While the fuel usually costs less, it can be costlier to drivers because they get about 25% fewer miles per gallon from ethanol than from gasoline. At a pro-ethanol group called the Iowa Renewable Fuels Association, Executive Director Monte Shaw estimates that E85 has to be at least 20 to 30 cents a gallon cheaper to compete with gasoline on price.
Iowa statewide average prices on a recent day were $2.18 a gallon for regular gasoline and $1.97 for E85, according to a Department of Energy Web site. Because E85 is less energy-intensive, the site said, it would cost the average owner of a big Chevy Tahoe SUV about $2,364 a year to fuel it with E85, and $1,935 to fuel it with regular gasoline.
Creating a Conflict
The price of ethanol has risen in the past year, partly because of demand from oil companies that want it for an additive. This usage creates something of a conflict for big ethanol producers like Archer-Daniels-Midland Co. Their main ethanol customers are the oil companies. Customers for E85 are far smaller and more fragmented.
ADM, whose yearly output of 1.1 billion gallons is more than 20% of the domestic ethanol market, says it is happy to sell E85 if someone wants it, but that is a "very small" part of its business. "Near term, we have focused more attention on the" additive side, says an ADM executive, Edward Harjehausen.
Even the main ethanol lobbying group in Washington, the Renewable Fuels Association, has focused mostly on developing the market for the fuel as an additive. "If you have a pump that sells E85 but you don't have customers pulling up to that pump, why do you want to bother?" says Bob Deneen, its chief lobbyist.
A few smaller producers do actively promote E85, such as VeraSun, which seeks to establish a branded E85. But even the smaller producers sell the bulk of their output for blending as a gasoline additive.
Because ethanol is more corrosive than gasoline, there's some concern it could leak out of a standard dispensing system and spark a fire. No E85 dispensing system -- nozzles, hoses, pumps -- has been certified by Underwriters Laboratories, the organization that tests the safety of products.
In October, UL suspended certification of parts that had been certified for use in E85 systems. Though there hadn't been any reports of problems, UL said it decided it needed to do its own safety research. Results aren't expected until late this year.
Among those trying to overcome obstacles to E85 are the domestic auto makers. They have built flex-fuel vehicles for years because doing so gives them "credits" in their efforts to meet federal fuel-economy standards. Without the credits, Ford and GM wouldn't have met mileage goals for light trucks in 2003, 2004 and 2005 and would have owed fines. The mileage goals pose a bigger challenge to Detroit because of its heavy reliance on large, thirsty vehicles. Foreign makers generally haven't resorted to building flex-fuel cars to meet the mileage goals.
For Detroit, the credits applied even if the flex-fuel cars they built never actually burned ethanol. For a long time, the auto makers said little about ethanol, and many owners of flex-fuel cars didn't know they had them. But when gasoline prices surged in 2005 and 2006, GM and Ford saw their flex-fuel cars as a way to counter their image as gas-guzzler makers.
Both began promotional campaigns, such as one in which GM gave buyers in Chicago and Minneapolis $1,000 gift cards good for E85. GM began to work with state officials to find grants to pay for installing pumping equipment. It has helped add E85 to 235 stations. Ford helped pay for installing 50 pumps so someone could drive from Chicago to Kansas City while filling up only with E85.
Among ethanol backers' recruits are two grocery chains. Kroger installed E85 at about 40 stations in Ohio and Texas. Privately held Meijer Inc. did the same in Michigan and Indiana.
Wal-Mart could provide a significant boost. It said last year it was considering selling E85 at its 388 company-owned stations but hasn't made a decision.
The U.S. tax code acts as a stimulus. Service-station owners can get a credit of up to $30,000 for their outlays to convert equipment to sell E85.
Some states have done their bit to spur the market. New York enacted a bill last year that barred oil companies from requiring stations to buy all of their fuel from the companies.
In the Albany area, station owner Christian King has begun selling E85 at one of his three Mobil outlets and plans to do so at a second. He says Mobil's restrictions still mean he can't put the price of E85 on the main sign or let drivers charge it on their Mobil credit cards.
Adding E85 "is a personal thing," Mr. King says. "I'm trying to do anything I can to reduce our dependence on foreign oil. And if this thing kicks off, I'm in a position to benefit."
Write to Laura Meckler at laura.meckler@wsj.com
Showing posts with label oil monopoly. Show all posts
Showing posts with label oil monopoly. Show all posts
Monday, July 27, 2009
Friday, July 3, 2009
Breaking Oil’s Monopoly in the Transportation Sector
Breaking Oil’s Monopoly in the Transportation Sector
By Gal Luft
August 22, 2008
Ten years ago, Osama bin Laden set a target price for oil at $144 a barrel. At the time, crude oil prices stood at $12 a barrel and his figure, aimed to compensate the Muslims for what he called “the biggest theft in the history of the world,” sounded delusional.
Four years ago, just prior to the U.S. elections, when oil prices stood at $38, bin Laden explained his economic warfare strategy: “We bled Russia for ten years until it went bankrupt and forced to withdraw in defeat. We are continuing the same policy to make America bleed profusely to the point of bankruptcy.” Reputable energy analysis outfits held a completely opposite view on the future of oil. A 2005 report by Cambridge Energy Research Associates (CERA) held that by 2010 global oil supply would rise by as much as 16 million barrels per day (mbd). “We expect supply to outstrip demand growth in the next few years, which would take the pressure off prices around 2007-2008,” wrote the report’s authors. As we know, this never happened.
World oil production has been flat since 2005 and $144 might soon become a fond memory. Today, with oil prices above bin Laden’s stated goal, his economic warfare strategy seems like a resounding success. At a time al-Qaeda is on the run, $144 oil is a major morale booster and the best birthday present for its 20th anniversary next month. There is no need to elaborate on the implications of such a victory in terms of loss of U.S. prestige and our ability to prevail in the Long War of the 21st century. Furthermore, at current price level, the U.S. will spend over $600 billion on imported oil this year, more than our defense budget, and much of that money will flow into the coffers of those who wish us ill. It has long been clear that our oil dependence forces us to pay for both sides of the war on terrorism. In light of this year’s figures, we are paying the other side more than we invest in our own defense.
A cartel married to a monopoly
In order to chart the road to energy security, we must first understand why we are where we are. There are many reasons for the current oil crisis. Strong demand in developing Asia, speculation, geological decline, and malevolent disruptions have all contributed their share. But by far, the main culprit is OPEC’s reluctance to ramp up production. The cartel owns 78 percent of the world’s proven reserves and produces about 40 percent of its oil production. In 1973, OPEC produced 30mbd, while non-OPEC produced 25mbd. Today, OPEC produces 32mbd while non-OPEC production is close to 45mbd. In other words, OPEC today produces almost as much oil as it did 35 years ago while the world global demand for oil has nearly doubled.
Clearly it is not in OPEC’s interest to provide relief to the struggling global economy. The cartel enjoys a vertical monopoly of the world vehicle fuel supply, and it is currently at the receiving end of the biggest transfer of wealth in human history. To understand the magnitude of the forces in play it is instructive to visualize the scale of OPEC’s wealth in comparison to that of consuming countries: imagine that OPEC members are corporations and a barrel of oil is a share. At $125 oil, OPEC’s market capitalization based on its proven reserves stands today at roughly $137 trillion. This is roughly equivalent to the value of the world’s total financial assets--stocks, bonds, other equities, government and corporate debt and bank deposits--or roughly three times the market capitalization of all the companies traded in the world’s top 27 stock markets. Such monumental wealth potential will translate into unprecedented buying power for the oil countries. For demonstration sake, at $200 oil OPEC could potentially buy Bank of America in one month worth of production, Apple Computers in a week and General Motors in just 3 days. It would take less than two years of production for OPEC to own a 20 percent stake (which essentially ensures a voting block in most corporations) in every S&P 500 company.
OPEC’s reluctance to increase production is today the main factor contributing to global poverty. While we in the U.S., which enjoys a per capita income of over $40,000 a year, are feeling the sharp pinch of high oil prices, we should all consider the impact of these prices on the world’s poor. People throughout the world who live on $2 a day are being now looted by OPEC price fixing. This has profound implications for global security, driving regional unrest, increasing poverty, and nipping in the bud progress towards democracy.
Beware of perpetuation of the petroleum standard
The unique strategic importance of oil to the modern economy—beyond that of any other commodity today—stems from the fact that the global economy’s very enabler, the transportation sector, is utterly dependent on it, with 220 million cars and trucks in the United States alone (today, contrary to popular belief, only 2 percent of U.S. electricity is generated from oil, and conversely only about 2 percent of U.S. oil demand is due to electricity generation.) With 97 percent of U.S. transportation energy based on petroleum, oil is the lifeblood of America’s economy. America is poor in oil relative to its need. It consumes one of every four gallons in the world but has barely 3 percent of the world’s proven reserves of conventional oil. The United States now imports over 60 percent of its oil, more than twice the ratio of imports before the 1973–74 Arab oil embargo.
Neither efforts to expand petroleum supply nor those to crimp petroleum demand through increased CAFE standards will be enough to reduce America’s strategic vulnerability anytime soon. On the contrary, as the graph from OPEC’s own statistics shows, when we drill more, they drill less. Such policies at best buy us a few more years of complacency, while ensuring a much worse dependence down the road when America's conventional oil reserves are even more depleted.
Rather than focusing on solutions that perpetuate the petroleum standard, we should invest in transformational policies that aim to diminish the strategic importance of oil by breaking its monopoly in transportation.
Real energy security can be achieved only through fuel choice and competition. That competition cannot take place as long as we continue to put 16 million new cars that run only on petroleum on our roads every year, each with an average street life of 16.8 years -- thereby locking ourselves into decades more of petroleum dependence.
Barring a significant change, a senator elected in 2008 will witness the introduction of 102 million gasoline only cars during his or her 6-year term. I cannot think about something more detrimental to America’s security than Congress letting this happen.
When in a hole, stop digging
The first thing we must do is to ensure that the cars rolling onto America’s roads are platforms on which fuels can compete. For a cost of less than $100 extra as compared to a gasoline-only vehicle, automakers can make virtually any car a flex fuel vehicle, capable of running on any combination of gasoline and a variety of alcohols such as ethanol and methanol, made from a variety of feedstocks, from agricultural material, to waste, to coal. (Alcohol does not just mean ethanol, and ethanol does not just mean corn.) Flex fuel vehicles let consumers and the market choose the winning fuels and feedstocks based on economics. In Brazil, where ethanol is widely used, the share of flex fuel vehicles in new car sales rose from 4 percent to 90 percent in under five years. These cars are manufactured by the same automakers that sell to the U.S. market and entail no size, power, or safety compromise by consumers. The proliferation of flex fuel vehicles in Brazil has driven fuel competition at the pump to the point where the Brazilian oil industry has had to keep gasoline prices sufficiently low to compete with ethanol in order not to lose more market share, so low that it actually just received a government subsidy to do so. Indeed, in Brazil, ethanol will become this year an alternative fuel.
Expanding U.S. fuel choice to include biofuels imported from developing countries has significant geopolitical benefits at a time when U.S. global standing is eroding. Sugar, from which ethanol can be cheaply and efficiently produced, is now grown in one hundred countries, many of which are poor and on the receiving end of U.S. development aid. Encouraging these countries to increase their output and become fuel suppliers, opening our fuel market to them by removing the protectionist 54 cent a gallon ethanol tariff, could have far-reaching implications for their economic development. By creating economic interdependence with biomass-producing countries in Africa, Asia, and the Western Hemisphere, the United States can strengthen its position in the developing world and provide significant help in reducing poverty.
At this point, the fallacy that increased use of biofuels in general, and corn ethanol in particular, is driving world hunger must be addressed. The primary drivers of price increases for food commodities spanning the spectrum from fish to rice (neither of which are used to make fuel) and beyond are the massive increases in oil prices -- raising the cost of distribution, labor, packaging and so forth; commodity speculation driven by a weak dollar and increased calorie demand from hundreds of millions of people in China and India who have risen out of poverty and bare subsistence. Further, despite corn ethanol production, the U.S. corn food and feed product has increased 34 percent over the last five years, and U.S. food exports overall have increased 23 percent on the year. America is clearly doing its share to feed the world.
Furthermore, the International Energy Agency has reiterated that biofuels are key to keeping the lid on an overheated transportation fuel market. According to Merrill Lynch, without the increase in biofuels production, oil prices would have been 15 percent higher, which at current oil prices translates into a savings of over $80 billion a year to the U.S. economy. The much derided biofuels program which has facilitated this $80 billion saving, costs the taxpayer $4 billion a year. By any reasonable standard it is a far better deal to send money to America’s farmers than to various petro-dictators.
Methanol
True flex fuel cars should also accommodate another important fuel called methanol. China has embraced this alcohol fuel. Several provinces in China already blend their gasoline with methanol and scores of methanol plants are currently under construction there. The Chinese auto industry has already begun to produce flex-fuel models that can run on methanol. Methanol packs less energy per gallon and is more corrosive than ethanol. But it is cheaper and far easier to produce in bulk. While ethanol can be made only from agricultural products such as corn and sugar cane, methanol can be made from agricultural waste, natural gas, coal, industrial garbage and even recycled carbon dioxide captured from power stations' smokestacks -- an elegant way to reduce greenhouse gas emissions.
Electricity
Since we hardly generate any electricity from oil, using electricity as a transportation fuel enables the full spectrum of electricity sources to compete with petroleum. Plug in hybrid electric vehicles (PHEVs) can reach oil economy levels of 100 miles per gallon of gasoline without compromising the size, safety, or power of a vehicle. If a PHEV is also a flexiblefuel vehicle powered by 85 percent alcohol and 15 percent gasoline, oil economy could reach over 500 miles per gallon of gasoline. Ideally, plug-in hybrids would be charged at night in home or apartment garages, when electric utilities have significant reserve capacity. The Department of Energy estimates that over 70 percent of the U.S. vehicle market could shift to plug-in hybrids without needing to install additional baseload electricity-generating capacity. In addition, the U.S. is the world’s biggest potential market for electric cars which can be sold as second or third family car. Thirty one percent of America’s households own two cars and additional 35% own three or more vehicles. There are over 75 million households in the US that own more than one vehicle and that can potentially replace one or more gasoline only cars with cars powered with made-in-America electricity.
A nationwide deployment of flex-fuel cars, flex fuel plug-in hybrids, and alternative fuels could take place within two decades. But such a transformation will not occur by itself. Every year that passes without Congressional action to ensure that new cars sold in America are flex fuel vehicles is another year in which 16 million gasoline-only cars start their 17-year life on U.S. roads, further binding us to foreign oil. On the grounds of national security and in the interest of stemming the hemorrhaging of our economy, Congress should take swift action to require that new vehicles sold in the United States are flexible fuel vehicles through an Open Fuel Standard. Such an Open Fuel Standard would level the playing field and promote free competition among diverse energy suppliers. A few years ago Congress passed an open standard for television mandating that as of February 2009 every television sold in the U.S. must be digital enabled. Further, Congress allocated coupons in the amount of $80 per household to allow Americans to convert their analog TV to digital transmission. One would hope we consider our transportation sector at least as strategic as television watching.
I realize that many are opposed to any government interference in the market. Indeed, in a perfect world, government would not need to intervene in the energy market, but in a time of war, the United States is taking an unacceptable risk by leaving the problem to be solved by the invisible hand. This is especially true since the energy market is anything but free. It is manipulated by a cartel, heavily rigged in favor of the status quo, and, as the case of the ethanol tariff shows, riddled with protectionism.
Choosing not to embrace an Open Fuel Standard, is choosing to preserve oil’s monopoly in the transportation sector, and with it OPEC’s growing stranglehold over the global economy and in essence guaranteeing continuous economic and strategic decline.
Gal Luft is the Executive Director of the Institute for the Analysis of Global Security (IAGS) and Co-Founder of the Set America Free Coalition.
By Gal Luft
August 22, 2008
Ten years ago, Osama bin Laden set a target price for oil at $144 a barrel. At the time, crude oil prices stood at $12 a barrel and his figure, aimed to compensate the Muslims for what he called “the biggest theft in the history of the world,” sounded delusional.
Four years ago, just prior to the U.S. elections, when oil prices stood at $38, bin Laden explained his economic warfare strategy: “We bled Russia for ten years until it went bankrupt and forced to withdraw in defeat. We are continuing the same policy to make America bleed profusely to the point of bankruptcy.” Reputable energy analysis outfits held a completely opposite view on the future of oil. A 2005 report by Cambridge Energy Research Associates (CERA) held that by 2010 global oil supply would rise by as much as 16 million barrels per day (mbd). “We expect supply to outstrip demand growth in the next few years, which would take the pressure off prices around 2007-2008,” wrote the report’s authors. As we know, this never happened.
World oil production has been flat since 2005 and $144 might soon become a fond memory. Today, with oil prices above bin Laden’s stated goal, his economic warfare strategy seems like a resounding success. At a time al-Qaeda is on the run, $144 oil is a major morale booster and the best birthday present for its 20th anniversary next month. There is no need to elaborate on the implications of such a victory in terms of loss of U.S. prestige and our ability to prevail in the Long War of the 21st century. Furthermore, at current price level, the U.S. will spend over $600 billion on imported oil this year, more than our defense budget, and much of that money will flow into the coffers of those who wish us ill. It has long been clear that our oil dependence forces us to pay for both sides of the war on terrorism. In light of this year’s figures, we are paying the other side more than we invest in our own defense.
A cartel married to a monopoly
In order to chart the road to energy security, we must first understand why we are where we are. There are many reasons for the current oil crisis. Strong demand in developing Asia, speculation, geological decline, and malevolent disruptions have all contributed their share. But by far, the main culprit is OPEC’s reluctance to ramp up production. The cartel owns 78 percent of the world’s proven reserves and produces about 40 percent of its oil production. In 1973, OPEC produced 30mbd, while non-OPEC produced 25mbd. Today, OPEC produces 32mbd while non-OPEC production is close to 45mbd. In other words, OPEC today produces almost as much oil as it did 35 years ago while the world global demand for oil has nearly doubled.
Clearly it is not in OPEC’s interest to provide relief to the struggling global economy. The cartel enjoys a vertical monopoly of the world vehicle fuel supply, and it is currently at the receiving end of the biggest transfer of wealth in human history. To understand the magnitude of the forces in play it is instructive to visualize the scale of OPEC’s wealth in comparison to that of consuming countries: imagine that OPEC members are corporations and a barrel of oil is a share. At $125 oil, OPEC’s market capitalization based on its proven reserves stands today at roughly $137 trillion. This is roughly equivalent to the value of the world’s total financial assets--stocks, bonds, other equities, government and corporate debt and bank deposits--or roughly three times the market capitalization of all the companies traded in the world’s top 27 stock markets. Such monumental wealth potential will translate into unprecedented buying power for the oil countries. For demonstration sake, at $200 oil OPEC could potentially buy Bank of America in one month worth of production, Apple Computers in a week and General Motors in just 3 days. It would take less than two years of production for OPEC to own a 20 percent stake (which essentially ensures a voting block in most corporations) in every S&P 500 company.
OPEC’s reluctance to increase production is today the main factor contributing to global poverty. While we in the U.S., which enjoys a per capita income of over $40,000 a year, are feeling the sharp pinch of high oil prices, we should all consider the impact of these prices on the world’s poor. People throughout the world who live on $2 a day are being now looted by OPEC price fixing. This has profound implications for global security, driving regional unrest, increasing poverty, and nipping in the bud progress towards democracy.
Beware of perpetuation of the petroleum standard
The unique strategic importance of oil to the modern economy—beyond that of any other commodity today—stems from the fact that the global economy’s very enabler, the transportation sector, is utterly dependent on it, with 220 million cars and trucks in the United States alone (today, contrary to popular belief, only 2 percent of U.S. electricity is generated from oil, and conversely only about 2 percent of U.S. oil demand is due to electricity generation.) With 97 percent of U.S. transportation energy based on petroleum, oil is the lifeblood of America’s economy. America is poor in oil relative to its need. It consumes one of every four gallons in the world but has barely 3 percent of the world’s proven reserves of conventional oil. The United States now imports over 60 percent of its oil, more than twice the ratio of imports before the 1973–74 Arab oil embargo.
Neither efforts to expand petroleum supply nor those to crimp petroleum demand through increased CAFE standards will be enough to reduce America’s strategic vulnerability anytime soon. On the contrary, as the graph from OPEC’s own statistics shows, when we drill more, they drill less. Such policies at best buy us a few more years of complacency, while ensuring a much worse dependence down the road when America's conventional oil reserves are even more depleted.
Rather than focusing on solutions that perpetuate the petroleum standard, we should invest in transformational policies that aim to diminish the strategic importance of oil by breaking its monopoly in transportation.
Real energy security can be achieved only through fuel choice and competition. That competition cannot take place as long as we continue to put 16 million new cars that run only on petroleum on our roads every year, each with an average street life of 16.8 years -- thereby locking ourselves into decades more of petroleum dependence.
Barring a significant change, a senator elected in 2008 will witness the introduction of 102 million gasoline only cars during his or her 6-year term. I cannot think about something more detrimental to America’s security than Congress letting this happen.
When in a hole, stop digging
The first thing we must do is to ensure that the cars rolling onto America’s roads are platforms on which fuels can compete. For a cost of less than $100 extra as compared to a gasoline-only vehicle, automakers can make virtually any car a flex fuel vehicle, capable of running on any combination of gasoline and a variety of alcohols such as ethanol and methanol, made from a variety of feedstocks, from agricultural material, to waste, to coal. (Alcohol does not just mean ethanol, and ethanol does not just mean corn.) Flex fuel vehicles let consumers and the market choose the winning fuels and feedstocks based on economics. In Brazil, where ethanol is widely used, the share of flex fuel vehicles in new car sales rose from 4 percent to 90 percent in under five years. These cars are manufactured by the same automakers that sell to the U.S. market and entail no size, power, or safety compromise by consumers. The proliferation of flex fuel vehicles in Brazil has driven fuel competition at the pump to the point where the Brazilian oil industry has had to keep gasoline prices sufficiently low to compete with ethanol in order not to lose more market share, so low that it actually just received a government subsidy to do so. Indeed, in Brazil, ethanol will become this year an alternative fuel.
Expanding U.S. fuel choice to include biofuels imported from developing countries has significant geopolitical benefits at a time when U.S. global standing is eroding. Sugar, from which ethanol can be cheaply and efficiently produced, is now grown in one hundred countries, many of which are poor and on the receiving end of U.S. development aid. Encouraging these countries to increase their output and become fuel suppliers, opening our fuel market to them by removing the protectionist 54 cent a gallon ethanol tariff, could have far-reaching implications for their economic development. By creating economic interdependence with biomass-producing countries in Africa, Asia, and the Western Hemisphere, the United States can strengthen its position in the developing world and provide significant help in reducing poverty.
At this point, the fallacy that increased use of biofuels in general, and corn ethanol in particular, is driving world hunger must be addressed. The primary drivers of price increases for food commodities spanning the spectrum from fish to rice (neither of which are used to make fuel) and beyond are the massive increases in oil prices -- raising the cost of distribution, labor, packaging and so forth; commodity speculation driven by a weak dollar and increased calorie demand from hundreds of millions of people in China and India who have risen out of poverty and bare subsistence. Further, despite corn ethanol production, the U.S. corn food and feed product has increased 34 percent over the last five years, and U.S. food exports overall have increased 23 percent on the year. America is clearly doing its share to feed the world.
Furthermore, the International Energy Agency has reiterated that biofuels are key to keeping the lid on an overheated transportation fuel market. According to Merrill Lynch, without the increase in biofuels production, oil prices would have been 15 percent higher, which at current oil prices translates into a savings of over $80 billion a year to the U.S. economy. The much derided biofuels program which has facilitated this $80 billion saving, costs the taxpayer $4 billion a year. By any reasonable standard it is a far better deal to send money to America’s farmers than to various petro-dictators.
Methanol
True flex fuel cars should also accommodate another important fuel called methanol. China has embraced this alcohol fuel. Several provinces in China already blend their gasoline with methanol and scores of methanol plants are currently under construction there. The Chinese auto industry has already begun to produce flex-fuel models that can run on methanol. Methanol packs less energy per gallon and is more corrosive than ethanol. But it is cheaper and far easier to produce in bulk. While ethanol can be made only from agricultural products such as corn and sugar cane, methanol can be made from agricultural waste, natural gas, coal, industrial garbage and even recycled carbon dioxide captured from power stations' smokestacks -- an elegant way to reduce greenhouse gas emissions.
Electricity
Since we hardly generate any electricity from oil, using electricity as a transportation fuel enables the full spectrum of electricity sources to compete with petroleum. Plug in hybrid electric vehicles (PHEVs) can reach oil economy levels of 100 miles per gallon of gasoline without compromising the size, safety, or power of a vehicle. If a PHEV is also a flexiblefuel vehicle powered by 85 percent alcohol and 15 percent gasoline, oil economy could reach over 500 miles per gallon of gasoline. Ideally, plug-in hybrids would be charged at night in home or apartment garages, when electric utilities have significant reserve capacity. The Department of Energy estimates that over 70 percent of the U.S. vehicle market could shift to plug-in hybrids without needing to install additional baseload electricity-generating capacity. In addition, the U.S. is the world’s biggest potential market for electric cars which can be sold as second or third family car. Thirty one percent of America’s households own two cars and additional 35% own three or more vehicles. There are over 75 million households in the US that own more than one vehicle and that can potentially replace one or more gasoline only cars with cars powered with made-in-America electricity.
A nationwide deployment of flex-fuel cars, flex fuel plug-in hybrids, and alternative fuels could take place within two decades. But such a transformation will not occur by itself. Every year that passes without Congressional action to ensure that new cars sold in America are flex fuel vehicles is another year in which 16 million gasoline-only cars start their 17-year life on U.S. roads, further binding us to foreign oil. On the grounds of national security and in the interest of stemming the hemorrhaging of our economy, Congress should take swift action to require that new vehicles sold in the United States are flexible fuel vehicles through an Open Fuel Standard. Such an Open Fuel Standard would level the playing field and promote free competition among diverse energy suppliers. A few years ago Congress passed an open standard for television mandating that as of February 2009 every television sold in the U.S. must be digital enabled. Further, Congress allocated coupons in the amount of $80 per household to allow Americans to convert their analog TV to digital transmission. One would hope we consider our transportation sector at least as strategic as television watching.
I realize that many are opposed to any government interference in the market. Indeed, in a perfect world, government would not need to intervene in the energy market, but in a time of war, the United States is taking an unacceptable risk by leaving the problem to be solved by the invisible hand. This is especially true since the energy market is anything but free. It is manipulated by a cartel, heavily rigged in favor of the status quo, and, as the case of the ethanol tariff shows, riddled with protectionism.
Choosing not to embrace an Open Fuel Standard, is choosing to preserve oil’s monopoly in the transportation sector, and with it OPEC’s growing stranglehold over the global economy and in essence guaranteeing continuous economic and strategic decline.
Gal Luft is the Executive Director of the Institute for the Analysis of Global Security (IAGS) and Co-Founder of the Set America Free Coalition.
Why Big Oil Should Not be Allowed to Monopolize the Blender’s Tax Credit
Tampa, FL (April 20, 2009) - The issue is whether state legislatures should allow oil companies, or affiliates of oil companies, to have a monopoly on blending fuel ethanol with unblended gasoline.
The American Jobs Creation Act of 2004 established the Volumetric Ethanol Excise Tax Credit (“VEETC”), also known as the “Blender’s Tax Credit.” Excise taxes on highway fuels have been a dedicated source of funding for the Federal Highway Trust Fund since its creation in 1956. The Federal Government levies a tax of 18.4 cents per gallon on domestic gasoline sales. The blender’s tax credit provides a credit against federal gasoline taxes that is worth 45 cents for every gallon of ethanol blended into the gasoline pool.
The excise tax credit is fully refundable. To receive a refund, a blender must first apply the excise tax credit against any excise tax liability for a particular taxable year. To the extent the blender has any excise tax credit remaining after applying the credit against its excise tax liability, the blender may request a refund of the excess credit or may apply the excess credit against its income tax liability.
It was never the legislative intent of the U.S. Congress, nor the intent of the U.S. Environmental Protection Agency, to allow oil companies to be the sole beneficiaries of the blender’s tax credit. Section 6426 of the Internal Revenue Code creates a credit against the excise tax on taxable fuels. The excise tax credit is generally available to any person that blends alcohol or biodiesel with taxable fuel in a mixture. To qualify for the credit, a qualifying mixture must either be sold by the producer to a buyer for use by the buyer as a fuel or be used as a fuel in the trade or business of the producer.
If U.S. ethanol producers are able to be blenders of fuel ethanol and unblended gasoline, and thereby receive the 45 cents-per-gallon tax credit, small-capacity ethanol producers would be able to enter the market. The result would be fair and healthy competition in the marketing of ethanol blends.
The benefits of allowing ethanol producers to blend and directly market ethanol blends to the consumer are the following:
(a) Rural economic development and job creation would be maximized. Increased investments in plants and equipment would stimulate the local economy by providing construction jobs initially and the chance for full-time employment after the plant is completed. On average, an ethanol plant supports 45 full-time jobs and nearly 700 jobs throughout the entire economy;
(b) The resulting increase in local and state tax revenues would provide funds for improvements to the community and to the region; and
(c) Federal and state renewable energy technology grants for ethanol would not be required. The blender’s tax credit and the market would reward the ethanol producer/blender.
In 2008, ExxonMobil reported the largest annual profit in U.S. history. ExxonMobil’s annual profit jumped 11%, or $5.2 billion, to $45.2 billion on the back of record oil prices. ExxonMobil returns most of its profit to shareholders, distributing about $40 billion in 2008 in the form of share buybacks and dividends. Chevron was also up more than $5 billion for the year, to $23.9 billion. A substantial portion of Chevron’s increase came in a fourth-quarter jump in its profits for refining and marketing of gasoline and other fuels.
Currently, oil companies are refusing to sell unblended gasoline to ethanol producers. The sole beneficiaries of the 45 cents-per-gallon blender’s tax credit are the oil companies, blenders affiliated with oil companies, and oil company shareholders. As a result, the farmers/landowners, ethanol producers and consumers never realize any benefit from the blender’s tax credit; rural economic development is ignored; and U.S. jobs are not created.
State legislatures should not permit only oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit. This monopoly impairs fair and healthy competition in the marketing of ethanol blends. U.S. ethanol producers have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the blender’s tax credit and be cost-competitive.
Rural development and job creation, not the maximization of oil company annual profits, should be the focus of our state legislatures.
The American Jobs Creation Act of 2004 established the Volumetric Ethanol Excise Tax Credit (“VEETC”), also known as the “Blender’s Tax Credit.” Excise taxes on highway fuels have been a dedicated source of funding for the Federal Highway Trust Fund since its creation in 1956. The Federal Government levies a tax of 18.4 cents per gallon on domestic gasoline sales. The blender’s tax credit provides a credit against federal gasoline taxes that is worth 45 cents for every gallon of ethanol blended into the gasoline pool.
The excise tax credit is fully refundable. To receive a refund, a blender must first apply the excise tax credit against any excise tax liability for a particular taxable year. To the extent the blender has any excise tax credit remaining after applying the credit against its excise tax liability, the blender may request a refund of the excess credit or may apply the excess credit against its income tax liability.
It was never the legislative intent of the U.S. Congress, nor the intent of the U.S. Environmental Protection Agency, to allow oil companies to be the sole beneficiaries of the blender’s tax credit. Section 6426 of the Internal Revenue Code creates a credit against the excise tax on taxable fuels. The excise tax credit is generally available to any person that blends alcohol or biodiesel with taxable fuel in a mixture. To qualify for the credit, a qualifying mixture must either be sold by the producer to a buyer for use by the buyer as a fuel or be used as a fuel in the trade or business of the producer.
If U.S. ethanol producers are able to be blenders of fuel ethanol and unblended gasoline, and thereby receive the 45 cents-per-gallon tax credit, small-capacity ethanol producers would be able to enter the market. The result would be fair and healthy competition in the marketing of ethanol blends.
The benefits of allowing ethanol producers to blend and directly market ethanol blends to the consumer are the following:
(a) Rural economic development and job creation would be maximized. Increased investments in plants and equipment would stimulate the local economy by providing construction jobs initially and the chance for full-time employment after the plant is completed. On average, an ethanol plant supports 45 full-time jobs and nearly 700 jobs throughout the entire economy;
(b) The resulting increase in local and state tax revenues would provide funds for improvements to the community and to the region; and
(c) Federal and state renewable energy technology grants for ethanol would not be required. The blender’s tax credit and the market would reward the ethanol producer/blender.
In 2008, ExxonMobil reported the largest annual profit in U.S. history. ExxonMobil’s annual profit jumped 11%, or $5.2 billion, to $45.2 billion on the back of record oil prices. ExxonMobil returns most of its profit to shareholders, distributing about $40 billion in 2008 in the form of share buybacks and dividends. Chevron was also up more than $5 billion for the year, to $23.9 billion. A substantial portion of Chevron’s increase came in a fourth-quarter jump in its profits for refining and marketing of gasoline and other fuels.
Currently, oil companies are refusing to sell unblended gasoline to ethanol producers. The sole beneficiaries of the 45 cents-per-gallon blender’s tax credit are the oil companies, blenders affiliated with oil companies, and oil company shareholders. As a result, the farmers/landowners, ethanol producers and consumers never realize any benefit from the blender’s tax credit; rural economic development is ignored; and U.S. jobs are not created.
State legislatures should not permit only oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit. This monopoly impairs fair and healthy competition in the marketing of ethanol blends. U.S. ethanol producers have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the blender’s tax credit and be cost-competitive.
Rural development and job creation, not the maximization of oil company annual profits, should be the focus of our state legislatures.
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