Furthermore, because the amount of oil that consumers demand does not change much when the price rises or falls — i.e., the demand is “inelastic” — small changes to the supply can cause large fluctuations in price. The 2 percent temporary reduction of Middle East oil supplies caused by the disorders associated with this year’s putative “Arab Spring” caused oil prices to go up 20 percent — a ten-to-one ratio. Assuming a conservative five-to-one ratio, the 0.85 percent addition to the world’s oil supply represented by the Canadian oil could be expected to drive prices down by about $4.25 per barrel. This would save us an additional $20 billion, an amount that in theory could create 200,000 jobs.
In summary, then, what is at stake in the Keystone pipeline is not 20,000 jobs, but more like half a million jobs. Congressional Republicans are thus entirely correct in linking approval of the payroll-tax cut and the unemployment-insurance extension to approval of the pipeline, as without the revenues that come from economic growth, such benefits are unaffordable.
That said, however, the Keystone oil represents a limited addition to the world fuel market. A much larger impact could be achieved if we can find a way to make use of our natural-gas supplies.
As a result of improved technology, American natural-gas production is rising at a rate of 6 percent per year. Unfortunately, however, this cannot currently be marketed as liquid fuel. The result has been a crash in the price of natural gas that leaves oil prices, and oil imports, unscathed.
Natural gas can, however, be readily and cheaply converted to methanol, which in turn can be used in flex-fuel cars. This is a much faster and cheaper way to get natural gas into the vehicle-fuel market than converting cars to run on natural gas directly, as no high-pressure vehicle fuel tanks or costly compressor filling stations (which would require massive subsidies) are needed. Rather, the large majority of cars sold in the U.S. today (and for at least the past five years), including all GM and Ford vehicles, have been equipped with computers and chromated fuel lines that make them capable of flex-fuel operation. If provided with the right software, and methanol-impervious Buna-N plastic seals (costing less than 50 cents per vehicle) for their fuel systems, every new car sold in the U.S. could be fully flex-fuel, capable of running equally well on methanol, ethanol, or gasoline.
The bipartisan Open Fuel Standards bill (HR 1687), cosponsored by Reps. John Shimkus (R., Ill.) and Eliot Engel (D., N.Y.), contains provisions that would require that the flex-fuel capability of the majority of new cars sold in the U.S. be activated. If it passes, a market for methanol would be created that would very quickly call into being expanded production and distribution facilities, both in the U.S. and elsewhere as foreign auto manufacturers switched their lines over. This would force gasoline into competition with other fuels at the pump worldwide, thereby putting in place a permanent global competitive constraint on the price of oil. Furthermore, this would allow many other nations with resources suitable for producing methanol (and in some cases ethanol) to enter the world market, thereby increasing the downpour of additional supply.