If you suffer a heart attack but your doctor thinks you’ve got a nasty case of indigestion, the medicine he prescribes probably won’t cure you. The same applies to policymaking and legislating: Misunderstand the problem, and you’re likely to come up with a useless — or damaging — response.
Anne Korin and Gal Luft, co-directors of the Institute for the Analysis of Global Security (IAGS), have long argued that liberals, conservatives, and libertarians have all misdiagnosed why the West has become dependent on oil; why the price of oil keeps rising no matter how much we drill, conserve, and boost miles per gallon; why dependence on increasingly expensive oil is a dire threat; and what we can do to restore the health of our national and economic security. In Petropoly: The Collapse of America’s Energy Security Paradigm, they make a muscular case for a Teddy Roosevelt–style solution: trust-busting.
This point requires emphasis: Korin and Luft are not attempting to pick technological winners and losers. On the contrary, they recognize that think-tank researchers, Energy Department bureaucrats, and politicians are ill-equipped to make such calls. President Carter’s Synthetic Fuels Corporation, President George W. Bush’s “hydrogen economy,” President Obama’s Solyndra scandal, and years of bipartisan ethanol subsidies should have taught us to reject “taxpayer funded boondoggles.” Their alternative is to seek guidance from the works of such free-market economists as Milton Friedman, Ludwig von Mises, and Friedrich Hayek.
Friedman, Von Mises, and Hayek all believed in limited government. But as Friedman noted, “the first and most urgent necessity in the area of government policy is the elimination of those measures which directly support monopoly.”
Oil is unlike other products: It is a strategic commodity — a shorthand way of saying that America and other industrialized nations would collapse without it. Our enemies know this as well as we do — better, actually.
We don’t need oil for electricity — for that we are now using coal, natural gas, nuclear energy, and renewables. We do need oil for transportation, an essential component of a modern economy. In the transportation sector, oil enjoys a virtual monopoly.
The Organization of Petroleum Exporting Countries (OPEC), a cartel, controls 78 percent of the world’s conventional oil reserves, yet accounts for only about 33 percent of global oil production. The explanation: By conspiring to restrict production, OPEC members manipulate prices.
“Price fixing by private companies on the OPEC scale would not be tolerated in any industrial country,” MIT professor emeritus of economics M. A. Adelman observes. “In the United States, the officers of firms that engage in such activities go to jail. But the OPEC members are sovereign states, subject to no country’s laws.”
Yes, we can and should drill more in the U.S. because that produces wealth and jobs here at home. But we can’t drill enough to have an impact on prices — OPEC can simply drill less to offset our production and keep prices where it wants them. Similarly, we can build more fuel-efficient cars, drive them less, and raise taxes on gasoline, and it still won’t help because OPEC can adjust their faucets and the price to its liking and our detriment.
What specific government policy can break the oil monopoly and encourage the emergence of a free market in transportation fuels? Korin and Luft are convinced that all we need to do is move from single-fuel automobiles to vehicles that are capable of running on a variety of liquid fuels. The technology already exists. The additional cost is about $100 a car — less than the cost of an airbag.
“It is the petroleum-only vehicle that gives the oil-exporting governments of Iran, Saudi Arabia, Venezuela and Russia inordinate power on the world stage,” they write. “It is the petroleum-only vehicle that forces us to pay more and more per barrel, sinking our economy deeper and deeper into debt. It is the petroleum-only vehicle that forces us to borrow ever growing amounts of money from China to finance our oil expenditures.”
Korin and Luft note that in Brazil motorists today buy cars capable of running on gasoline, ethanol (made from sugar cane), and, increasingly, natural gas. Meanwhile, in Shanxi, China, “the city’s buses, taxis and many private vehicles run on methanol” — a fuel that is both cleaner and cheaper per mile than gasoline. “Within less than a decade, China’s methanol use in the transportation sector grew from virtually zero to a point it replaced more than eight percent of the country’s gasoline demand,” they report.
Much of China’s methanol is made from coal, but methanol also can be made from biomass (essentially, agricultural and urban garbage) and from natural gas, a commodity the U.S. is now producing in abundance thanks to technological advances such as hydraulic fracturing and horizontal drilling.
Again, Korin and Luft are not arguing for any of these fuels. They are arguing for the opening of the market so that these and other fuels — both existing and not yet in production — can give oil a run for its money. More fuel, more diverse fuel sources, and more consumer choice, they believe, will both lower and stabilize prices while reducing the political power of foreign oil producers.
No one should be surprised that the creation of a free market in fuels is opposed by OPEC and others who benefit from the status quo. They are spending lavishly to undermine potential competitors, not least through an elaborate disinformation campaign. To take but one example: The United Arab Emirates recently funded a feature film starring Matt Damon that raises alarms about the environmental risks of fracking.
Oil-only advocates are also influential on Capitol Hill. As a result, Korin and Luft conclude, members of Congress who had no difficulty voting to mandate digital television and rear-end cameras for cars are opposing measures to allow fuel competition. Korin and Luft charge these legislators with “aiding and abetting OPEC” and standing between “the perpetuation of a restrictive monopolistic and economically ruinous fuel system and a free and competitive fuel market which could provide us true and lasting energy security.”
If Americans understood that was what their representatives were doing, I doubt they’d let them get away with it for long.
— Clifford D. May is president of the Foundation for Defense of Democracies, a policy institute focusing on national security.