May 27, 2005, 8:55 a.m.
Alternative-Fuel Nonsense
Forcing the U.S. to import less oil would only hurt Americans.

By Alan Reynolds

Proposals for extra billions of dollars in federal subsidies invariably attract impressive bipartisan support. If someone proposed big subsidies to replace fuel-guzzling airplanes with hot-air balloons, organizations would instantly spring up and eminent Beltway bandits would scramble for a piece of the action. Groups with names like “Americans for Everything Wonderful” would suddenly flood the talk shows with representatives arguing that we could easily reduce dependence on imported oil by simply elevating our balloons with imported liquefied natural gas. Lobbyists inconspicuously tied to the coal or corn industries might provide additional hot air about methanol or ethanol. If the White House and Congress were dominated by Democrats, the sales pitch would be about cooling the planet. If Republicans held the purse strings, balloon subsidies would become a national-security emergency.

The current debate about U.S. oil policy is equally enlightened. It is dominated by a special-interest lobby whose primary interest is to enrich automakers and alternative-fuel producers, and by journalists whose enthusiasm for the green agenda has clouded their understanding of basic economics.

In 2004, the Apollo Alliance was patched together as an election-year opportunity to promote $300 billion in federal subsidies and tax breaks, largely for ethanol and methanol to (as the Kerry campaign put it) “help farmers and coal miners.” This year, it has again endorsed a $12-billion subsidy plan.

Meanwhile, Set America Free, a group associated with the Apollo Alliance, has made a highly publicized claim that the government could painlessly bribe or compel Detroit (but not BMW or Infiniti) to make cars that get 500 miles per gallon. This bizarre number starts with the Toyota Prius, which gets about 44 mpg. What they don’t tell you is that the figure would fall to 32 mpg if the Prius ran on the group’s proposed mix of 85 percent ethanol. They claim such a car’s mileage per gallon could be doubled by adding heavy batteries to be plugged in for short trips on electricity (i.e., 67 horsepower and no air conditioning) alone.

Even if drivers were willing to do this, it would be bad for the environment. As the Sierra Club’s Dan Becker notes, “coal is more polluting than gasoline, and nearly 60 percent of U.S. electricity is generated by burning coal.” Yet the plug-in supposedly gets us up to 100 mpg, which magically rises to 500 by assuming one out of every five or six gallons consists of gasoline and the rest is ethanol or methanol (and pretending those fuels can be produced without energy). They mean gallons of petroleum, not fuel. But it takes a lot of petroleum to farm corn (fertilizer, pesticides, and farm-equipment fuel), convert it to ethanol, and get it to market. By the same logic by which the IAGS came up with that 500 mpg figure, an all-electric car or a methanol-powered giant truck could be said to get infinite miles per gallon.

A closer look at some of Set America Free’s supporters sheds a little light on the group’s political objectives. Aside from their association with the Apollo Alliance — whose raison d’être is to promote ethanol and methanol subsidies — the group is significant in that one-third of their masthead consists of directors and advisors to the Institute for Analysis of Global Security (IAGS), although just two are identified as such. Other individuals not directly affiliated with IAGS or Apollo include a few prominent names identified only by their past government jobs, even though some now have conflicting interests in energy companies and electric utilities. IAGS’s directors and advisors include an executive director of the International LNG Alliance, the vice chairman of the International Committee on Coal Research, an executive director of the Gas Technology Institute, a founder of DCH Technology Inc. (a fuel-cell company), a founder of Global Energy Investors LLC, and a principal of Energy and Communications Solutions LLC.

What such disinterested advisors have in common is that they want to send $4 billion to U.S. automotive manufacturers to build the hybrids Japan already sells, $4 billion to “demonstration plants” to produce methanol or ethanol and provide the related pumps, $2 billion to those who will “continue work on commercializing fuel cell technology,” and $2 billion to the incentive bin in the form of tax breaks for those rich enough to afford a $48,535 Lexus 400h or the larger new hybrids coming from GM and Ford (many of which promise only 10 to 15 percent better mileage than gas-powered equivalents).

The IAGS is a “global security” advocacy group, interested in energy economics only as a roundabout means to their global (not national) foreign-policy objective. They want to impose stern conservation on U.S. (not foreign) motorists. Putting possible special-interest conflicts aside, the ideological rationale of IAGS is to use austerity in driving as unilateral economic warfare against two identifiable Middle Eastern oil producers.

Their argument begins by feigning alarm that “22 percent of the world’s oil is in the hands of state sponsors of terrorism.” But only three of the seven countries on the State Department’s list of terrorism sponsors are oil exporters, and one of those is now occupied by U.S. forces. That leaves Iran and Libya, who account for merely 7 percent of world production. Reserves are irrelevant. Governments are paid for what they produce, not for what remains in the ground. A full 93 percent of the proposed austerity in U.S. oil demand would be aimed at oil-producing countries who are not state sponsors of terrorism, notably Canada, Mexico, and the U.S. itself.

The IAGS nonetheless theorizes, “Reducing demand for Middle East oil would force the petroleum-rich regimes to invest their funds domestically, seek ways to diversify their economies and rethink their support for America’s enemies.” This echoes the “geo-green” theme of New York Times columnist Thomas Friedman, who wrote in January that “if we put all our focus on reducing the price of oil — by conservation, by developing renewable and alternative energies and by expanding nuclear power — we will force more reform [of Middle Eastern politics] than by any other strategy.” He promised $18 a barrel would guarantee “political and economic reform from Algeria to Iran.”

But the process of replacing older vehicles with ethanol-fueled plug-in hybrids would move with glacial slowness, and would not shrink global oil demand enough to collapse oil prices. That is why Friedman proposes to further decrease demand by raising U.S. taxes high enough to keep gasoline above $4 a gallon regardless of the price of crude. In practice, this would simply mean that we would pay much more for gasoline so other nations could pay less.

Even if world oil did fall back to $18 a barrel, as Friedman would like, there would be no incentive for Asia or Europe to economize on oil use at all, nor for anyone to supply or demand expensive alternatives. Besides, the price of oil was below $18 nearly all the time from February 1986 to June 1999 — falling as low as $11 at the end of 1998 and remaining below $20 through the end of 2001. Yet cheap oil did nothing to promote economic or political liberty in Algeria, Iran, or anywhere else. This theory has been tested — and it failed completely.

Serious economic warfare has to be multinational to stand any chance of doing any damage to anyone except the consuming countries who are inflicting artificial scarcity on themselves. Forcing the U.S. alone to import less oil just leaves more oil available to other countries at a lower price. And even a broadly supported multinational embargo that really did curb Iraq’s oil sales did nothing to dislodge Saddam Hussein; it just hurt the Iraqi people, pushed oil prices higher (helping Iran and others), and enriched Saddam and some other thieves. A prolonged unilateral embargo against Fidel Castro did not dislodge him either.

Given this history, it’s hard not to conclude that the 500-mpg claim and its geo-green “global security” rationale are simply excuses for wasting even more taxpayer dollars on subsidies and special tax breaks.

— Alan Reynolds is a senior fellow with the Cato Institute.