Politics & Policy

Obama Covers for OPEC

The problem is the cartel, not the “price gouging.”

When faced with an issue of grave concern to the public, a politician has two choices. He can try to solve the problem. That would be the course of a true statesman. Alternatively, however, he can take the path of the demagogue, and seek to exploit the problem by blaming it on scapegoats among or linked to his political adversaries.

In the case of the current energy crisis, President Obama has chosen the second path.

Responding to public concern over sharply rising gasoline prices, President Obama announced last week that he was asking Attorney General Eric Holder to launch a criminal investigation of price gouging by oil companies, refiners, and gas stations.

Such posturing is so absurd as to exceed the capacity of satire. The reason gasoline prices are up is that the price of crude oil is up. There is not only a direct correlation between the two, but a causal relationship: The primary cost of producing gasoline is the cost of the oil from which it is refined. It is impossible to make cheap gasoline from expensive oil. To launch a witch hunt against gasoline providers for high price at the pump when oil is selling for $110 per barrel is a truly amazing political stunt.

However, there is a question worthy of investigation, and that is why oil prices are so high. Well, prices are determined by supply and demand. If oil prices are high, it must be because there is too little supply relative to demand. Whose fault is this? The answer can be obtained by looking at the data.

These graphs show non-OPEC and OPEC oil production, as well as the global price of oil, for the years 1973 through 2011. Note the vast difference in the production patterns: Non-OPEC production rises to meet increased demand. In fact, it nearly doubles — which is what one would expect, since the world economy and world population roughly doubled as well over the same span of time. In contrast, OPEC production figures show no rational trend. Instead, they vary wildly in accord with tactical decisions by the cartel to manipulate supplies and prices. But what is even more stunning is this: In 1973, OPEC oil production was 30 million barrels per day, exactly what it is today. That is, despite the passage of more than a third of a century, during which time the world population doubled in size — and despite the fact that OPEC countries are sitting on top of 80 percent of the world’s commercially accessible oil reserves — OPEC production has not increased at all.

OPEC’s complete stagnation in production since 1973 is remarkable, especially when you consider the fact that in the shorter period from 1945 to 1973, the output of the countries that became OPEC grew more than tenfold. Indeed, to take just the single most important example, the production of Saudi Arabia grew at a rate of 16 percent per year from 1965 to 1974. Then the brakes were slammed on, and from 1974 to today, it has grown at a rate of 0.3 percent.

Did Saudi Arabia and the other OPEC countries reach “peak oil” (the maximum rate of petroleum extraction) in 1973? No. Rather, in conjunction with events leading up to and surrounding their 1973 oil embargo, the national governments of the OPEC powers seized control of their oil concessions from the Seven Sisters (the oil multinationals: Exxon, British Petroleum, Shell, etc.), which had developed them. With the new management came a new policy. The Seven Sisters’ policy had been to plan ahead to increase production so as to meet the needs and thereby ensure the continued growth of the world market. As a result of this policy, world oil prices were flat or slightly declining from 1947 through 1972, helping to create one of the greatest periods of economic growth the world has ever seen. In place of this policy, OPEC instituted a new plan, one of restricting production to drive prices up, regardless of the catastrophic effects such actions might impose on the world economy. In the following graph, note the relative stability of oil prices from 1880 through 1972, and the complete instability and wild price fluctuations since OPEC took control of the world oil market in 1973.

This predatory policy of OPEC is not a matter of ancient history. It is going on right now. On April 25, 2011, the Saudi oil minister announced that his country would cut production by 800,000 barrels per day. Was this a cut in order to stabilize falling oil prices at reasonable levels? Clearly not. Rather, it was a malicious action designed to drive already-too-high oil prices through the roof. If that occurs, our economy will crash, millions will be thrown out of work, state and federal deficits will explode, and our currency itself will be imperiled.

The United States uses about 8 billion barrels of oil per year. At the current contrived price of $110 per barrel, we will be charged $880 billion per year for our oil, and the world as a whole will have to pay $3.5 trillion, with 40 percent of the take ending up in the coffers of the OPEC governments.

If there were a free market in oil, its price would be closer to $30 per barrel, and this tribute would be cut by three-quarters. Instead, the price of oil is under the control of a cartel that has placed the industrial world in a state of siege. In exchange for our possessions, they will give us limited supplies of fuel. If we do not wish to be dispossessed, we need to break the siege.

There is a way to do this. The power of the cartel lies solely in its ability to limit the world’s supplies of liquid fuels by limiting access to petroleum resources. But there is a fuel that can be produced cheaply, without the use of petroleum. This is methanol, commonly known as wood alcohol. It can be made from coal, natural gas, garbage, or any kind of biomass without exception. It costs about $0.50 per gallon to make, and its current spot price, without any subsidy, is $1.20 per gallon. (This is equivalent in miles per dollar to gasoline at $2.18 per gallon.) The only problem is that the cars on the road today can’t use it. This, however, can readily be corrected. Flex-fuel technology will allow any car to run equally well on methanol, ethanol, or gasoline. It adds only $100 to the cost of a new car. Were such a feature made standard, gasoline and ethanol would be forced to compete with methanol, and OPEC’s power to limit access to fuel supplies and drive prices up would be broken.

The bipartisan Open Fuel Standards bill being discussed in Congress would achieve this critical objective. If the president truly is against high fuel prices, he should throw his full political support behind this bill. If, instead, he continues to prefer cheap demagoguery to necessary action to protect America from OPEC extortion, then history, and perhaps the voters, will render harsh judgment.

— Robert Zubrin, an aerospace engineer, is president of Pioneer Astronautics and author of Energy Victory: Winning the War of Terror by Breaking Free of Oil.


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