Politics & Policy

How to Reduce Oil Prices

Map of the proposed Keystone Pipeline (TransCanada)
Approve the Keystone pipeline, and mandate flex-fuel vehicles.

The United States is by far the world’s leading oil importer. Thus, when the price of oil goes up, our economy is severely taxed. At the beginning of 2011, many economists were talking about an emerging U.S. economic recovery. Yet by spring, as oil prices climbed above $100 per barrel, it became apparent to all who were paying attention that no escape from recession was in sight.

The economic impact of oil prices on the American economy is shown on the graph below, which compares oil prices (adjusted for inflation to 2010 dollars) to the unemployment rate from 1970 to the present. Every oil-price hike for the past four decades, including those in 1973, 1979, 1991, 2001, and 2008, was followed shortly afterwards by a sharp rise in American unemployment.

The distress to American workers caused by such events is manifest, but the economic damage goes far beyond the impact on the unemployed themselves. A sustained oil price of $100 per barrel will add $500 billion to the U.S. balance-of-trade deficit. This represents a subtraction from our gross domestic product equal to that required to support 5 million jobs at $100,000 per year each. And when Americans are out of work, many cannot pay their mortgages — a factor that undoubtedly contributed to the recent crash of home prices and the resulting recession.

Looking at the data in the graph, it is clear that cap-and-trade plans, or alternative methods of carbon or fuel taxation, are not the answer. Indeed, by increasing the cost of energy, they will only make the economic situation worse. Rather, what we need is a policy that will force world oil prices down. The way to do this is to flood the world market with liquid fuel from every source available to us.

It is in this light that the extreme malfeasance of the Obama administration in delaying the approval of the Keystone pipeline becomes apparent. While much has been made of the loss of 20,000 jobs building the pipeline, that is the smallest part of the matter. The real issue is that by refusing to approve the pipeline, the Obama administration is acting to block the introduction of 270 million barrels per year of Canadian oil into the world market. In doing so, the administration is acting in accord with the interests of the OPEC oil cartel, which wishes to see supplies limited so that it can maintain high oil prices at the expense of the West. At current prices of $100 per barrel, this will cause a loss to the North American economy of $27 billion per year — an amount sufficient to create 270,000 North American jobs. (Canada draws 65 percent of its imports, which amount to 31 percent of its GDP, from the United States. The two nations effectively share one economy.)

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.

If we assume the conservative five-to-one elasticity ratio, it would take the addition of the equivalent of 3.3 billion barrels of oil per year (10 percent of the world’s supply) to decrease oil prices by 50 percent (which would incidentally bankrupt the Iranian government, thereby stopping its nuclear-bomb program dead in its tracks).

If all of this were to be contributed by methanol, an additional production of about 122 billion gallons per year would be needed. To make this from natural gas would require 8.7 trillion cubic feet per year. Currently, world natural-gas production stands at 120 trillion cubic feet per year, with the United States contributing about 29 trillion cubic feet of the total. At our current 6 percent per year rate of increase of natural-gas production, the entirety of the needed expansion of natural-gas capacity could be developed from American sources inside of five years. The result would be the effective elimination of oil as a significant factor in our balance-of-trade deficit, the marginalization of the Islamist and other petroleum-financed tyrannies, and a worldwide advanced-sector economic boom driven by cheap oil.

We have here in North America all the resources needed to break the cartel-rigged restrictions on humanity’s liquid-fuel supply, and by so doing lead the world back to prosperity and on to freedom.

— Robert Zubrin is president of Pioneer Astronautics, a member of the steering committee of Americans for Energy (www.americansforenergy.us), and the author of Energy Victory: Winning the War on Terror by Breaking Free of Oil. His next book, Merchants of Despair: Radical Environmentalists, Criminal Pseudoscientists, and the Fatal Cult of Antihumanism will be published by Encounter Books in February 2012.


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