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Hello, New Congress: For Our Energy Future, Cut Pork, Simplify Bills and Embrace Alternative Options

December 27th 2010

Contributors / Staff - Gal Luft

What should the new Congress do to address America’s energy security challenge?

First, insure America against the next oil shock. America is still mired in a recession yet oil, the commodity that lubricates its economy, is already at $90 a barrel. Iran, which currently presides over OPEC, announced that oil is set to hit $100 in the short term, a price the Islamic republic sees as “quite normal.” At current prices America pays more than a billion dollars a day for foreign oil. But this cost is bound to increase whether or not we overcome the recession. If strong growth resumes, demand for oil will grow and so will its price. A lingering recession, on the other hand, could too bring about high oil prices. Oil makes the lion share of all traded commodities. Possible economic dislocations like dollar collapse or the onset of inflation will trigger a rush to commodities and this in turn will cause an upward pressure on crude prices. If oil goes back to its summer 2008 level of nearly $150, some $700 billion will migrate overseas, an amount equivalent to our defense budget or about half of all discretionary spending. In the current economy, such an oil spike would be as devastating as a second heart attack for a fragile patient who is just recovering from a first one. It could send the country into a depression. Congress should do all it can to prevent such oil-induced economic heart attack.

Second, focus on crude, not carbon. The reason the Pelosi-Reid duo’s energy legislation failed so miserably in the 111th Congress is that Democrats were more focused on the climate than on energy security. The obsession with cap-and- trade failed to resonate with the economically embattled American people. Voters’ support dwindled further when they discovered that the “low-carbon-economy-creates-green-jobs” aplenty indeed—but in China rather than the U.S. Hard as it may be for some to accept, the melting of the ice caps is not anywhere on the top of Americans’ priority list, but the melting of the U.S. economy is. Global warming driven Democrats set their sights on the coal industry. But from an economic standpoint coal is a great bargain. The annual U.S. coal expenditure for electric generation is roughly $30 billion, and because the U.S. does not import coal most of this money remains in the U.S. economy. America’s oil bill, on the other hand, is over $600 billion—twenty fold—and most of it leaves the U.S., accounting for half our trade deficit while enriching some of the world’s worst regimes. If we are to stem the flow of money out of our economy Congress should focus on policies that lessen our use of oil, not coal.

Third, think small: One reason the previous Congress failed to move energy policy is that it tried to lump all energy related issues, from electricity to transportation to nuclear waste disposal, into one comprehensive omnibus bill. Such an approach becomes a legislative nightmare marred with jurisdictional warfare. The result, heavily lubricated with pork, is always a mishmash of expensive policies—the sum of all lobbies—creating a lot of K Street jobs but much less energy. Instead, the new Congress should divide energy policy making into smaller, more manageable and politically feasible issue-specific bills aimed at expanding competition and liberating the energy market, and focus on them one at a time. In Washington, less is often more.

Fourth, ensure that new cars enable fuel competition. The root of our energy security vulnerability is not the amount of oil we consume or import but the fact that the oil cartel, OPEC, sits on 78 percent of world oil reserves while deliberately constraining supply to keep prices high, and that this cartel is the driver’s seat of the global economy due to oil’s virtual monopoly over transportation fuel. Almost all of our cars can run on nothing but oil. To knock OPEC off its pedestal we must strip oil of its strategic status—make it just another commodity, something that’s bought and sold and useful for a range of purposes, but its price spikes can no longer bring our economy to its knees. For that to happen we must have the option of buying non oil based fuels for our car if prices go up. There are a number of vehicle technologies that enable fuel competition, but the simplest and cheapest way to open the fuel market to competition is to ensure that all new cars sold in the U.S. are flex fuel vehicles, capable of running on any combination of gasoline and alcohol fuels such as methanol (made from coal, natural gas, and biomass) and ethanol. Such Open Fuel Standard legislation would add about $100 to the cost of a new vehicle but would save consumers a great deal of money if oil prices spike by enabling them to fuel switch on the fly. The Open Fuel Standard requires no new taxes, no expensive tax breaks or other government handouts. All that is needed is for automakers to tweak the engine of new cars at a cost lower than that of a CD player.

Fifth, open the transportation fuel market to natural gas. America has increased its natural gas reserves and natural gas is historically cheap in comparison to oil, which is why it is probably a good idea to use part of America’s gas as an oil substitute. But we should do it the free market way, not the Pickens way. Influenced by T. Boone Pickens’s multimillion dollar PR campaign, Congressional leaders are willing to provide tax credits of up to $65,000 per vehicle to convert it to run on compressed natural gas. But if new cars were gasoline-ethanol-methanol flexible, a feature that adds less than $100 to the cost of a car, the same natural gas could be converted to methanol, which currently sells for about a dollar a gallon, and used as transportation fuel without the need for such expensive tax breaks. Which makes more sense?

In sum, the new Congress should do what it was elected to do—be fiscally responsible. As such, it should adhere to conservative economic principles of advancing competition, consumer choice, free trade and conservative spending and apply them consistently in its energy policy making. By cutting the nation’s oil bill Congress could prevent hundreds of billions of dollars from bleeding out of the anemic U.S. economy. Members of the new Congress should remember that any attempt to put our fiscal house in order will not be complete without breaking the stranglehold of OPEC over our economy by breaking oil’s monopoly over transportation fuels.

Gal Luft is executive director of the Institute for the Analysis of Global Security and co-author of Turning Oil into Salt: Energy Independence through Fuel Choice.


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