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Kicking our Oil Addiction

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Breaking the Oil Cartel--Gal Luft Interview

October 13th 2008

Contributors / Staff - Gal Luft 1
Gal Luft

Cutting Edge News energy analyst Gal Luft is one of America's most influential energy independence advocates. He is executive director of the Institute for the Analysis of Global Security (IAGS) a Washington based energy policy think tank and co-founder of the Set America Free Coalition, an alliance of groups promoting ways to reduce America's dependence on foreign oil. Luft specializes in strategy, geopolitics, terrorism, energy security and economic warfare. He was interviewed by Jamie Glanov, managing editor of Frontpage.com.

Your thoughts on the oil cartel and what it is doing to the world?

The oil cartel is looting the world economy and is by far the main culprit behind the current oil crisis. This is a cartel that owns 78 percent of world oil reserves but produces only 33 percent of the world's supply. Stunningly, OPEC's production is less than what it used to be 35 years ago, just before the Arab Oil Embargo. Then they produced 30 million barrels per day. Today their quota is just under 29 million barrels per day. So in 35 years the world economy essentially doubled, non-OPEC production nearly doubled, but the oil cartel, despite the fact that last year it brought in two new members, Angola and Ecuador, with combined daily production capacity equivalent to that of Norway, hasn't ramped up production. In fact, only this month OPEC decided to reduce its production by more than half a million barrels per day.

The consequences of this daylight robbery are dire, particularly to the poor people of the world. Developing economies are hemorrhaging and this will increasingly become a destabilizing factor. Even more troubling is the fact that the two main engines of radical Islam-Saudi Arabia and Iran-as well as the top two obstructionists of U.S. foreign policy-Russia and Venezuela-are now on the receiving end of hundreds of billions of dollars in oil and gas revenues. As long as we continue to enrich those countries while depleting our own coffers we will not be able to prevail in the long war of the 21-Century.

How do we break the oil cartel?

We need to instill in OPEC the fear of Adam Smith and break them through good old competition. To do so we need to end oil's monopoly in the transportation sector by making our cars platforms on which alternative liquid fuels and electricity (which is essentially no longer generated from oil in this country) can compete against gasoline. You see, today almost all of our cars, trucks, planes and ships can run on nothing but petroleum. This gives OPEC control over the global transportation system and by extension, over the world economy. And yet, we continue to foolishly put on the road 16 million new gasoline-only vehicles every year, each with an average street life of 16 years. We are in a deep hole and instead of climbing out we continue to dig. This has to stop.

Your angle on oil's monopoly in the transportation sector?

The transportation sector underlies the world economy. Without it people and goods cannot move around the globe. Unlike the electricity sector where a variety of energy sources like coal, nuclear power, natural gas and wind contribute to the grid, in the transportation sector oil is the only game in town. More than 95 percent of our transportation sector is petroleum based. If something goes wrong with oil, our economy will come to a grinding halt. The monopoly in transportation doesn't only leave us vulnerable to supply disruptions it also enables the oil cartel to jack up prices with impunity to the detriment of our economy. Today, most alternatives to oil are fully competitive at $50-$60 a barrel oil. Yet, oil prices are at the three-digit level. Why? Because there is no competition. If our cars were all capable of running on alternative fuels in addition to gasoline why would anybody in his or her right mind buy oil at $100 when the alternative is half the price?

Oil vs. "foreign oil?"

Several years ago, when the UK was still a net oil exporter, British truckers went on strike because fuel prices soared. This tells you that self sufficiency in oil doesn't protect you from price shocks and the instability in the global oil market. If today the U.S. miraculously stopped using foreign oil, someone else would have bought from the Saudis and the Nigerians their oil and we'd still be paying $100 per barrel. Shuffling suppliers doesn't mean much if you don't affect the overall supply and demand. The main problem we are facing today is not the availability of oil but its inflated price and the transfer of wealth and economic dislocation that occur as a result. I have nothing against increasing domestic production but let's not delude ourselves: drill anywhere you want, we still have only 3 percent of the world's oil while we consume a quarter of the world's supply. Beyond that, history shows that when non-OPEC countries drill more, OPEC countries simply drill less. The problem to be solved is not the magnitude of our imports or that of our consumption, but rather the fact that oil has strategic status, which stems from its virtual monopoly in the transportation sector.

Russia just joined the "high society" of oil extremists - Iran and Venezuela. Your view of this development?

I'm not surprised. For some time the Russians were thought of as part of the solution, a leading producer with large reserve which could balance OPEC. In recent years they have become part of the problem. Russia is one of the main obstructionists of US foreign policy and unlike Iran and Venezuela that only threaten to use the energy weapon the Russians actually do it, as we've seen in the case of the gas cut-off to Ukraine. Russia's energy minister recently said he'd like Russia to yield more influence over the oil market, meaning being able to manipulate prices like OPEC does. Also, Moscow is now one of the cheer leaders of an emerging OPEC-like natural gas cartel. This is something T. Boone Pickens and other proponents of expanded use of natural gas in the transportation sector often forget.

So what does energy independence really mean?

First, let me explain what energy independence doesn't mean. Energy independence is not self sufficiency. It doesn't mean not importing energy from anybody. It means being independent of the holders of this resource-- not having to kowtow to countries that are corrupt, dictatorial, and, in some cases, genocidal, just because they produce a significant portion of the world's oil supply. It means not having to see your president travel to Saudi Arabia on bended knee, wearing a ridiculous robe and begging for oil.

Energy independence means not having to see our financial system being increasingly controlled by sovereign wealth funds owned by some of the least transparent, most corrupt and human rights abusing governments in the world. Energy independence means restoring our freedom of action and our ability to operate in the world stage without fearing economic repercussions. If you are a European energy independence means being able to confront the Russians for their thuggish behavior without having to fear power cut-offs.

So what do you recommend? And give us your thoughts on some of the popular proposed solutions.

Solutions that are currently being touted by both Republicans (domestic drilling) and Democrats (increased fuel efficiency standards) do not address the core problem, which is the monopoly of petroleum in the transportation sector. All they do is at best buy us few more years of complacency. In the long run solutions that do not enable fuel choice will lead us to stronger dependence. We will deplete more of our domestic reserves and our cars will still be able to run on nothing but oil. The discussion on alternatives like nuclear power (McCain) and solar and wind (Obama) as a way to address our oil dependence is very troubling as it reflects a serious misunderstanding of the energy 101 by both senators vying for the White House. Only 2 percent of our electricity is made from oil and only 2 percent of our oil is used for electricity. So how exactly would solar power displace oil? Even if we plug in our cars today to run on electricity, that electricity is not generated from oil.

To address our strategic vulnerability we need to break both the oil cartel and oil's monopoly in the transportation sector. This can be done in a stroke of the pen by requiring that every new car sold in the U.S. be a flex fuel car capable of running on any combination of gasoline, ethanol and methanol. The latter is particularly important as methanol can be made from coal, biomass, garbage and even carbon dioxide. Since flex fuel capability is very cheap (roughly $100 extra per new car) this should be a standard feature like a seatbelt or an airbag. In fact there is bipartisan legislation in Congress now calling for 50 percent of new cars to be flex fueled by 2012 --the Open Fuel Standard Act, S.3303 in the Senate and HR6559 in the House. This is a good start. Once we have such an Open Fuel Standard, within few years roughly one fifth of the cars on the road will be able to run on alternative fuels. This will create a huge market for alcohols of all types and will provide a perfect business case for fuel distributors to retrofit their equipment to offer consumers alternative fuels in every station. To increase the market for alternative fuels we must remove the tariffs on imported ethanol and redirect our foreign aid programs from countries like Egypt and Bolivia for which we get nothing in return other than anti-Americanism to poor developing countries in Africa, Latin America and South Asia capable of producing fuel crops like sugar cane. Such a program will not only contribute to our energy security but it could be the best engine for world development.

In addition to liquid fuel choice, another key part of the puzzle is electrification of transportation. We must begin to use electricity as a transportation fuel by deploying electric cars and plug-in hybrids. Electricity is cheap, clean and domestically produced. It is a superior fuel to gasoline on almost every level, but we need the cars that can run on it. Impressive progress has been made in recent years toward an electric transportation system. Batteries are significantly better and most automakers will have plug-in hybrids in the showroom by the end of the decade. The best policy tool here would be consumer tax credit for plug in hybrids to reduce the cost for early adopters and pull the technology into the mass market.

Jamie Glazov is Frontpage Magazine's managing editor and author of Canadian Policy Toward Khrushchev’s Soviet Union (McGill-Queens University Press, 2002). A version of this interview appeared originally at the Frontpage Magazine, www.frontpagemag.com.


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