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By Daveed Gartenstein-Ross

March 26, 2008

Notes and Comments


THE HIGH PRICE OF OIL DEPENDENCE: A poll conducted last week link

finds that more than three out of four Americans now believe that the U.S. is in a recession. There are numerous reasons for the present economic downturn, but surely one significant factor is the steep increase in energy prices. Oil prices have more than doubled in the past fifteen months, rising from around $50 a barrel in early 2007 to about $110 a barrel today. How could such a rise in energy prices not harm the U.S. economy? We depend on long supply lines to transport agriculture to consumers, as well as the vast majority of products that you can buy off store shelves. All prices - the price of food, the price of consumer goods - are pushed upward by the rising price of oil.

In a March 20 op-ed in the Miami Herald, Gal Luft - the executive director of the Institute for the Analysis of Global Security - writes: link

By now it is abundantly clear that the U.S. economy is in dire straits. What should also be clear is that the path to economic recovery will be compromised as long as America is dependent on imported oil to the degree that it is while oil continues to hover over $100 a barrel. At current oil prices, this country sends overseas $460 billion per year to finance the daily buying of 12 million barrels of imported oil. This amount of money is about the size of our defense budget and three times the size of the "economic stimulus" package recently passed by Congress. But the real economic impact of oil dependence is hidden to most Americans. Energy economist Milton Copulos (who passed away this month) calculated last year that the grand total of all external costs associated with foreign oil dependence - including the cost of oil-related defense expenditures, amortized cost of supply disruptions, and lost economic activity and tax revenues - stands at $825 billion per year.

Luft notes that the consequences are not just economic, but also geopolitical:

For the U.S. economy, oil dependence is a double whammy. While it contributes to our economic decline, it allows OPEC governments, many of which do not have our best interests in mind, not only to laugh all the way to the bank but to literally own the bank. The recent buyout by foreign governments of chunks of America's prime symbols of economic prowess - like Citigroup, Merrill Lynch, Morgan Stanley, Blackstone Group and Bear Stearns - is only the preview to what is yet to come should the petrodollar fueled transfer of wealth continue. If oil prices climb to $200, as President Hugo Chavez of Venezuela recently warned, this wealth would double again. While the value of the dollar and the U.S. economy is shrinking, OPEC's monumental wealth enables its countries unprecedented buying power. As an illustration, at current oil prices it would take OPEC just six days to buy GM and three years to buy a 20 percent voting block in every S&P 500 company. It is hard to see how such buying power amassed by oil producers would not upset the West's economic and political sovereignty.

Neither the Bush administration nor any previous presidential administration has seriously addressed the dangers of our oil dependence. For example, the primary strategy of Bush's Energy Independence and Security Act of 2007 is a new national mandatory fuel economy standard that, in President Bush's words <http://www.whitehouse.gov/news/releases/2008/03/20080305.html>, "will save billions of gallons of gasoline." But as FDD senior fellow Robert Zubrin shows in his book Energy Victory, conservation-based strategies are not, and will not be, sufficient. If we could duplicate the technical success that Corporate Average Fuel Efficiency (CAFE) standards achieved from 1975 through 1990, Zubrin writes, "it would reduce our expected rate of increase of oil usage by only 2.2 million barrels a day, during a period when the world as a whole is likely to raise its consumption another 30 million barrels per day. Whatever demand we eliminate would be replaced fifteen times over."

There are, however, solutions. Zubrin argues: that Congress should pass a law requiring that all new cars sold in the U.S. be "flex-fueled," capable of running on any combination of gasoline or alcohol fuels:

Such cars already exist - two dozen different models of flex-fuel vehicles (FFVs) are being produced by Detroit's Big Three this year - and they only cost about $100 more than identical models that can run on gasoline only. ...FFVs currently command only about 3 percent of the new-car market. After all, there is little upside for consumers to own one, with alcohol-fuel pumps being nearly as rare as unicorns. Little wonder: Why should gas-station owners dedicate one of their pumps to alcohol fuels (like E85 - a mix of 85-percent ethanol and 15-percent gasoline - or M50 - a mix of half methanol and half gasoline) when only a tiny percentage of cars can use them? But, within three years of the enactment of an FFV mandate, there would be 50 million cars on American roads capable of running on high-alcohol fuels. Under those conditions, fuel pumps dispensing E85 and M50 would be everywhere - creating, for the first time, an effectively open market in vehicle fuels, and competition for OPEC oil.

While this is likely the most critical issue we face at present, no presidential candidate has made energy security a campaign centerpiece. Yet we are worse off, and our enemies in a better position, for each day that action is delayed. Look for FDD's work on energy security over the coming weeks and months.


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