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Tuesday, January 28, 2014

Time to Crush OPEC

Bob Zubrin believes that the surge in oil production due to fracking and horizontal drilling will be transitory, and that the United States should take the breathing room it affords us to crush OPEC once and for all. He notes that OPEC has done incredible harm to the world's economy, including our own:
Before discussing the policies that could break OPEC, let us first examine how the cartel harms the United States, the global economy, and world peace.

From the end of World War II through 1973, while under the control of the big multinational oil companies, the countries that subsequently became OPEC increased their oil production by more than a factor of ten, from about 3 to 30 million barrels daily — keeping up, step by step, with the needs of the rapidly growing postwar global economy. Because of this, oil prices, adjusted for inflation, remained stable and even declined somewhat from 1947 through 1972, enabling one of the most spectacular sustained periods of economic growth in human history. Since the oil crisis of 1973, total world demand has grown even further, from about 57 million barrels per day to almost 90 million barrels per day in 2012.

Yet despite this dramatic increase in world demand for oil since 1973, OPEC has never produced much more than it did in 1973. In fact, OPEC currently limits its production rate to 1973 levels: At its May 2013 conference in Vienna, the cartel decided to “adhere to the existing production ceiling” of 30 million barrels per day, which is the same amount OPEC countries produced in 1973. Although the world’s non-OPEC oil producers increased their output by more than 60 percent since 1973, that increase has been insufficient to offset OPEC’s dominant position. As a result of OPEC’s constraint on supply, inflation-adjusted oil prices have more than quadrupled since 1973, and global economic growth has slowed accordingly. By limiting the amount of oil OPEC countries produce, the cartel’s leaders can control the total amount available to the world market, and thereby can essentially fix the price of oil wherever they wish.

The effects of oil prices on the broader economy are not complicated: when the price of oil goes up, everything that depends on oil becomes more expensive. This is not just a matter of the “pain at the pump” that consumers feel when they fill up their cars. Over 90 percent of the energy used in the U.S. transportation sector is derived from oil, which means that when prices rise, all of the goods and services that depend on cars, trucks, planes, trains, and ships — which is to say, nearly everything — will become more expensive.

With higher energy prices eating into profits, businesses have to raise prices or find ways to cut costs — which often means firing employees. This can be clearly seen in Figure 2 (below), which compares oil prices (adjusted for inflation to 2012 dollars) to the U.S. unemployment rate from 1970 through 2012. 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 economic damage goes far beyond the impact on the unemployed themselves. For example, in 2008, rising oil prices — exceeding $140 per barrel by mid-year — contributed to millions of Americans losing their jobs, which in turn made many of them default on their home payments, fueling the destruction of the value of mortgage-backed securities held by U.S. banks. This, in turn, threatened a general collapse of the financial system, with a bailout bill for $800 billion sent to the taxpayers as a result. But that is not all. The destruction of the spending power of the unemployed and the draining of funds from everyone else to meet the direct and indirect costs of high oil prices reduced consumer demand for nearly every type of product, wrecking retail sales and the industries that depend upon them. It is no surprise that, as University of California, San Diego economic historian James D. Hamilton has documented, ten of the eleven postwar U.S. recessions were preceded by sharp increases in oil prices.

The economic effects of rising oil prices are painful enough in wealthy, industrialized countries, but people living in poorer countries are even more vulnerable. The escalating costs of production, transportation, wages, and packaging all drive up the retail cost of food, contributing to greater poverty and instability. And governments paying higher energy costs have less funding available for life-saving investments in economic development, vital imports, public health, and poverty reduction.

To make matters worse, several of the OPEC member countries have a track record of using their oil profits to support activities inimical to American interests. Saudi individuals and “charities” have long funded jihadist groups. As recently as December 2009, the U.S. State Department noted (in one of the cables published by Wikileaks) that “donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide” and that the country “remains a critical financial support base” for Al Qaeda, the Taliban, Hamas, and other terrorist groups. The rulers of Iran, the cartel’s second-largest oil producer, are the great patrons of the Hezbollah terrorist organization, and are using their oil profits to fund the development of nuclear weapons.

So OPEC’s manipulation of oil prices is the equivalent of a severe regressive tax on the U.S. economy, and it threatens international peace and stability. How can it be stopped?
Zubrin notes that the key to crushing OPEC is to adopt methanol (wood alcohol) based fuels. It apparently is easy to adapt most modern vehicles to burn methanol, and it is already cheaper to produce methanol. Zubrin believes wide spread use of methanol would drive the price of oil down and breach the cartel.

I don't have any problem with adopting methanol to crush the cartel. It would also have the salutary effect of terminating the odious ethanol subsidies. But we also need to be prepared for the consequences. The OPEC countries heavily subsidize fuel, food, and other social services in order to maintain social order (i.e., the power of the corrupt dictatorships and autocracies that rule those countries). Most of those countries have to maintain hefty fuel prices in order to fund these welfare programs.

Zubrin expects that if the United States turned to methanol, oil prices would drop to half of their current levels. This is below what any of the OPEC nations could survive on. The result would be one Middle Eastern capital after another falling to revolution, wide spread civil war, and torrents of migrants. We need to be prepared to contained and isolate the violence.

If we are going to crush OPEC, we also need to be aware that the left will fight it with all of their heart. Leftists love autocratic governments, particularly those hostile to the West. Environmentalists love the money they get from the Middle-East. Establishment Republicans also enjoy the money and illusion of power they get from kowtowing to political cronies.

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