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OPEC Is Yesterday's News

November 14, 2013

By Robert Bryce

Forty years have passed since the OPEC oil embargo of 1973. In that time span, the United States has increased its population by about half, nearly tripled its economic output, and nearly doubled its per capita GDP. While doing so, the U.S. has increased its oil consumption by just 7 percent.

Despite those facts, fearmongering about OPEC and the possibility that it might use the "oil weapon" continues unabated. Alongside the never-ending denunciations of OPEC are, of course, calls for more "investment" (read subsidies) in alternatives to oil, such as electric vehicles and, of course, biofuels.

The latest edition of the bash-OPEC argument was published on November 4 in the Wall Street Journal. In their op-ed, former secretary of state George Shultz and FedEx CEO Fred Smith declared that the U.S. should seek to uncouple its economy from "high and volatile global oil prices" and "achieve true energy security."

The two claim that by relying on the global oil market, the U.S. government is allowing "a tax on American consumers imposed by foreign powers." They also trot out the familiar trope that OPEC’s total export revenue, which "exceeded $1 trillion in each of the last two years . . . ranks among the greatest wealth transfers in human history."

Escaping OPEC’s evil clutches, Shultz and Smith claim, "will require a concerted national effort that prioritizes investment in the development of advanced energy technologies — such as low-cost advanced batteries for electric vehicles." They also, rightly, discuss the advantages and rapid rise of natural-gas-fueled vehicles. (I’ll discuss these NGVs more in a moment.)

In their article, Shultz and Smith barely manage to avoid using the most hackneyed phrase in American politics — "energy independence" — but they do claim that "meaningfully reducing oil dependence" will allow the U.S. to worry less about global oil-supply interruptions, and that "such independence holds tremendous value as the country contends with a fragmenting Middle East."

We’ve heard these very same claims from every U.S. president since Richard Nixon. They continue to be hyped by a ragtag coalition of defense hawks and corn-ethanol boosters. But these claims are no more valid today than they were during the Watergate era.

Thanks to markets — not subsidies for politically favored industries (and here I’m talking about the corn-ethanol scam) — the U.S. has dramatically reduced its reliance on oil over the past 40 years. And thanks to the shale gale, the U.S. is dramatically reducing its net oil imports as well. But that does not mean the U.S. will be "energy independent" — whatever that dubious phrase might mean.

Back in 1973, the U.S. was consuming about 17.3 million barrels of oil per day. At that time, nearly 17 percent of all the electricity produced in the U.S. was generated with oil. Today, only about 1 percent of U.S. electricity is generated with oil. Why the reduction? Simple economics. As oil prices rose, electric utilities switched to other fuels.

The same fuel diversification has happened around the world. In 1973, oil provided a whopping 48 percent of all global energy use. Last year, oil was still dominant, but its share of the global market had declined to 33 percent.

Over the past 40 years, oil has lost ground to coal and natural gas. Over that span, oil use has jumped by 34 million barrels per day, an increase of 61 percent. That’s healthy growth, no doubt. But the biggest gainer in the global energy market since 1973 has been coal, the use of which has increased by nearly 44 million barrels of oil equivalent per day, or 140 percent. Following on the heels of coal has been natural gas, the use of which has increased by about 39 million barrels of oil equivalent per day, or 184 percent.

During that same period, nuclear energy saw huge growth, rising by 1,100 percent. In absolute terms, however, nuclear remains a small player, producing about 11 million barrels of oil equivalent per day, which is less than 5 percent of global energy demand.

This continuing diversification of the energy market, along with the stockpiling of strategic petroleum reserves, has made the global economy more resilient to sudden changes in oil prices.

While we continue to hear rhetoric about America’s lack of a comprehensive energy policy, the fact remains that other countries would love to be in America’s position. In 2012, the U.S. produced more natural gas — an average of nearly 66 billion cubic feet per day — than it has at any time in its history. The flood of natural gas now being produced from shale deposits has driven down prices (they’re now at about $3.60 per million BTU) and has given the U.S. a price advantage over nearly every other country on the planet, with the possible exception of Qatar. That cheap gas is fueling a resurgence in American manufacturing in everything from steel to fertilizer.

The surge in natural-gas production has occurred alongside huge increases in oil output. Last year, U.S. oil production rose by about 800,000 barrels per day, the biggest annual increase since 1859. And it is expected to rise by another 600,000 barrels per day this year. That increased oil production has led to a huge increase in U.S. oil exports. In July, the U.S. exported an average of nearly 3.9 million barrels of refined products per day. Back in 1973, those exports were a paltry 211,000 barrels per day.

Shultz and Smith want readers to believe that over the last four decades, OPEC members have been dining out on America’s credit card. Here’s the reality: Since 1973, the OPEC countries have largely stayed poor while we got richer. OPEC member countries have a combined population of some 429 million. Their combined GDP is some $3.3 trillion, or about a fourth that of the U.S. The per capita GDP for all the member countries is $7,800. That’s about 62 percent of the world-average per capita GDP and less than one-sixth of the per capita GDP in the U.S., which is nearly $50,000.

In short, there’s a near-total disconnect between the reality of today’s global energy market and the OPEC-centric worldview that’s being promoted by Shultz, Smith, and their alarmist allies. The depth of the disconnect can be seen in their promotion of electric cars. The two are advocating electric vehicles even though the history of the electric car is a century-plus of failure tailgating failure. How much more in the way of subsidies do Shultz and Smith want? The Obama administration has already provided about $6.5 billion in handouts for what is clearly a failed concept.

It’s worth mentioning that Smith, as the head of FedEx, has an economic interest in getting the government to support the development of alternative fuels because his company uses enormous quantities of petroleum in its airplanes and trucks. Last year, Smith predicted that biofuel produced from algae would become a big deal. My prediction: Don’t count on it.

If the U.S. wants to reduce the amount of oil it uses domestically (and thereby increase its exports), the best course is to simply let the free market work. Indeed, it’s already working. Proof of that can be seen by looking at the soaring popularity of NGVs. All over the world, consumers and fleet owners are using more natural gas to fuel their vehicles because the fuel reduces emissions and, in many cases, it’s cheaper than refined oil products.

In June, the International Energy Agency estimated that global demand for natural gas in the transportation sector will nearly double, to about 9.6 billion cubic feet per day, by 2018. The agency also revealed a remarkable fact: "The expansion of gas as a transport fuel has a bigger impact on reducing the medium-term growth of oil demand than both biofuels and electric cars combined."

In July, Simmons & Co., a Houston-based investment-banking firm, projected that by 2020 the number of heavy trucks in the U.S. fueled by natural gas will increase sixfold to some 170,000 vehicles.

In October, UPS announced it would spend $50 million on new liquefied-natural-gas refueling stations that will be used to fuel 1,000 of the logistics company’s long-haul trucks. Doing so will save the company about 24 million gallons of diesel fuel per year. Depending on where you are in the U.S., a natural-gas gallon-of-diesel equivalent is $1.00 to $2.00 cheaper than diesel fuel. If we assume a $1.00 differential, UPS could recover its capital investment in about two years. And here’s the most important part: UPS is making the switch not because of government mandates or subsidies, but because doing so saves money.

The takeaways here are obvious: First, the world’s consumers are diversifying away from oil because they have an economic incentive to do so. Second, the energy superpower of today is the United States, not OPEC. Third, providing more subsidies and mandates for inefficient and uneconomic oil substitutes will only result in a waste of taxpayer dollars.

Forty years of hand-wringing about OPEC is quite enough. It’s time to ignore OPEC and let the energy market work.

Original Source: http://www.nationalreview.com/nro-energy/363919/opec-yesterdays-news-robert-bryce

 

 
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