Myths and Facts

Myth #1: It is impossible to rig oil prices, because oil prices are set via the free market on the futures exchange.

Myth #2: OPEC is not that strong, as proven by their minority share of world oil production.

Myth #3: We can counter OPEC through conservation.

Myth #4: We can beat OPEC if we extract our oil reserves in the Arctic National Wildlife Refuge (ANWR) in Alaska.

Myth #5: So, OPEC wins. There is no solution that offers significant short-term gains and will end our oil dependency.

Myth #6: Flex fuel cars cost much more than regular cars, so the open fuel standard will create further financial hardship for the U.S. auto industry.

Myth #7: A federal open fuel standard violates free market principles.

Myth #8: We shouldn't use biofuels because they are toxic, and will cause additional air and water pollution.

Myth #9: Alcohol-based fuels will increase greenhouse gas emissions.

Myth #10: The switch to biofuels is the dominant cause of rising food prices around the globe.

Myth #11: The switch to biofuels is causing environmental devastation around the world, including the deforestation of the Amazon.

Myth #12: Alcohol fuels cannot work because it takes more fuel to create ethanol than the ethanol produces.

Myth #13: It is impossible for alcohol-based fuels to replace oil. We are using 20% of our corn acreage for ethanol, and it is only producing enough fuel to replace 5% of our gasoline supply. So, at best, alcohol fuels can only make a marginal contribution.

Myth #14: Hydrogen fuel cell cars are a better answer. Hydrogen is the most common element in the universe, and when you use it in a fuel cell, you get perfectly clean electric power to drive your car, with only water for exhaust.

Myth #15: They've tried ethanol in a big way in Brazil. It didn’t work.

 

Myth #1: It is impossible to rig oil prices, because oil prices are set via the free market on the futures exchange.

Fact: While the futures exchange is the mechanism through which the price is set for a barrel of oil, the outcome of that process is determined by the traditional economic principle of supply and demand. However, the total available supply is ultimately decided by the Organization of Petroleum Exporting Countries (OPEC), and is generally not reflective of international demand. By controlling supply in the face of insatiable demand, OPEC is able to manipulate oil prices to their advantage – and our detriment.

 Founded in 1960, OPEC is a cartel of 13 countries: Saudi Arabia, Qatar, Ecuador, Iraq, Kuwait, the United Arab Emirates, Libya, Algeria, Iran, Venezuela, Nigeria, Angola, and Indonesia. While OPEC strives to ensure the "stabilization of prices," Article 2 of the cartel’s statute also says: “Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income.” Thus, OPEC's main objective is ensuring the economic prospects of its members. By capping production in times of high demand, the cartel is able to minimize supply and increase oil prices. Over the past 48 years, there have been numerous examples of OPEC’s price manipulation tactics. Throughout much of 2001, supply cuts added up to 4 million barrels a day. This included a 500,000-barrel cut in the months after 9/11, during which oil prices surged by 20%. Perhaps the most dramatic instance of the rigging of oil prices was in 1973 when, in response to the Yom Kippur War, OPEC slashed production by 4.3 million barrels a day and caused a four-fold increase in oil prices.

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Myth #2: OPEC is not that strong, as proven by their minority share of world oil production.

Source: Energy Information Administration

Fact: OPEC maintains control over the oil market and is actually getting much stronger. In contrast to the non-OPEC producing nations, OPEC members present a unified voice through the cartel, and are able to exert a disproportionate level of influence over the global market. It is true that their share of global oil production does not constitute a majority hold over the market. In 2007, OPEC’s share was 42%, while non-OPEC oil production comprised 58% of the global market. These numbers represent a decline in OPEC’s proportional production: in 1973, OPEC production constituted 53%, while the non-OPEC share stood at 47%. This decline in global share, however, should not be interpreted as a decline in power. Over the last 35 years, OPEC’s production has never exceeded initial levels (32.5 million barrels a day), while global demand for oil, has more than doubled. In the face of this growing demand, OPEC’s refusal to expand its production has allowed it to effectively constrict the world’s oil supply and force elevations in prices.

 However, OPEC’s strength extends beyond its ability to manipulate prices. The cost of extracting crude oil is generally far less for OPEC members than it is for the non-OPEC suppliers who have entered the global market to fill the supply void. One barrel of Saudi oil costs $1.80 to produce, exploration costs included, whereas the production cost for a barrel of oil from the former Soviet Union is $21. It is important to also note that as the non-OPEC powers exploit their cheapest oil much more rapidly than OPEC, OPEC will soon be left with a near monopoly on low-cost oil supplies. As such, OPEC member’s profits have skyrocketed, allowing them to amass huge monetary reserves. Furthermore, as the price of oil rises, the value of the OPEC oil reserves in the ground (70% of the world’s oil reserves) increases in proportion. The added value gives the OPEC powers additional financial assets.

 As a result of these factors, OPEC will soon be in a position to cut production as radically as they choose, sending oil prices to levels that could force the industrial world into economic depression. While this hardship would not escape OPEC nations, they would be able to use their ample “petro-wealth” to absorb the financial shock. These oil rich nations could then use their sovereign wealth funds to take control of the major global industries. Even today, when the global economy has been moderately slowed by high oil prices, an oil rich emirate like Abu Dhabi, which controls 90% of the UAE oil reserve, is able to buy a $7.5 billion stake in Citigroup (4.9% share) to add to its estimated $875 billion in assets. It now surpasses Saudi Prince Al Waleed bin Talal as Citigroup's largest shareholder. But it doesn’t stop there. In March of this year, the UAE and Saudi Arabia set up a $2 billion global acquisition fund to further develop their international financial interests. The amount and size of such acquisitions are likely to increase in step with rising oil prices.

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Myth #3: We can counter OPEC through conservation.

Fact: Unfortunately, conservation will not solve our oil dependency on its own. Over the years, Congress has attempted to conserve our oil consumption in the transportation sector through Corporate Average Fuel Efficiency (CAFE) standards. In 1975, Congress more than doubled the efficiency standard for passenger cars from 12.9 mpg in 1974 to 27.5 by 1985. The fuel economy for light duty trucks was increased to 22.2 mpg by 2007. Recently, the CAFE standard was bolstered again, to a 35 mpg for passenger cars by 2020.

 However, a conservation-based energy policy has limitations. Domestically, the quantity of cars on American roads is expected to grow significantly as a result of population growth, and other demographic and economic factors. Analysts have argued that the increase in demand for oil—caused by the increase in cars—would exceed the rate of conservation. As such, the current CAFE standards will only limit the expected growth in demand for oil in the U.S.—not end it. Internationally, the problem is more extreme as worldwide oil consumption is set to burst. From 2001 to 2006, global consumption increased by 11.4%. China and India alone are expected to double their demand for oil over the next 20 years in order to keep pace with their rapid economic growth. However, OPEC projects that it will increase its production by only 30 million barrels a day by 2030—far less than global demand is expected to rise. The likely outcome will be skyrocketing oil prices that will dwarf any of America’s efficiency gains.

 Conservation can have a positive impact and should not be discounted from any energy security policy. The recent technological advancements though plug-in hybrids and electric cars are impressive and have increased fuel efficiency by phenomenal numbers. They have not, however, ended our dependence on oil, and will not do so in the short-term.

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Myth #4: We can beat OPEC if we extract our oil reserves in the Arctic National Wildlife Refuge (ANWR) in Alaska.

Fact: Increasing our supply of domestic oil will reduce our dependence on foreign oil, but it will not end it. The Department of Energy estimate of the number of barrels in ANWR ranges anywhere from as little as 5.7 billion to as high as 16 billion. The U.S. currently consumes approximately 7.5 billion barrels of oil each year—5 billion of which are imported. Hypothetically, if the reserves in ANWR were to become available immediately, they would at best provide 2 years worth of oil consumption. However, immediate production is impossible. The economic relief that oil from ANWR could provide would be staggered over the course of a number of years, and thus minimized. As such, the Energy Information Administration estimates that ANWR exploration will likely only cut crude oil prices by 75 cents per barrel by 2025.

 In terms of the global market, U.S. domestic drilling will not reduce OPEC’s ability to dictate oil prices. To date, the U.S. has approximately 30 billion barrels of proven oil reserves. By contrast, Saudi Arabia, Iran, Iraq, the UAE, and Kuwait have more than 700 billion barrels of oil. The U.S. does have about 22 billion barrels of oil available in its continental shelves. However, continental exploration is a prolonged and expensive process that, even long term, would not increase America’s share in the global market—which would grow from 10 percent to 11 percent. Even if OPEC’s global share stayed stagnant at 42%, they would still have a controlling interest in the market and the ability to manipulate prices at will.

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Myth #5: So, OPEC wins. There is no solution that offers significant short-term gains and will end our oil dependency.

Fact: No, we don’t have to accept that at all. OPEC’s power is simply a product of their monopoly over the primary fuel source currently used by almost every vehicle. If we make our vehicles compatible with fuels derived from non-petroleum sources, there will be less demand for oil and OPEC’s power will dissipate.

To achieve this goal of oil independence, Congress should establish an open fuel standard that all new cars sold in the America be able to run on any mix of alcohol-based fuels—ethanol or methanol. Based on the current advancements in research and development, alcohol-based fuels provide the most immediate solution as an alternate to fossil fuels. While not immediate, an open fuel standard can achieve significant short-term achievements, and potentially put over 50 million FFV vehicle on our roads by 2015.

 Of course, it cannot happen overnight. There are currently a number of car companies in America producing FFVs, but the overall market share is minimal (about 4.4 million). This lack of demand for FFVs has resulted in a limited supply of alcohol-based fuels at the pumps. Indeed, there are very few such stations that are accessible to the public outside of Minnesota and Illinois. The reluctance to install alcohol fuel pumps is understandable since a very small percentage of vehicles on the road are today able to utilize those pumps. The significant growth of the FFV market though an open fuel standard will serve as a financial incentive for independent and small fuel suppliers to convert their pumps to support flex fuel sources.

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Myth #6: Flex fuel cars cost much more than regular cars, so the open fuel standard will create further financial hardship for the U.S. auto industry.

Fact: America’s dependence on oil is hurting the U.S. auto industry. High oil prices leave people with less disposable income, which in turn decreases the overall demand for automobiles. The problem is most acute for the U.S. auto manufacturers, since their sales niche tends to be among the larger, less fuel-efficient vehicles. As a result, the American auto industry has been hit particularly hard by the high gas prices over the last few years.

 The costs of meeting the open fuel standard for the auto industry are not high. Building a FFV costs between $100 and $200 more than an equivalent car without flex fuel capability. All that is required is a new fuel sensor and corrosion-resistant fuel lines. As such, adhering to an open fuel standard should be no more onerous than it was complying with seatbelt laws. American auto companies already produce an estimated 1 million FFVs per year, allowing them to adapt to the open fuel standard with relative ease.

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Myth #7: A federal open fuel standard violates free market principles.

Fact: The purpose of the open fuel standard is to counteract the detrimental impact of OPEC's non-competitive practices. It is analogous to monopoly busting. In his seminal work The Wealth of Nations, economist Adam Smith description of monopolists bears a striking similarity to OPEC and its anti-free market practices: "The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate." In the face of such practices, economists, including Arthur T. Hadley, have long argued the necessity of government action for the difficult task of controlling "the abuses of monopolies without destroying the industries." The open fuel standard will not hurt the fuel industry. Rather, by lowering the barrier of entry into the energy market, it will stimulate research and development for numerous forms of fuel. Furthermore, the open fuel standard will encourage American entrepreneurship and drive innovation to create wealth, jobs, and opportunity.

 Over the years, the U.S. government has taken action to break monopolies and generate freer markets within industries. In 1982, President Ronald Reagan ordered the break-up of telecommunications monopolist AT&T. It was eventually bought by one of its spin-off firms, each of whom went on to succeed within the industry. The result for the consumer was a major increase in competition (some 800 new companies entered the $82 billion marketplace), lower prices for long-distance service, and a steep increase in innovation.

 The open fuel standard will simply establish that all new cars in America be capable of running on flex fuels. American consumers will be free to choose whatever source of fuel they wish to use. Unlike today, where the oil monopoly limits our choices to one fuel source, the open fuel standard will open up the market to multiple options. Far from violating the principles of a free market, the open fuel standard will facilitate the development of one in America’s transportation industry.

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Myth #8: We shouldn’t use biofuels because they are toxic, and will cause additional air and water pollution.

Fact: While methanol is toxic when drunk, so is gasoline. Ethanol is unique among fuels in that it is edible. However, methanol is much less of an environmental pollutant than gasoline. Methanol evaporates when exposed to air, dissolves in water, and microorganisms living in the soil can break it down. Plants and animals do not store it. Methanol is the primary component of windshield wiper fluid, which is consumed in high-quantities across the country.

 With regards to the environment, alcohol fuels burn much cleaner than gasoline. They produce fewer particulate emissions and NOx, and unlike gasoline, contain no carcinogens. In 2007, ethanol use in the U.S. cut CO2-equivalent greenhouse gas emissions by approximately 10.1 million tons. In Brazil, where there has been a substantial switch from gasoline to ethanol, there has been a marked improvement in air quality.

 Alcohol fuels can cause no permanent environmental damage in the event of a spill. Sea otters are still dying today from eating oil-coated clams polluted by the Exxon Valdez tanker accident, which happened over a quarter century ago. However if the Exxon Valdez had been carrying an alcohol-based fuel, its cargo would have dissolved in the ocean and have been undetectable within a few days.

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Myth #9: Alcohol-based fuels will increase greenhouse gas emissions.

Fact: Depending upon how they are made, alcohol fuels can potentially reduce CO2 emissions substantially relative to gasoline use, which introduces new emissions into the atmosphere. Alcohols made from biomass do not introduce new CO2 emissions into the atmosphere because the CO2 they emit was initially pulled out of the atmosphere by a plant. Alcohols made from natural gas that would otherwise be flared, or from urban trash that would decay to CO2 by microbial action if left to its own fate, also reduce overall CO2 emissions in comparison to gasoline. Alcohols made from coal do not reduce CO2 emissions, unless the extra CO2 generated in the production process is sequestered.

 Opinions differ as to how important it is to move immediately to counter global CO2 emissions, compared to dealing with other problems such as global poverty that is being severely aggravated by high oil prices. However a fundamental point is this: with petroleum fuels there is no choice – when we burn petroleum, we invariably add to global CO2 emissions. With alcohol fuels, however, we have a choice, as they would allow us to produce the fuel we need with greatly reduced CO2 emissions. By making our vehicles compatible with alcohol fuels, we will give ourselves the option of a future that includes both economic growth and the ability to reduce greenhouse gas emissions. With gasoline-only vehicles, we have no such option.

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Myth #10: The switch to biofuels is the dominant cause of rising food prices around the globe.

Fact: It is true that food prices have risen worldwide over the past year, but this is largely a result of a decline in crop yields and the rising cost of oil. Our food systems are now heavily dependent on oil for production and distribution. In 1940, the average farm in the US produced 2.3 calories of food energy for every calorie of fossil energy used. By 1974, that ratio was 1:1. Today, it takes more than one calorie of fossil energy to produce a calorie of food. Change in the cost of processing, packaging, transporting, and selling foods is closely related to changes in oil prices. Thus in 2007, acting agriculture secretary Charles F. Conner rightly noted that the price of oil "is having a much, much greater impact than higher grain prices as a result of ethanol."

 A nonpolitical energy investment research firm, New Energy Finance, released a report in May 2008 assessing that biofuel production was accountable for only 8% of grain price increases while fuel costs accounted for 35%. In Brazil, "surging oil prices during 2005 and into 2006 drove domestic demand for ethanol" and "contributed to a 70% increase in sugar cane prices," but the market reacted swiftly and further capacity was brought online so that supply met demand and the price of cane reverted to the long-run average within a year.

 Since biofuels can come from diverse sources, such as corn, coal, natural gas, municipal waste, and crop residue, it is unlikely to cause starvation in the third world. Instead biofuels can help tropical agricultural countries by allowing them to replace overpriced oil with homegrown alcohol fuels, and to gain badly needed foreign funds by producing biofuels for export to the advanced industrial nations. A switch to flex fuel vehicles in the U.S. and other nations would greatly expand such markets, and allow the redirection of hundred of billions of dollars from OPEC to developing nations, with tremendous benefits for global development and the alleviation of poverty.

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Myth #11: The switch to biofuels is causing environmental devastation around the world, including the deforestation of the Amazon.

Fact: There is no truth to this. Deforestation of the Amazon actually slowed during the current decade, and is being driven primarily by human settlement, not ethanol production. Furthermore, the sugarcane that provides 45% of Brazil’s biofuel program requires a long dry season, and thus cannot be grown in the Amazon. Sugarcane is grown in the southern regions of Brazil, while the Amazon is located in the north. So far, the program has only used 1% of the country’s arable land; however, another 100 million hectares of uncultivated arable land could prove useful to achieve 100% biofuel dependency. As such, Brazil’s ethanol program in no way threatens the Amazon forest.

 The primary cause of environmental destruction in the developing world is poverty, which forces people to make short-term decisions that result in unnecessary damage to natural resources and wildlife. By providing many tropical third world countries with a stable and substantial source of income, biofuels can provide the economic base needed to avoid environmental destruction.

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Myth #12: Alcohol fuels cannot work because it takes more fuel to create ethanol than the ethanol produces.

Fact: In the 1940s we got about 100 barrels of oil back for every barrel of oil we spent getting it. Today, each barrel invested returns only ten. The costs associated with extracting oil are increasing. In contrast, new technology is actually decreasing the cost of generating ethanol as we move forward. In 2002 the U.S. Department of Agriculture estimated that the net energy balance of ethanol production was a ratio of 1 to 1.35 (energy in/energy out). That is to say, that for every 100 BTUs (British Thermal Units- a basic measure of thermal energy used to compare different types of fuels) of energy used to make ethanol, 135 BTUs were produced. This ratio was updated in 2004 to reflect technological advances to 1 to 1.67, signifying about a 20% increase in energy yield. That number is now 2.81 and likely to further increase.

Dr. Bruce Dale, of Michigan State University's Biomass Conversion Research Laboratory, argues that the net energy benefit of corn ethanol also translates into significant financial savings for the consumer. According to Dr. Dale, "generating 1 MJ (megajoule – the international system of units for energy) of gasoline requires 1.1 MJ of petroleum while only 0.04 MJ of petroleum is required to generate 1 MJ of ethanol from corn. The reduction in petroleum required per unit of fuel energy delivered to the consumer is therefore 106%." This effectively increases the miles run by the vehicle per gallon by a factor of 27. The savings increase exponentially if you run a hybrid flex fuel vehicle.


  

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Myth #13: It is impossible for alcohol-based fuels to replace oil. We are using 20% of our corn acreage for ethanol, and it is only producing enough fuel to replace 5% of our gasoline supply. So, at best, alcohol fuels can only make a marginal contribution.

 Fact: Not so. There are 442 million acres of cropland in the USA, of which about 340 million acres are being cultivated. This year, 93 million acres of land are being used to grow about 13 billion bushels of corn. Of those, 4.1 billion bushels, grown on 30 million acres, will be used to generate ethanol. At the end of this year, we will have actually grown 5% of our fuel supply on a little more than 7% of our arable land, leaving 9 billion bushels for traditional uses of corn.

 Furthermore, corn is just one source; alcohol fuels can currently be made from virtually any kind of sweet or starch-rich crop, and technology is currently in an advanced state of development that will allow us to produce ethanol from cellulose – which means that it will be possible to produce vast amounts of ethanol from crop residues that currently have no food value. It is already possible to produce methanol from any kind of biomass without exception, as well as from coal, natural gas, and recycled urban trash. To take one example, it is estimated that if turned into methanol, current world crop residues are sufficient to replace all the oil of OPEC. So there is no shortage of resources for alcohol fuel production. In order to utilize this supply, however, consumers must own cars that can use alcohol fuels.

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Myth #14: Hydrogen fuel cell cars are a better answer. Hydrogen is the most common element in the universe, and when you use it in a fuel cell, you get perfectly clean electric power to drive your car, with only water for exhaust.

Fact: Hydrogen is not a source of energy. It is a carrier for energy, and it takes more energy to make the hydrogen than the energy that the hydrogen carries. 95% of America’s hydrogen is produced from natural gas. So using hydrogen requires more fossil fuel use than just burning the fossil fuel in your car. Another approach creates hydrogen with nuclear or solar power, but that power could be fed directly into the grid instead and used to power plug in hybrids and pure electric vehicles. 

More importantly, hydrogen is impractical as a fuel for general use in automobiles, and not merely because it is much more expensive than other fuels. For hydrogen gas to achieve a manageable form, it would have to be cooled to a temperature of -253C in your vehicle. Such a measure requires significant expenditure of energy and money.

To sum up, hydrogen offers little cost or environmental advantages over fossil fuels, is difficult to store in vehicles or transporte to pumps, and the cost of the platinum-coated fuel cells used by hydrogen cars need to be reduced significantly to make them economically viable.

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Myth #15: They've tried ethanol in a big way in Brazil. It didn’t work.

 Fact: Exactly the opposite is true. In 1978 Brazil was 85% dependent on foreign oil. That figure dropped to 10% in 2002, and to nearly zero this year. In 1973, the USA was 30% dependent on foreign oil. Today the USA’s dependence on foreign oil has actually grown to 60% and is on track to grow still more to 70% dependency by 2030. In contrast, Brazil is now exporting ethanol to Japan. In accomplishing this feat, Brazil has been helped by expansion of its oil drilling as well. However, 50% of Brazil’s vehicle fuel supply now comes from ethanol, and without this contribution, it would still be roughly 50% dependent on foreign oil. The benefit to the country in creating jobs, reducing air pollution, and eliminating a huge balance of trade loss has been extraordinary. If they can do it, so can we.

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