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Ethanol and the Politics of OPEC

June 8, 2011


Just when America had all it could handle with the intense political struggle on Capitol Hill and around the country, a new column by Financial Times Commodities Editor Javier Blas tells us that the internal politics of the Organization of Petroleum Exporting Countries, or OPEC, may be far more troublesome. Blas reports that after nearly a decade of relative cooperation among the member countries, the coalition is beginning to unravel.  Blas warns that the more moderate voices in the cartel (yes, amongst this group Saudi Arabia is the moderate voice) are losing their influence. Instead, rogue nations like Iran and Venezuela are exerting more influence in a drive to keep global oil prices above $100 per barrel.  Previously, this level was thought to be too high and would result in demand destruction that the cartel sought to avoid.  But no more.  As Blas writes, "The hawkish camp needs much higher prices than it did over the last decade to survive economically. Venezuela, Iran and their allies need oil prices above $100 to balance their budgets after years of expansionary policies, generous subsidies and rampant military spending." That last rationale for higher oil prices should give everyone pause.  Nations with expressed ill-will and desire to see America fall are seeking to bolster their efforts by increasing the rate of wealth transfer from America to oil-rich regimes.  Americans are already sending nearly $1 billion a day overseas to pay for our oil addiction. All of this comes against a backdrop of American political angst and misleading efforts to derail America's pursuit of renewable alternatives to oil.  Many lawmakers, including those claiming to be tough on countries hostile to the U.S., are seeking to undermine the growth and evolution of American ethanol and biofuel production and cement oil's position as the default American fuel.  They are seeking to prevent the installation of blender pumps that offer consumers a choice when refueling.  They are seeking to pull the rug out from under and industry that is still maturing and threatening to derail the progress of new ethanol technologies like cellulosic ethanol production.  The only outcome of such policies is higher gas prices and an increase in oil imports – the exact outcome for which Hugo Chavez and Mahmoud Ahmadinejad are cheering. The black and white of it is that ethanol is the only alternative to oil that is having any impact on America's voracious oil appetite.  The use of 13 billion gallons of ethanol in 2010 reduced America's need for imported oil by 445 million barrels – more oil than we import from Saudi Arabia annually. Moreover, ethanol is reducing the pain American's feel at the pump as a result of oil markets being held hostage by the whims of OPEC.  According to a report from respected economists at the Center for Agriculture and Rural Development, the mere presence of ethanol in the market kept gasoline prices $0.89 lower than they otherwise would have been in 2010.  That is a savings of some $800 for the average American family. The impact of ethanol can even be seen in oil pricing around the world.  As RFA's Geoff Cooper noted in his analysis of the unusual and growing spread between the West Texas Intermediate crude contract at the terminal in Cushing, Oklahoma and the Brent Crude price in the UK, "... ethanol now constitutes 10% of the U.S. gasoline pool and represents a rapidly growing share of U.S. refinery input. In other words, the glut of North American oil creating the logjam at Cushing is in large part the result of increased ethanol production and use. Larger ethanol supplies are eating into U.S. oil demand and putting downward pressure on WTI prices." To be clear, all OPEC members are concerned about the growing role of biofuels.  In confidential 2010 U.S. Embassy cables recently uncovered by WikiLeaks, Ambassador James Smith stated that the Saudi assistant petroleum minister had expressed concern that Saudis could be "greened out" of the U.S. fuel market by biofuels like ethanol. According to the cable, "Prince Abdulaziz (the Assistant Minister of Petroleum) noted that in 2009, the U.S. for the first time consumed more ethanol domestically than Saudi oil. Saudi officials watched the ethanol debate with great interest..." Even the "moderate" voices in OPEC are concerned about the growth and potential of American ethanol production to replace the need for imported oil. With the motives of OPEC nations clear, it begs the question, "Why would we let them off the hook?"  Instead of seeking to turn back the clock to the days of gas lines and oil embargoes, the nation should be seeking ways to expedite the growth and evolution of the American ethanol and biofuel market.  Sadly, as is the case within OPEC, politics are threatening to trump sound policy.