When the subject of fighting OPEC comes up, the foremost idea that is generally advanced is conservation. Since OPEC is taxing us by selling us oil, and in fact using the demand generated by our purchases to help run up the price, we should simply use less. It sounds very sensible, yet it is completely unworkable.
The advocates of conservation break down into two groups. In the first instance, there are those who, for reason of their Malthusian convictions, favor conservation as a goal in itself, and are quite willing to support increases in the oil price in order to suppress consumption. These people, as we have already shown, are actually OPEC's allies. In fact, they have much more in common with the Islamists than simply economic goals, but we shall leave that subject for later.
In this section, however, I want to discuss the idea advanced by the second group, consisting of much more well-meaning people. Many of these people are quite hostile to OPEC. They understand the evil it is doing, either when it takes or when it gives, or both. They want to bring it down by boycotting its product. If I thought this idea had a prayer of working, I'd be for it. But it doesn't. It needs to be discredited because it proposes a strategy that guarantees defeat.
There are essentially only three ways to convince people to conserve: economic incentive, moral persuasion, or governmental action. None of them will succeed in this instance.
The most powerful persuader of the three is economics. Yet that is impractical here, because the objective is to reduce the price of oil. If the oil price is allowed to soar high enough to induce conservation, OPEC wins everything.
The notion of using moral exhortations to urge people to conserve is very nice, but as a practical strategy for reducing global oil consumption, let alone outmaneuvering OPEC, it is a joke. Whenever this idea is suggested, I am reminded of the Whip Inflation Now (WIN) campaign launched by the Ford administration during the mid-1970s to counter retail price hikes. (Whip Inflation Now! Rah, rah, rah!) Alternatively, one might think of it as being comparable to an attempt to alleviate world hunger through having church leaders call upon their congregants to eat less. A more serious approach is required.
That leaves the possibility of government mandates. These can certainly be forceful in their effect within the territorial jurisdiction of the United States, but for better or for worse, the United States is only one small part of the world. Demand for oil is a global issue. As I mentioned in chapter 1, and will discuss at greater length in the chapters to follow, there is a candidate mandate that could be enacted within the United States that could greatly affect the world energy market, but it is not one for conservation, which is what we are talking about here. Could any practicable US government conservation initiative lead to domestic consumption reductions large enough to influence the global oil price? Unfortunately, the answer is no.
Now admittedly, the term "practicable government initiative" used in the preceding paragraph has different meanings for different people. In November 2005, for example, I attended a World Technology Network workshop in San Francisco where energy conservation guru Amory Lovins argued that America could become oil-independent if its population were all induced to move to the vicinity of their workplaces. No doubt. But, thankfully, I don't think that the required Population Relocation Law would have a prayer in our political system. (Lovins, however, does have many good technical suggestions for reducing the energy consumption of particular items, such as buildings. If you are putting up a new factory and are concerned about the heating bill, look him up. It's his social ideas that go off the tracks.)15
To be realistic as an energy strategy, a plan must also be at least hypothetically, marginally, feasible politically. So utopianism of the Lovins sort is out. Instead we need to focus on policies that might actually be practicable. In the world of oil conservation ideas, the primary such candidate suggestion is that of increasing the standards for motor vehicle mileage.
Motor vehicle usage accounts for about half of all American oil use, so cutting it would certainly be a good place to start if one wanted to conserve oil. Moreover, there is some past success that can be pointed at in this respect. In 1976 the US government imposed the Corporate Average Fuel Efficiency (CAFE) standards on the auto industry. Those standards were met, and as a result, between that year and 1990, average American automobile fuel economy rose from 13 miles per gallon to 20 miles per gallon.16 Despite this remarkable achievement, however, US gasoline consumption increased over the same period from 89 billion gallons per year to 103 billion gallons per year. But the engineering mileage improvements accomplished between 1975 and 1990 were the low-hanging fruit. Since 1990 there has been no further increase in vehicle mileage, and oil consumption has continued to rise, reaching 140 billion gallons per year in 2005.
It may be remarked that if not for CAFE, the rise in gasoline consumption would have been even worse, and that is true. But the point is, it didn't stop OPEC. Far from it. Despite CAFE and comparable or even more forceful measures introduced in many other countries, between 1975 and today world oil consumption rose from 50 million barrels per day to more than 70 million barrels per day.
Furthermore, regardless of the quadrupling of oil prices over the past six years, the rate of rise of oil consumption globally is accelerating, with increases over the past several years averaging about 1.7 million barrels per day each year. Only about 11 percent of this increase is occurring in the United States.17 Most of it by far is occurring in China, India, eastern Europe, and Latin America. Everywhere the pattern previously seen is repeating: Once people become wealthy enough to buy a car, they do so. Auto sales in China doubled between 2001 and 2003, and have doubled again since. They are going to keep doubling.18 In the United States today eight hundred out of every thousand people own cars. In China the number right now is only eight cars per thousand.19 There are a lot more cars coming.
It would be harder to repeat the technical success of CAFE from 1975 through 1990 today, because the most obvious improvements have already been done. But let's say we could. This would imply raising average vehicle mileage from 20 miles per gallon to 31 miles per gallon. Then, over the next fifteen years, instead of US gasoline consumption rising to 190 billion gallons of gasoline per year (requiring an additional 5.7 million barrels of oil per day to produce), it would be expected to rise to only 162 billion gallons of gasoline per year (requiring an added 2.5 million barrels of oil per day to make). In other words, duplicating CAFE's achievement (whose impact, incidentally, was substantially augmented by a major US economic slowdown between 1974 and 1983) would not cut our oil consumption at all. Instead, 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. Yet all OPEC has to do to win is to keep making trillions, which they can do even if worldwide demand merely holds at its present level!
In the fight against OPEC, the conservation strategy is a sure loser.
There was another area of energy policy where post-oil-shock US government policies did achieve some measure of success in reducing America's petroleum dependence. This was in the field of electric power generation. In 1974 about 17 percent of all US electricity was produced by burning oil and 18 percent from natural gas. However, as a result of the Carter administration's Fuel Use Act, which discouraged this, by 1985, oil-fired generators supplied only 4.1 percent of our electricity, and natural gas 12 percent. Today, though natural gas is back up to 18 percent, oil is down to 3 percent. The fraction of electricity that was once generated by oil has been taken up primarily by nuclear power, which went from 4 percent in 1973 to about 20 percent today.20
In view of the fact that nearly all of the Carter administration's numerous other energy initiatives were complete failures, the dramatic success of the Fuel Use Act is particularly remarkable. Why did it work so well? The answer is simple: The Fuel Use Act was not a fuel conservation policy. It was a fuel substitution policy. There was no reduction in electricity use during the period in question. Far from it— in 1978, when the act was passed, the United States generated 252 million kilowatts of electricity. By 1986, by which time petroleum had been substantially removed from the mix, we were generating 284 million kilowatts. In 2005, with oil cut down to provide just 3 percent of our electricity, we produced 443 million kilowatts overall.21
There are two points to be made here. First, this particular achieve ment cannot be repeated. With petroleum gone from our electric power base, we can't save significant additional quantities of oil by altering our electricity production or use. So, as aesthetically pleasing as they might be, windmills and solar panels are not the answer for fighting OPEC. (They can however, along with nuclear power, indirectly assist matters by making more natural gas available for methanol production. We shall discuss this later.) The second point, however, is much more important: Conservation fails, but substitution works. Indeed, while it takes a huge price hike to reduce energy use, it only takes a small edge to cause a shift from one energy source to another.
This is the key insight to grasp if we want to destroy OPEC.
To annihilate the oil cartel, we need to switch the world to a different fuel.
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