"OBIC stymies OPEC": Why not?

After finishing two quick reads on energy policy (this paper and this book), it struck me that our current penchant for China bashing—lucrative as it is for populist politicians and ideologues—might not be our nation's best tactic for securing our grandkids' future well-being.  Maybe there's a wiser way. 

I'm sure you're familiar with most of the fear-mongering about China.  They are communists.  They are Asians.  They have a trade surplus with us.  They supposedly import jobs from us.  They will soon be creating one-third of California's air pollution, out of reach of our laws.  They've been practicing how to knock satellites out of the sky.  They own too much of our debt, and they might dump it.  They are destined to be our formidable opponents in some kind of future war, cold or hot.  And—most infuriating to some of us—they spent the entire summer of 2006 beating and torturing Jack Bauer. 

If you've been paying attention to this blog, you know I haven't been so quick to jump on the China-bashing bandwagon.  China's growth is the result of a shift towards economic capitalism; the resultant growing wealth for China's people will reinforce that shift, if not speed it up.  We should be welcoming that, not fearing it.  China's economic growth means a growing market for our goods and services, and it probably also implies that an internal learning curve is in store for its political system.

The populist innuendo that China is and should be our enemy, even if it is arguable, ignores Chinese general Sun-tzu's's advice: "Keep your friends close, and your enemies closer."  Why should a new Cold War with China be inevitable (...or worse, a hot one)?  Why can't we think of the opposite possibility as an additional alternative?

Consider a few established facts and near-certainties:
• Economic growth (wealth creation) conquers poverty.
• Growth in economic output requires growth in energy input.
• China's economy is growing, and will continue to grow.
• Chinese, like almost all human beings, consider the automobile a "personal freedom machine."
• Worldwide demand for personal freedom machines will continue to grow.
• Today, liquid fuel refined from petroleum has a near-monopoly on personal transportation energy. 
• The USA and China will be the world's largest consumers of (and competitors for) the world's oil supply into the foreseeable future—in the absence of a paradigm shift for personal transportation energy.

That last bullet point is the reason why so many are worried about the future of our relationship with China.  But I'm more concerned with the next-to-last bullet point—our economies' dependence on petroleum.  Although the Cato paper (link in first sentence above) makes a good case that much of today's worry about oil is greatly exaggerated, it also warns that the two big, unarguable threats are (1) single-nation hegemony (Iran?) over the Middle East oil reserves, or (2) unfriendly overthrow of the Saudi Arabian government.  We'd be in deep trouble if either of those two scenarios came about. 

For that reason, as I've said before, our top priority should be for science and technology to break the petroleum monopoly on personal transportation energy.  [Just as the Stone Age didn't end because we ran out of stones, the OPEC age doesn't have to end because we ran out of oil].  A technological breakthrough that made oil unnecessary for personal transportation energy would not only be good for us, it would be good for China, too.  It would enable both economies to grow as fast as their respective politicians would allow, with little need for conflict over the supply of an obsolete resource (oil). 

Today, OPEC sits on most of the world's oil reserves, and (by my guess) relishes the thought of a bidding war, or even a hot war, between China and the USA over oil supplies.  I don't like much at all about that scenario.  I bet China doesn't like it, either. 

In fact, I bet the USA, China, Japan, and a few other key nations could speed up the advent of a technological paradigm shift—one that obsoletes petroleum as feedstock for automobile fuel—by figuring out a way to work together on it, instead of spending resources working against each other militarily and in the oil market.  I bet such an organization, as it was cooperating to develop that breakthrough, could even wield some oil-buying leverage against the OPEC cartel in the meantime, don't you? 

A good name for such a partnership might be "Oil Buying and Importing Countries" — OBIC, for short.  Picture an "OBIC stymies OPEC" headline in the NYT and WSJ someday soon.  Intriguing, isn't it? 

=========
End note:
A lot of new things are happening in the automobile energy arena.  The book Energy Future by Bill Paul (see link at top of article) is a broad-based status report on all the various alternatives in play today, and touches on the geopolitical high points, too.  The Cato paper is a good perspective on the economics and geopolitics of oil.  Both were written very recently; I recommend reading them if you're interested in the energy sector of our economy.  I'll summarize it in the near future.

Comments

[Bob]

An intriguing proposition and one that should not be discounted out of hand. Whether or not China could be included in the development of alternate transportation energy is iffy given our current geopolitical
policy. As I have stated often our current crop of politicians is to be found wanting when it comes to innovative policy.

Unlike many, I'm not a China basher though I am disgruntled with their "developing" country status that cuts them slack on carbon emissions. It's an absurdity, in my mind. Go ahead and spew stuff in the air until you are more "developed", then go back and retrofit things. But, I digress.

There is one major hurdle to overcome in the pursuit of personal transportation powered by electricity (the fuel I personally favor along with Steve) and that is infrastructure. Given the huge investments that the oil refining companies have in processing as well as local delivery they will, I wager, be all too eager to support an alternate fluid and all too willing to oppose anything else. I'm not sold on ethanol as the silver bullet in this but it will be a big play in the next election. It's already in play as ConAgra is running adds touting their high yield technology to allay fears that we will be converting foodstuffs into fuel.

Personally, I've always thought that a "Manhattan Project" type of initiative is in order. I'm fond of laser-like focus and perhaps a multi-national effort should be considered. For obvious reasons I'd do it in a very clandestine manner, though.

[Bob]

Addendum

Lots of interesting comments to a post at one of Steve's daily rounds:

http://www.econbrowser.com/archives/2007/07/ethanol_and_foo.html

[Jim]

Perhaps the US government is getting more towards Steve's suggestion to put the innovative machine to work to solve our energy issues:

http://tinyurl.com/282j7k

Sure it is the DOD, but a lot of the technology we enjoy in our everyday lives today has its roots in military development. Maybe the DOT or DOE will take the hint if this contest works.

[Ariah]

The idea of a war between the USA and China is ridiculous. China may be politically hostile towards us at times, but they also have a heavily export-based economy. They cannot afford a major conflict, let alone a war, with one of their largest trade partners. I suspect that this is the reason why Taiwan remains functionally an independent nation.

[rufus]

You can profitably market ethanol at just a tish over $1.00/gal.

By cutting back the displacement, and upping the compression in an internal combustion engine you can achieve virtually the same HP - fuel economy ratio as gasoline.

It costs less than a hundred dollars for the manufacturer to make a vehicle "flex-fuel."

Brazil uses less than 1% of it's arable land for sugar cane production. They, alone, could produce all of our (and China's) transportation fuels, forever. We don't need it. We can produce our own from our 1.3 Billion tons of excess biomass.

Africa can out-produce Brazil.

Now, throw in Plug-in Hybrids, supplied with copious amounts of Wind, Wave, Current, Solar, Biomass generated electricity.

Don't worry; the cure for high oil prices REALLY IS "HIGH OIL PRICES."

[Kevin]

Rufus, sorry my friend but most of what you claim is wrong. Sounds like you've been drinking Vinod Khosla's cool-aid. It certainly costs more than $1 a gallon to make Ethanol, I'm not aware of anyone claiming otherwise -- even now it's probably only economical as a result of the various government subsidies that apply -- and that is a hidden cost.

It costs much more than $100 per vehicle to make them flex-fuel, which is why relatively few vehicles are flex-fuel cars. People who claim low numbers for that figure ignore the large cost of changing processes, refitting manufacturing plants, and adopting different materials to accommodate flex fuel. Those things are not free. About the only realistic estimate I've heard in the press is when an Auto exec admitted the true cost was more like $500 - 600.

Ethanol will always and forever get lower fuel mileage than gasoline in a comparable vehicle -- it's an issue of energy content and the laws of physics. Anything you can do to a flex fuel vehicle to improve mileage, you can also do to a gasoline vehicle to get similar improvements.

It is hopelessly unrealistic to think Brazil can make enough ethanol for everyone. You can't convert every square inch of Brazil to raising sugar cane. In fact, Brazil cannot currently supply 100% of it's OWN fuel needs with Ethanol, because the majority of auto fuel used in Brazil is in fact still gasoline.

However, I do expect technology to change the equations in time, and I agree whole heartedly that the cure for high oil prices is high oil prices. Like Steve said about the stone age, they didn't run out of stones. They found more productive alternatives.

[Bob]

Kevin,

Well done. There's a 51 cent subsidy on ethanol today. Nice profit when it's trading around 2 plus bucks a gallon. And at that price a 15/85 mix doesn't do much. And, as you noted, less energy from the stuff.

Iowa farmers will love the politician that caresses ethanol. I would if I were them.

[rufus]

Nah, Kevin; I'm more of a bud-light, crown and coke type of guy.

Corn is selling, today, for $3.10/bushel. The newer refineries get 3 gallons of ethanol per bushel of corn (Poet's new process takes them up to 3.6 gal/bu.)

They, also, render approx. 16 lbs of Distiller's Dried Grains (livestock feed that sells for about 4.5 cents/lb, and 1/3 gallon of corn oil (about $0.60 worth,) and 18 lbs of CO2 which can be used for recharging old oil fields.

Note: this is all WITHOUT SUBSIDIES.

Now, if you add all of this up you will realize that the ethanol will cover the cost of the corn, and the co-products will more than pay all costs and leave you a meager profit.

[rufus]

Nah, Kevin; I'm more of a bud-light, crown and coke type of guy.

Corn is selling, today, for $3.10/bushel. The newer refineries get 3 gallons of ethanol per bushel of corn (Poet's new process takes them up to 3.6 gal/bu.)

They, also, render approx. 16 lbs of Distiller's Dried Grains (livestock feed that sells for about 4.5 cents/lb, and 1/3 gallon of corn oil (about $0.60 worth,) and 18 lbs of CO2 which can be used for recharging old oil fields.

Note: this is all WITHOUT SUBSIDIES.

Now, if you add all of this up you will realize that the ethanol will cover the cost of the corn, and the co-products will more than pay all costs and leave you a meager profit.

[rufus]

Kevin, if you elected to convert the family buggy to flex-fuel it would, indeed, cost you about $600.00; but, once you reach a few million vehicles it seems pretty unlikely that it would be anywhere that high. I think I'll stay with the $100.00 ish call.

As for laws of physics: One incontrovertible law of physics is that ethanol has an octane rating of 105. This means that it gives it's energy up much more efficiently than gasoline (octane 87,) for instance.

What it boils down to is this: A smaller engine with higher compression running ethanol will render the same HP, and, almost, the same mileage as a larger engine running gasoline.

As for Brazil? They have more fertile land lying fallow than we have under cultivation. They could easily produce 144 Billion gallons/yr.

Anyway, we haven't touched on biodiesel (a huge developing story,) or the fact that ethanol isn't even the most efficient way to use biomass. It's, actuall, twice as efficient to turn corn into biogas (think natural gas) for example, than it is to produce ethanol.

[Kevin]

Ruf, you ethanol nuts are hopeless. Actually, my opinion is that's it's pretty difficult to wade through all the B.S. and account for all the variables anyway, which is why I don't put much stock in those academic or government analyses that hit the street from time about the productivity or lack in Ethanol.

I happen to know that the only computer really smart enough to do a competent analysis is the free market with its billions of monkey brains chewing on the problem. That's why I dislike the distorting subsidies so much. I'm not anti-ethanol, I'd be perfectly happy to see whether it proves productive in an undistorted market.

[rufus]

Kev, I gave you the numbers; what do you want? It's jist 'rithmetik.

BTW, there IS NO "Free Market." Big "Energy" got more subsidies in the last bill than ethanol did. They've been playing this lobbying (buy a congressman) game for 100 years, now. Also, they own the Distribution.

[Aaron]

"The idea of a war between the USA and China is ridiculous. China may be politically hostile towards us at times, but they also have a heavily export-based economy. They cannot afford a major conflict, let alone a war, with one of their largest trade partners."

Before WW I, there was much talk about how the high levels of foreign trade created interdependence and made war "unthinkable."

What was the other argument by Thomas Friedman (sp?) that No two countries that both have a McDonald's have ever fought a war against each other? That already was proven wrong as well.

If Taiwan attempts to declare independence, I think we will quickly see just how much nationalism trumps financial incentives.

[Aaron]

China might be willing to cooperate with the US in developing alternative energy and such, but they also could be looking at resources as a more of a zero sum game where China can easily make friends with bad regimes to secure their own supplies they need.

They also get a lot of government contracts now from such states who prefer to buy Huawei than Alcatel...I don't think they worry as much about their oil supplies, except about the US Navy interdicting them.

[Bob]

Again, I'm with Kevin on this. It appears though that the ethanol bandwagon is moving into second gear.

So, we will pay more for chicken, beef and pork for maybe a 10 cent reduction in a gallon of gas. Great.

Alas, Kevin, free markets sans subsidies doesn't buy votes.

[Patrick]

A good summary of the variable costs of producing ethanol can be found here (lower chart on right):

http://www.lsuagcenter.com/agmag/archive/2007/winter/the+economic+feasibility+of+ethanol+production+from+sugar+crops.htm

Ethanol from domestic corn is indeed just over $1/gal. However, using sugar cane bumps it up to the $2.40/gal range.

Bob,

I dont think the point is to save 10 cents a gallon, it is to displace our dependence on all of the nut jobs who seem to control a majority of the worlds oil supply.

[Patrick]

I should point out that the energy equivalent price is the relevant indicator. Gasoline has roughly 44% more energy per unit volume than ethanol, so the equivalent costs would be about $1.50/gal for corn and $3.45/gal for sugar cane.

[Bob]

Patrick,

Suppose there were reasonable, friendly and peaceful people sitting on top of the oil fields.

We'd still have a supply/demand problem. Best way to fix that is to increase supply or reduce demand. Best way to reduce demand is to drive less using higher MPG transportation.

[Kevin]

Being aware of the concept of "opportunity cost", I'm really not going to get sucked into wasting a lot of time trying to prove a point to fellow unknown blog commentators, however tempting.

But I'd point out (considering the article Patrick links) that the raw material cost of the corn itself is only a minority fraction of the cost of producing ethanol.

If it takes $1.10 of corn to make a gallon of ethanol, then yes I'd guess that means Ethanol probably costs from $1.60 to $2.00 or more to produce. (Corn being much more expensive now than during the production period covered in that article).

No, more, corn itself is subsidized, and therefore more expensive than its price tag suggests. More again, demand-driven high cost of corn is famously making other things more expensive too. Ask the Mexicans. These are the costs of Ethanol. That's why the problem, as I said, quickly gets far more complex than people seem to appreciate.

In any case, so what? The retail price of ethanol is governed by the price of gasoline, so I'm not sure how much any of this matters unless you own an Ethanol plant.

The discussion of the dubious claim that you can have more net miles per gallon from ethanol engines as a result of higher octane allowing you to make smaller, higher-compression engines is pointless to delve into, since there will be no Ethanol-only cars produced in the US in the foreseeable future. They will be flex-fuel, and built to accommodate gasoline. Before you argue, let me remind you we're talking about the auto industry here -- they still put cassette players in cars.

[rufus]

First, I was an "ethanol Nut," and now I'm making "Dubious Claims." Sheesh.

Look up Saab Biopower