The following article was written by Gal Luft and published in The National Interest. Luft is senior adviser to the United States Energy Security Council and co-author of Petropoly: The Collapse of America's Energy Security Paradigm.
It happened to potash. It can happen to oil.
Last week marked the collapse of one of the last remaining cartels in the world economy — the potash cartel. Potash is a critical ingredient in the production of the fertilizers that help grow our food. For decades, the global potash industry has been dominated by Belarusian Potash Company (BPC), a joint venture between the Belarusian Belaruskali and the Russian Uralkali, together producing about a third of the world’s potash supply. On July 30th Uralkali broke away from BPC and directed its exports to China, consumer of one fifth of the world’s supply, via its own distribution channels. The announcement rocked the potash industry. Potash miners worldwide lost a third of their share value, and the commodity’s price is projected to slump by thirty percent. The breakup of the potash cartel should soon translate into lower fertilizer prices, which should in turn lower wholesale food prices. But as a new World Bank report confirms, the biggest contributor to increases in food prices over the last several years was neither the price of potash nor, as many still mistakenly believe, demand for biofuels, but rather the price of oil. Oil products go into every part of our food supply chain, from packing materials to fuel for the agricultural machinery and the trucks, planes and ships that transport food products from farm to plate. So when crude-oil prices rise, as is the case now, we pay more for our food. While the price of potash is no longer set by a cartel, the price of crude still is.
Owning seventy percent of the world’s conventional oil reserves but constraining its production capacity to the point that it supplies just a third of the world’s oil use, OPEC has been dictating global petroleum for nearly half a century. Only last week it announced its intention to cut production by the most in seven months, in response to the current burst in oil production in the United States. In this, OPEC reduced its collective production to the level it was at forty years ago — 30.2 million barrels per day. This is a scandalous figure considering the fact that in the past forty years the world economy has grown by leaps and bounds, and global oil demand has almost doubled. Vexing as OPEC’s strategy of reducing supply in order to offset increasing non-OPEC production may be, it is also understandable. Just like the potash cartel did until last week, OPEC sticks to a price-over-volume strategy — meaning producers prefer to sell less product at a higher price per barrel — and all of its members depend on high oil prices for their economic well-being and, in most cases, political survival. Saudi Arabia’s fiscal break-even price per barrel — this is the price needed by the government to meet its fiscal obligations — stands today at $98. Venezuela’s is $112. Algeria and Nigeria’s is $125. Iran’s is $144. This means that double-digit oil prices are no longer acceptable to the cartel’s members. As a recent letter by SaudiArabia’s Prince Alwaleed bin Talal reveals, the U.S. oil boom is perceived to be an imminent danger to the Kingdom’s oil dependent economy; hence the response of an OPEC supply reduction to prop prices.
Unlike with potash, the oil cartel is not likely to be dismembered by a sudden exit of one or more of its members. After all, they’re all in the same boat, and holding on to the cartel is their only way of remaining economically viable and maintaining domestic stability. But OPEC’s ability to manipulate oil prices would be greatly reduced if oil faced competition in the sector from which it derives its strategic status — transportation fuel. As long as cars are made to run on nothing but petroleum fuels, OPEC will continue to be able to set world prices through its price-over-volume strategy. But coal, biomass, uranium, renewables and natural gas can all be converted into or used to generate transportation fuels. Should cars be open to a variety of fuels, petroleum included, oil would be forced to compete against these other energy commodities for transportation-fuel market share, and this competition would force the price of oil downward.
Today American natural gas is among the cheapest in the world. Yet only one percent of it is used to produce automotive fuel. Natural gas can be used directly in compatible cars as compressed natural gas. It can be used to generate electricity, which can power plug-in hybrids and pure electric vehicles. It can be converted into methanol, a liquid fuel that costs a dollar less than gasoline on an energy-equivalency basis, and used to power flexible-fuel vehicles that cost manufacturers an extra $100 to make compared to gasoline-only cars. If vehicles were open to at least some of these fuels the U.S. would be able to pit a cheap and abundant commodity against one whose price is inflated and controlled by a cartel, and the oil cartel would meet the same fate as the potash one.
Editor's note: This scenario is exactly what the Open Fuel Standard would accomplish. The consequences would be tremendous for the United States. Help us make it happen. Start here.