Koehler Urges Higher Gas Prices

A combination of policy and market impediments to diversification of US transportation fuels has prompted the free market-focused Fuel Freedom Foundation to team up with policy-focused environmentalist and former Sierra Club Executive Director Carl Pope to pursue coordinated efforts to wean the US off its oil dependency.

Pope and Fuel Freedom Foundation co-founder Eyal Aronoff  have outlined a two-track strategy to reduce US consumption of oil products by 7 million barrels per day, displacing the large part of imports, and nearly halving import outlays in the process. Their joint efforts will focus specifically on moving away from petroleum dependency in the transportation sector.

“What this is about is disrupting the monopoly,” Pope told Breaking Energy.

“Today the bill for fuel in the United States made from petroleum is about $780 bln a year,” Aronoff told Breaking Media, noting that the total fluctuates with oil prices and demand.

“We’re trying to shave off $300 bln of that bill,” Aronoff said. “We’re not going to cut the demand by half by having people not driving. But we are going to do it by introducing competitive fuels,” such as natural gas, ethanol, methanol, and even electricity, through the use of electric vehicles.

Pope explained that diversification in the transport sector could add substantial slack to oil markets, resulting in potentially dramatic price cuts. “When global oil demand was at or below 80 million barrels per day, oil never got above $30/bbl,” he said. At around 85 MM bbl/d of consumption, “we start paying $50 [per barrel]”, he said. “If the world displaces 5 MM bbl/d of today’s demand, if we get back to 85 MM bbl/d, the price of oil will fall back to $50/bbl.”

The ultimate goal is to displace 7 MM bbl/d of demand from the transportation sector using a combination of energy efficiency, vehicle electrification, ethanol, methanol and natural gas. “We will get cheap oil, we will get domestic oil, and from my perspective as an environmentalist, that also takes off the global table the Brazilian deep salt, the Arctic, the tar sands, the Venezuelan bitumen, all of the really extreme oil reserves cost more than $50/bbl to bring to market,” Pope said.

Barriers to Entry

Pope and Aronoff identified two primary barriers to entry for non-petroleum fuels, arguing that neither one is economic: both the auto fleet and existing refueling infrastructure are designed specifically for petroleum products. A combination of technical and policy measures will be required for diversification to take hold, they said.

To attack the auto fleet aspect of the problem, “we need to enable cars to run on multiple fuels”, Aronoff said. Fuel Freedom Foundations’ proposal for lifting barriers to entry entails devising a system that enables cars manufactured in the last ten years to run on multiple fuels, which he said is simply a question of reconfiguring the software that operates the engine, a process that is currently illegal.

“We want to enable the fuels to compete in the cars on the road today,” Aronoff said. “For anywhere between $100-$300, you can make most cars that have been built in the last ten years to work on fuels not made from petroleum,” he said, adding that this requires adjustments to automotive software, and in some cases to fuel lines.

On the infrastructure side, “we need to somehow make the gas stations sell fuels that are not petroleum, and we need to broaden the regulatory framework to incumbent fuels that are not made from petroleum”, said Aronoff. Holding this back is “the canopy issue” – gasoline stations’ legal obligation to sell only branded fuels at branded fueling stations, which restricts station operators to those fuels supplied by Hess or Chevron or Shell, which may not offer the range of alternative fuels that Pope and Aronoff have in mind.

But some of the largest station owners, such as Kroger and Wal-Mart, use them as a means of bringing people into their stores, Aronoff said. “They have great motivation to sell less expensive fuels at their stores, particularly since some of these fuels have less energy content per gallon, which means that people will have to come a little bit more often.”

Bringing Stakeholders to the Table

But changing the market will require changing the regulatory regime. Pope has a strategy that he thinks will help to accelerate regulatory change. He noted that California’s early adoption of a low-carbon fuel standard prompted a few other states to follow suit, putting automobile manufacturers in a position of having to supply two separate markets in the US, which prompted calls for a national solution. “It brought them to the table,” Pope said.

Pope thinks the same strategy could urge stakeholders to push for a national solution to fuel diversification. “Go to the states, begin developing a set of regulatory processes that break the monopoly that oil has,” he said. “At some point, pressure on the oil industry monopoly business model becomes strong enough that they then come to Washington and say ‘we need a deal’, just as the auto industry did.”

“That is the way you can actually get this done, which accepts the reality that legislative energy leadership in the United States is not an option,” Pope said.

Questions Remain

Basic economics supports the notion that a substantial reduction in global demand would have a negative impact on global oil prices. But forecasting oil prices is tricky, and there are many factors to consider beyond US demand alone.

Some analysts might contest Pope’s assertion that $50/bbl would be a high enough price for US oil production growth to continue, at least at current rates. Many estimates suggest that sustaining growth in US oil output – much of which is unconventional – requires prices at or above the $75/bbl range, or possibly higher. And the International Energy Agency expects non-OECD oil demand to continue gaining global market share in the 2012-2018 period, rising from 49% to 54%, potentially limiting some of Pope’s expected price impact of consumption cuts in the US.

And coordinating all these moving parts will undoubtedly take time. Given what the last five years have done to the global energy landscape – with particularly dramatic changes in North America – it seems the safest assumption is that the problems facing the US transportation sector are not static, nor are the solutions.