Addicted to Oil

We aren’t addicted to oil. Russia is. So are Iran, Venezuela, and all the other petrocracies. They have not developed alternative revenue sources and they are spending the oil windfall as though it will be permanent. The problem is the rest of the world’s dependency is on liquid fuels that can be produced from raw materials other than petroleum. Oil’s dominance rests on being cheap and plentiful. Today it is neither and the world will find other sources for gasoline, diesel, and aviation fuels. It’s been done before. It will be done now. Let me make a prediction. By the end of the next US President’s first term the price of oil will be half or less than it is today. Gasoline will be under $2 per gallon and it will be there to stay.

The necessary fuels can be produced from coal at a cost equivalent to about $50 per barrel of oil. The US has more than enough to satisfy the needs of the entire world for many decades. The only reason we haven’t done it already is an inability to compete with low cost oil. But now demand has outstripped oil’s capacity at any price. Its day will soon be over. Technology is or soon will be here to compete not just with coal but with shale oil and we have more of that than the proven reserves of Russians and Saudis combined. Biofuels from algae aren’t far behind. That supply is limitless

This is all bad news for today’s more belligerent autocrats. It’s been said that credit for the Soviet Union’s collapse shouldn’t go so much to Ronald Reagan or Pope John Paul II as to $10 oil, or rather $80 oil followed by $10 oil. At $80 the Soviets were fat. They could subsidize all sorts of mischief around the world and compete in the arms race at the same time. When oil collapsed their economy collapsed with it. They fell like a house of cards. Russians can be slow learners. They failed to modernize their military after a disastrous Russo-Japanese War in 1904-1905. That led directly to an even more disastrous performance in WWI. It cost the Tsar his throne and his life. Now problems are more clearly economic. Vladimir Putin feels flush and is throwing his weight around. He thinks folks at home will back him in anything while the money keeps on pouring in. Europeans will do nothing to put energy supplies at risk. It’s a colossal strategic blunder. Europeans don’t have to go to war to stop him as they did with Hitler. They just have to find a new supplier. They can, they will, and it won’t take them very long. Russia’s economy will collapse again and she will find herself in need of Europe’s good offices. With less oil to export, Iran already has internal problems, even at current price levels. Their economy will eventually force them to behave as well.

We have only to look at Germany at the outset of WWII. They lost access to most of their oil supplies and switched to coal hardly missing a beat. The Wehrmacht wasn’t exactly awash in fuel but did have enough aviation gasoline to keep Messerschmitts flying, and diesel for Panzers. It may take us a little longer but only because the situation is less dire and our environmental lobby is dazzled by what they see as an opportunity to force the abandonment of the internal combustion engines. They are on the wrong side of that argument. We have already begun to see it. Our economy really does need those engines and will for decades. Keeping prices artificially high is a huge economic damper we will not long tolerate. Even if we would the Chinese and Indians would not. There is nothing keeping them from building their own coal refineries. They already explained that in no uncertain terms when they refused requests this summer to sign on to new restrictions on carbon dioxide emissions. Their prosperity is at stake. So is ours.