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Lecture challenges economics of oil

Students often hear how the U.S. should work toward a sustainable future, but they may not often hear how the country’s stuck in an unsustainable present.

For its first Conversation Series event of the fall semester, the Patel Center for Global Solutions hosted Gal Luft, senior advisor to the U.S. Energy Security Council and co-director of the Institute for the Analysis of Global Security. Luft spoke to a room of over 50 students, faculty and staff Wednesday afternoon.

“We cannot separate the issue of energy from our security,” he said. “We also cannot separate energy from our economic security.”

The country’s biggest vulnerability, he said, is reliance on oil.

“Look around you, this great American country was built on the premise of cheap transportation,” he said. “I don’t know how many people can buy a loaf of bread without driving somewhere.”

For a country to have energy security, Luft said, affordability and availability is key. Though America is seemingly secure, sustainability is an illusion.

“America will be flooded in tears,” he said. “This American civilization we’ve built is going to go down fast.”

Energy independence, however, is not Luft’s solution.

“Often we hear things from politicians and pundits say that, ‘oh, we’re too dependent on foreign oil,’” he said. “We’ll be fine if we cut ties with the turmoil in the Middle East.”

Yet U.S. directly imports less oil than popularly believed. According to the Energy Information Administration, the U.S. produces 60 percent of its petroleum and only 13 percent comes from Saudi Arabia.

“We could buy more oil from Canada or Mexico and do away with the Middle East,” he said. “It has never been true that the U.S. has been dependent on the Middle East.”

In 2011, the U.S. did not import any oil from Libya, yet its war sent global shockwaves. The cost for the U.S. to buy a barrel of oil went up 15 percent, according to The Economist, just as it did for every other nation in the world.

Luft said it is not the oil companies, such as Shell or Exxon, that control oil price, but a “cartel” known as OPEC, or the Organization of the Petroleum Exporting Countries.

“What we call big oil in the United States, I call midgets,” he said.

OPEC is an international organization that controls 81 percent of the world’s crude oil reserves and adjusts the global supply to ensure steady income to its countries, such as Saudi Arabia, Venezuela and Iran.

“OPEC countries have one thing in common: all of them of them are heavily dependent on oil revenues,” Luft said. “If the price of oil goes down, they go down.”

To control prices, OPEC manipulates their supply of reserved oil. When Shell increased the supply, for example, OPEC withdrew oil from the market to keep prices high.

“Those who major in economics should know that when supply goes up, the price should go down,” Luft said. “OPEC acts like a regulating mechanism to keep the price of oil at a sweet spot.”

As anti-trust lawsuits cannot be filed against governments, Luft said the solution is to move away from petroleum all together.

“Republicans say ‘drill, baby, drill’ and Democrats say ‘conserve, baby, conserve,’” he said. “One party promotes more supply, the other promotes more demand and I say they’re equally wrong.”

Luft said the U.S. could solve the problem by moving away from petroleum. Solar, nuclear and electric energy are possible long-term solutions, but he said the U.S. could take short-term advantage of its abundant supply of natural gas.

But only one “flexible fuel” car sold in the U.S., the Honda Civic GX, can run on the natural gas extracted from hydraulic fracking.

“If we don’t like the price,” he said. “We can move to another source. But we need different cars.”

Luft said the U.S. should take notes from Brazil, where its cars can run on the ethanol extracted from sugarcane.

As to why the U.S. doesn’t require cars to be able to run on ethanol, Luft said there is too much vested interest in politics.

“Read this Sunday’s New York Times about how much money foreign governments are pouring into Washington think tanks,” he said.

Consumption must change to increase U.S. energy security, Luft said, or else inevitable consequences “will consume us.”

“Every issue that underlies our national security, if you stretch a little bit, you’ll find energy,” he said. “Pearl Harbor was a Japanese response to an American oil embargo.”

Oil is also interconnected to every aspect of the U.S. and world economy, Luft said. A spike in oil preceded every recession in the last four decades, according to a Bloomberg article.

“Our disposable income goes down and we can’t pay our mortgages, and so on until U.S. economy crumbles and the world economy follows,” he said.

Though the U.S. may be too stuck in its ways, Luft said there is hope in China’s fresh perspective while entering a modern economy.

China has been the world’s largest car manufacturer since 2008, according to SKY News, and its production has only increased with its population’s rising demand.

This gives China a unique position in deciding what fuel its cars should run on, Luft said, as it doesn’t want to get caught in the same trap as the U.S.

“China is going to define the future of fuel,” he said. “GM will see what China is doing, and have to follow.”

Mohsen Milani, the moderator and executive director of the USF Center for Strategic and Diplomatic Studies, said it’s not often that a speaker of Patel Center for Global Solutions is so pessimistic.

“Usually when I have a guest, I leave feeling optimistic,” he said. “Today, I feel very sad.”

An anecdote about the salt, however, illustrated a past solution.

“Salt used to be the most valuable commodity because it had a monopoly on food preservation,” Luft said. “If you didn’t have salt, you would starve.”

Cities were built and wars were fought around salt, Luft said, just as they are with oil today. It wasn’t until Napoleon offered an incentive of 12,000 Franc prize that canning was invented to feed his grand army.

“You have to break the commodity oil controls, which is transportation,” Luft said. “If you want to do to oil what we did with salt.”