On oil and its many 'prices'

Posted Wednesday, September 26, 2012 in Sustainable Maine

On oil and its many 'prices'

Source: Oak Ridge Laboratory

by Paul Kando

If you drive a car, you probably watch with concern as the price of gasoline edges past the $4 mark. As daily low temperatures dip into the 40s and below, we all wonder what our next oil delivery will cost. Yet petroleum – for heating or driving – costs half to a third less at the pump here than in most industrial countries. In late  2010, for example,  our gasoline at the pump cost less per gallon than milk, bottled water or orange juice. This is because the oil companies have a lot of political (i.e: financial) muscle. They see to it that subsidies remain high and fuel taxes low. The 2006 federal subsidies for oil, for instance, exceeded $35 billion. And for such oil users as automobiles they are even higher: over $111 billion in 1998, translating to $16 per barrel of oil. When we add such costs to the price at the pump, $4 a gallon begins to look like a bargain.

Alas, the at-the-pump price covers but a fraction of what we all pay to extract, produce and use petroleum. According to the U.S. Energy Information Agency, the country’s 2006 oil bill came to $0.9 trillion.  Of this $388 billion (43 percent) went abroad as payment to foreign oil producers. Such massive wealth transfers amount to a 2% tax on our whole national economy. It increases our trade deficit and weakens the dollar, which, in turn, boosts oil prices further as suppliers try to maintain their purchasing power. (That some of this money paid for state sponsored violence, weapons and terrorism only adds insult to injury.)

OPEC can easily charge above market prices for their oil as long as the U.S. –  consumer of 26% of the world’s oil –  remains addicted to it, keeping demand high. According to an Oak Ridge National Laboratory report, in recent years more than $3 trillion have been removed from our economy in this fashion – an “investment” with no return  we could ill afford, considering our unmet social needs and crumbling infrastructure. During the last three decades of the 20th century, wealth transfers to oil-rich countries cost the U.S. more than a year’s worth of GDP, reducing real GDP over that period by more than 10%. Not surprisingly, high oil prices preceded every single recession since 1973, putting transportation-dependent industries – shipping, travel, tourism – at increased risk and triggering inflation.

Oil price volatility and speculation add to the problem. Recent futures market bids suggest an expected $40 per barrel rise in the crude oil price over five years and a $124 per barrel ($2.95 per gallon) increase for gasoline – a 40%  to 47% increase.  Our 2010 consumption of gasoline alone carried a hidden volatility cost of over $0.4 trillion, and well over half a trillion dollars for our total oil consumption. Politicians say we must produce more oil ourselves. But even if we produced all our oil domestically, we could not control its price: oil prices are set internationally, under the control of international oil companies committed to sell at the highest profit possible.

All told, our national oil dependency caused us citizens to incur a cool $1 trillion in 2008 economic costs alone, above what we spent on the oil itself. To this we must add the cost of the U.S.  war machine stationed around the Persian Gulf.  In the 1990s it cost the U.S. 2 to 3 times as much to maintain those forces than it has paid for oil. According to a Rocky Mountain Institute report, if those costs were included, crude oil from the Gulf would have cost $77 per barrel more in 2000 – 2.7 times the price of Saudi crude.

As of 2011, the Iraq war alone has cost over $3 trillion (not to mention 4,400 American lives and 600,000 to 1,033,000 Iraqi dead) and, according to a 2010 Princeton University study, maintaining U.S. forces just in the Persian Gulf cost $0.5 trillion in 2007 alone, half of  all U.S. military expenditures that year. That’s in league with peak level expenditures during the Cold War and 10 times what the U.S. paid that same year for Persian gulf oil. Based on an average of $100/barrel, that translates to a real cost of $23.80 per gallon of oil.

All told, the hidden cost of our oil dependency comes to about $1.5 trillion/ year or 12 percent of U.S. GDP.  Call it tax, penalty or  surcharge, we pay this year after year through increased business risks, taxes and deficits. It far exceeds the at-the-pump price of gasoline and also the supposedly high motor fuel taxes in most other industrial countries. Yet, for all that, according to Pentagon and intelligence sources, the whole oil supply chain is astonishingly vulnerable: look at the mayhem a third-rate religious bigot can cause with a B-movie posted on YouTube! 

The good news is that even without counting all the hidden expenses, renewable energy is already competitive with oil. Look at Germany, Denmark, Sweden, China – anyone who has caught on.  Switching to energy conservation and renewable energy creates wealth, reduces risk, opens opportunities for innovation, creates jobs, reduces threats to health and well-being, and even corrects serious structural defects in our ailing  economic system. We will focus on this good news in future columns.

In the meantime it’s time to get real. Ask your favorite political candidate to explain the pathetic inaction and campaign silence about oil dependence. Tell our congressional busybodies lusting for budget cuts, here is their real target. Services to the elderly and the poor are easy to pick on because they are powerless. Real men would take on something more man-sized, like the oil interests and their minions courting state legislatures and Capitol Hill alike. Citizens, we have a man-sized job cut out for us: an election looms ahead and so is a cold winter.

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