Folks,

In this week’s article for Energy and Capital, I review some of the studies that have tried to assign a value to all the externalities and hidden subsidies of the oil business, to show that oil really isn’t cheaper than renewables (not by a long shot, as it turns out). I hope you find this enlightening!

The True Cost of Oil: $12.5 Trillion* a Year?

2007-06-29

By Chris Nelder

Quick: What’s the most common criticism of renewable energy?

Right: That it’s not economical. Too expensive compared to cheap oil, coal, natural gas, and nuclear.

And that’s true, if you have a calculator that can only add, and you don’t count a bunch of stuff.

But that’s not the way we do math around here. We like to figure out the real cost of things. It’s the only intelligent way to invest!

Let’s try adding up everything for once, leaving nothing out, with no “externalities.”

Crude Cost: $69 a Barrel

Neal Dikeman, partner at energy investment banking firm Jane Capital, adds up the production cost of oil this way:

Finding cost: $7.5/bbl (JS Herold 3 year avg costs for global integrated oil companies).

Lifting, production, and transportation cost: $6.5/bbl (JS Herold 3 year avg costs for global integrated oil companies).

Refining cost: <$5/bbl (10Ks from US independent refiners 2004-2005; the majors are lower).

So for a typical major oil company like Exxon, with its vertically integrated business from the wellhead all the way to the consumer, the average actual production cost is $14 to $19/bbl, depending on a lot of variables.

But of course two thirds of our oil is imported, and for that we pay at the delivery point: West Texas Intermediate is $68.97 today, NYMEX crude future is $69.12; call it $69/bbl in round numbers.

Counted in terms of transfer of wealth, at current prices, the U.S. sends about $313 million each day to OPEC for crude oil. That’s $114 billion per year, just to OPEC countries . . . countries that are mostly dictatorships and oligarchies hostile to us.

If all of our 21 Mbpd consumption of crude oil were bought at the market price, it would cost the economy $1.5 billion per day, or $529 billion per year.

It is such direct fuel costs, as they contribute to the price of grid electricity, that are compared to renewable energy to show that the latter is too expensive. But have we really counted the cost of oil? Not even close.

Cost of Dependence: $233 Billion a Year

According to a 2000 study for the Department of Energy, there is a significant cost attached to the mere fact of our dependence. Supply disruptions, price hikes, and loss of wealth suffered through the oil market upheavals have cost the U.S. economy around $7 trillion (1998 dollars) over the 30 years from 1970 to 2000.

The study focused on three primary factors: macroeconomic adjustment costs, the potential loss of GDP, and wealth transfer. Still, the study notes, “These cost estimates do not include military, strategic or political costs associated with U.S. and world dependence on oil imports.” (We’ll get to that.)

All Economic Costs: $480 a Barrel

Milton Copulos, the head of the National Defense Council Foundation, has a different view. And as the former principal energy analyst for the Heritage Foundation, a 12-year member of the National Petroleum Council, a Reagan White House alum, and an advisor to half a dozen U.S. Energy Secretaries, various Secretaries of Defense, and two directors of the CIA, he knows his stuff.

After taking into account the direct and indirect costs of oil, the economic costs of oil supply disruption, and military expenditures, he estimates the true cost of oil at a stunning $480 a barrel.

That would make the “real” cost of filling up a family sedan about $220, and filling up a large SUV about $325 (when oil was $10 a barrel cheaper than it is now!).

Due to the enormous military cost of protecting Persian Gulf imports, the hidden cost of oil from that region amounts to $7.41 per gallon of gasoline. The cheapest gas out in my part of the Bay Area is $3.11 a gallon for regular. Add them together, and the true cost of my gas is probably around $10.52 a gallon.

We use 21 million barrels a day of oil. At $480 a barrel, that’s $10 trillion a year draining from the national coffers.

And we haven’t even tried to count the blood.

But we’re not done yet.

Government Subsidies

Ah, everyone’s favorite, the government subsidies.

It’s a surprisingly difficult thing to put a boundary around, because there are so many direct and indirect ways in which the government supports the oil industry, and every study has its own list of things to leave in and things to leave out.

For example, none of the studies I found included the hidden subsidy of leasing public lands to oil companies for next to nothing, which in essence assigns zero value to the oil extracted from the ground, paying the public nothing for the loss of its natural capital.

One 1998 study by the International Center for Technology Assessment (CTA) looked at petroleum industry subsidies, including the percentage depletion allowance and tax-funded programs that directly subsidize oil production and consumption, among other things.

It assessed up to $17.8 billion per year in tax subsidies, plus government program subsidies (such as vehicle R&D programs, highway construction, and environmental cleanup) of between $38 billion and $114.6 billion per year.

They pegged health and social costs at an additional $231.7 billion to $942.9 billion per year, counting factors such as health issues due to pollution, loss of crop yields, and so on.

As for related costs, such as the direct and indirect costs of traffic delays, traffic accidents, subsidized parking and the like, they counted another $191.4 billion to $474.1 billion per year.

Adjusting the estimates to 2006 dollars and rounding, that makes a total of between $68 and $161 billion in government subsidies, between $283 billion and $1,152 billion in health and social costs, and between $233 billion and $579 billion in related costs.

All told, $584 billion on the low side, $1.9 trillion on the high side.

Environmental Costs

Burning fossil fuels has serious environmental costs, from water and soil pollution, to loss of species, to loss of ecosystem services such as cleaning the water and air. And yet nobody ever pays those costs directly. They are “externalized” onto the environment: you and me, and everything that lives around us.

The Union of Concerned Scientists reviewed some studies on this subject in a 1995 article citing several estimates: “Delucchi (1995) estimates the total cost in 1991 of environmental externalities to be $54 billion to $232 billion. Human mortality and morbidity due to air pollution accounts for over three quarters of the total environmental cost and could be as high as $182 billion annually. For the Los Angeles area, Hall et al. (1992) estimates the annual health-based cost from ozone and particulate exposure alone to be almost $10 billion.”

Taking the upper estimate (because there’s no way their list of factors was comprehensive), and adjusting for inflation, call it a total cost of $345 billion per year.

Climate Change Cost

Then there is the cost of climate change owing to the production of CO2 from burning oil and gas.

A 2006 study by the U.K.’s New Economics Foundation looked at these costs company by company and concluded that the climate change costs far outweighed the oil companies’ profits.

Using a government estimate that put the cost of environmental damage at $35 per ton of carbon dioxide, they calculated the cost of emissions from BP’s oil business from production all the way through to burning the fuel. They came up with a damage bill of $51 billion a year. But BP’s profit was only $19 billion, putting the entire enterprise $31 billion in the red!

The same calculation put Shell $23 billion in the red.

Once you take into account the externalized costs, the oil business isn’t even worth doing.

Somewhere up there, Sitting Bull is saying “Duh!”

Given the U.S.’s emissions of some 1,614 million metric tons, and using the $35/ton figure, that gives us a CO2 bill of about $56 billion a year.

Summing It Up

To be honest, I have no idea how one could sum up these estimates. There are too many different boundaries for the costs that are counted and a lot of troublesome math that wouldn’t yield a terribly significant number anyway.

But, just for fun, let’s add up the above numbers.

All economic costs: $10 trillion.

Cost of dependence: $233 billion.

Government subsidies, health and social costs, and related costs: $1.9 trillion.

Environmental costs: $345 billion.

Climate change costs: $56 billion.

Total: About $12.5 trillion a year.

And our GDP is about $13 trillion a year.

OK, undoubtedly some of the costs are being counted more than once.

But however you add it up, it’s clear that we’re running up an enormous tab with Mother Nature, even if “nobody” is paying for it.

Which makes it incredibly obvious why renewable energy is the answer. Almost all of those costs go away with renewables, and we could probably replace our entire energy generation system for that kind of cash.

No wonder $71 billion of new capital was poured into the renewables sector last year.

And you’d better believe Green Chip Stocks members are getting a piece of this action too!

Until next time,

–Chris

* This post originally went to press with some regrettable spreadsheet errors. It has been corrected in this version.