The True Cost Of Oil: $65 Trillion A Year?

In an Energy and Capital article, Chris Nelder does some rough calculations to determine what oil is really costing the United States, factoring in all the externalities.
Crude Cost: $69 a Barrel
If the U.S. daily crude oil consumption, 21 million barrels, were bought at the market price (roughly $69 per barrel), it would cost the economy $1.5 billion per day, or $529 billion per year.
Cost of Dependence: $233 Billion a Year
A 2000 study for the Department of Energy reported that supply disruptions, price hikes, and loss of wealth caused by oil market upheavals cost the U.S. economy around $7 trillion (1998 dollars) between 1970 and 2000. The study focused on macroeconomic adjustment costs, the potential loss of GDP, and wealth transfer, but noted “These cost estimates do not include military, strategic or political costs associated with U.S. and world dependence on oil imports.”
All Economic Costs: $480 a Barrel
After taking into account the direct and indirect costs of oil, the economic costs of oil supply disruption, and military expenditures, Milton Copulus estimates the true cost of oil at $480 a barrel, equivalent to an annual expenditure of $10 trillion.
Government Subsidies
Depending on how you figure it, what you leave in and what you leave out, direct and indirect subsidies come to between $584 billion and $1.9 trillion per year. Typical hidden or disregarded costs include:

  • Loss of income from leasing public lands to oil companies for minimal rents
  • Tax-funded programs that directly subsidize oil production and consumption
  • Health costs from pollution, reduced crop yields
  • Direct and indirect costs of traffic delays, traffic accidents, subsidized parking

Environmental Costs
Burning fossil fuels has serious environmental costs: water and soil pollution, loss of biodiversity and ecosystem services. A 1995 article from the Union of Concerned Scientists arrived at a 1991 figure for environmental externalities of between $54 billion and $232 billion. Allowing for inflation, the current cost could be as much as $345 billion a year.
Climate Change Cost
Using a figure of $35 per ton as the cost of CO2 emissions, burning oil and gas is costing the U.S. $56 trillion per year.

The author Chris Nelder freely admits that these figures are ‘back of a fag packet’ stuff, and frankly to my eyes some of the numbers are inconsistent to put it mildly. Even so, there’s enough here to call into question the mantra that renewable energy is too expensive compared with ‘cheap’ oil and natural gas. As he says, “No wonder $71 billion of new capital was poured into the renewables sector last year”

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21 Responses to The True Cost Of Oil: $65 Trillion A Year?

  1. matt says:

    Nice image there Pete. Good solid point about renewables actually being cheaper than oil. Of course renewables have their impacts but this is mainly at the mining of materials, production and installation stages. Time for the River Severn Tidal Barrage to be taken more seriously.

  2. Stephan says:

    As in 2006 GDP was calculated at $13.2 trillion for the US, and $48.1 trillion fro the whole world, the estimate seems somewhat unrealistic:)

  3. Pete Smith says:

    Stephan,
    As the author admits, the actual numbers are dubious, and in a sense irrelevant. What this article does do is draw attention to the externailities, some of which are quite obscure.
    On your specific point, I imagine similar issues about fudged numbers and overlooked externalities are involved in calculating GDP as well. GDP is such a theoretical concept anyway, and unsatisfactory in so many ways, regardless of the method you use to calculate it. And since oil is so deeply imbedded in the economy, if you cost oil ‘correctly’, that will be reflected in GDP, won’t it?
    Pete

  4. Stephan says:

    Hi Pete,

    GDP = consumption + investment + (government spending) + (exports − imports)

    External costs are those that people, other than the buyer of a good or service, are forced to pay as a result of a transaction having taken place. They include things like pollution from production etc and are likely to have to be paid for by society in some way, such as through healthcare etc (which might then appear as part of government spending, or as reduced productivity due to all the sick workers taking time off, and thus be part of GDP). You are right in implying that fully accounting for externalities is not yet a robust practice, but it is I hope more robust than you have indicated.

    Stephan

  5. Pete Smith says:

    Up to a point, Lord Copper! I’m not an economist, so inevitably there’s a number of things I don’t get about the GDP as an economic indicator. It’s the Gross Domestic Product, which means that imports reduce GDP, not increase it. Since the US imports 2/3 of its oil, there’s scope for creative accounting there. Subsidising oil companies by leasing them public land for peanuts (assigning a zero value to the oil extracted and paying the public nothing for the loss of its natural capital) doesn’t show up either, as far as I can work out.
    All in all, invoking GDP to rubbish these figures doesn’t seem particularly relevant except as a point of comparison.

    Pete

  6. Stephan says:

    They were only meant as a point of comparison:) To me the climate change figure you quote seems to be totally out of relation to abaitment/mitigation costs given by either the IPCC or the Stern Report which I seem to recall are about 3% of global GDP (and there is a minus in the above equation). 😉

  7. Pete Smith says:

    Yeah, it does to me too. I might try and find out exactly where that $35 per ton CO2 cost comes from.

    As I said, I don’t think we need to get too anal about the exact figures. Like many numbers to do with global processes (atmosphere, ocean, economics, Al Gore) the bottom line is only as good as the data you start with.

    But I do wish you’d stop banging on about GDP all the time 🙂

  8. Pete Smith says:

    Well, that was easier than I expected. The Nelder article refers to “a 2006 study by the U.K.’s New Economics Foundation” that uses “a government estimate that put the cost of environmental damage at $35 per ton of carbon dioxide”.

    The NEF study ‘Hooked on oil: breaking the habit with a windfall tax’

    http://www.neweconomics.org/gen/uploads/hya3c255clsra5yk04fkvh3n23102006092016.pdf

    says “Government estimates suggest an environmental damage cost per tonne of carbon dioxide of around £20”.

    Their source for this figure is a 2002 Treasury study ‘Estimating the Social Cost of Carbon Emissions’ which arrives at a low end cost of £35 per ton of carbon (not CO2) and a mid-range cost of £70 per ton..

    http://www.hm-treasury.gov.uk/mediastore/otherfiles/SCC.pdf

    Does £35 per ton of carbon equate to $35 per ton of CO2? Someone else do the math 🙂

  9. matt says:

    > Their source for this figure is a 2002 Treasury study ‘Estimating the Social Cost of Carbon Emissions’ which arrives at a low end cost of £35 per ton of carbon (not CO2) and a mid-range cost of £70 per ton..

    Should that not read ‘$35 per ton …… mid-range cost of $70 per ton …’ ?

  10. Pete Smith says:

    No. It’s a UK Treasury report, they give figures in £££.

  11. Stephan says:

    GDP is just the cloth the emperor’s suit is made from 🙂

  12. Pete Smith says:

    Not sustainable, recyclable or biodegradable then? We all know what these emperors are like 😎

  13. Pete Smith says:

    Not with you old boy.

  14. the Grit says:

    Hi All,

    First, I would say that it’s nice we can afford it. Nest, I would ask what the alternative is? Combined this means that, we all know an oil based economy sucks, however, it still sucks the least.

    Unless, that is, we consider the ideas presented in the book, “Colonies In Space” by T. A. Heppenheimer. We have the technology to take a new path, where solar power satellites could solve our energy problems and grant us access to the riches of the solar system; we just don’t have the political will to implement it. Such is life.

    the Grit

  15. Pete Smith says:

    Hi Grit,

    “it’s nice we can afford it”
    Seems to me the main theme of the original article is that we can’t afford it.

    “we all know an oil based economy sucks”
    Agreed on that one at least 🙂 Still, it’ll be over soon.

    Pete

  16. Scorpion says:

    DUH
    DID ANYONE CHECK THE MATH!!??
    $35/TON OF CO2 TIMES 1,614 MILLION TONS/YEAR (SAME AS 1.614 BILLION TONS/YEAR) IS $56 BILLION PER YEAR IN CLIMATE CHANGE COSTS.
    NOT $56 TRILLION!! GEEZ

  17. matt says:

    It won’t be in the billions. That’s peanuts. I think you’ll find the maths has been checked. Unless of course you think you’ve broken a story here all by yourself. 🙂

  18. Pete Smith says:

    Well done! Shame you didn’t spot this a year ago.

  19. matt says:

    Are you saying this dude is correct Pete? T’is your post remember!

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