The Real Price of Oil: More than Just Carbon Emissions

In a recent post, Adam noted a neat new computer plugin called RealCosts, which allows the user to see the carbon footprint of various potential purchases. While this is certainly a heartening step toward an accurate accounting system for our purchasing decisions, it got me thinking that any computer widget that came close to calculating the actual cost of a product made with oil would have to account for a heck of a lot more than just carbon. Local pollution, infrastructure investments made with public dollars, and the exorbitant military cost of guarding oil from the Persian Gulf would all need to be factored in, as would the economic liability of markets dependent on the roller coaster of crude oil prices.

The price of gasoline doesn’t factor in hidden costs like oil spills

But what if all these things were considered? What would it do to the price of oil, and what would that mean in economic terms? Because of the many and complicated variables involved, estimates vary wildly, from an increase of a few cents per barrel to a jump of nearly $100. Resources for the Future economist Ian W.H. Parry wrote a 2003 paper that considered the economic impacts of air pollution, greenhouse gas emissions, traffic congestion and auto accidents. He found that all of these impacts aggregated could justify a gasoline tax of just over $1 per gallon, which is 2.5 times the current U.S. gasoline tax rate. Taking a narrower focus, transportation researcher Kenneth Small of UC Irvine has estimated that the additional illness and death generated by auto emissions in the Los Angeles Basin alone could add over 40 cents to the price of a gallon of gas, which translates to roughly eight additional dollars per barrel for the oil that it is derived from.

Auto emissions coat L.A. in a blanket of smog (from flickr/steven-buss)

Calculating the cost of carbon emissions is even more assumption-dependent than traffic congestion or smog, because it depends on a suite of variables including global emissions rates, climate sensitivity, the potential for extreme climate shifts, and the discount rate that you apply to the well being of future generations. Nevertheless, economists have lived up to their reputation in this realm and attempted to measure the seemingly un-measurable yet again. Wesleyan economist Gary Yohe told the Senate Foreign Relations Committee in 2006 that the average from about 100 estimates in the published economics literature was $11 per barrel of oil.
So we’ve broached about $20 extra per per barrel, all without even mentioning oil infrastructure or military costs. Obviously, accounting for these drives the price up further. Tax breaks and publicly funded ports and pipelines provided between $1.1 and $2.3 billion to the oil industry in 1995, according to a study for Greenpeace by economist Ted Kaplow. The largest tax break currently given to industry comes through something called “accelerated depreciation,” which allows companies to deduct capital expenses from their taxable income more quickly than capital equipment ages and becomes obsolete.
Tax exemptions granted to the Navy for harbor construction projects are borne by the public at large, but since harbors are critical transfer points from oil tankers to inland locales, they grant between $600 and $650 million a year in indirect subsidies to oil. Royalty relief for drilling on federal lands provides another several hundred million dollars in savings to oil companies annually.

Pipelines and other infrastructure represent a hidden form of subsidy for oil companies

For all the controversy over what to include when calculating oil subsidies, the cost that seems to infuriate both liberals and conservative hawks alike is that associated with guarding foreign oil as it makes its way from under their sand into our tanks. According to a 2005 study by the conservative National Defense Council Foundation, the military allocated about 49.1 billion for that purpose alone in 2003. The NDCF estimated that accounting for that along with all the other costs of oil could add more than $7 to the price of gasoline derived from Persian Gulf crude.

Protection of overseas U.S. oil supplies may have cost nearly $50 billion in 2003

If oil is underpriced, then what do we do about it? The clear answer is two-pronged: impose taxes and cut subsidies. Things like carbon taxes or congestion charging go part way toward accounting for the damages of oil, but an overarching tax is needed that incorporates all of its adverse impacts. Congressional Democrats have already begun chipping away at the subsidy side by attacking royalty relief given to companies who drill on public lands, and a recent bill from New York Congressman Maurice Hinchey, the “End Oil Aid Act of 2007,” goes much further in that direction. Clearly, no one knows precisely the correct surcharge to place on a barrel of oil, but as has been said many times before, the right number is not zero.

There is undoubtedly a role for consciousness-raising in this process; one can imagine a plugin to your web browser that calculates an oil surcharge for the product you’re checking out based the share of U.S. petroleum imports used to produce it. But given the immense complexity of attaching any hard numbers to the cost of oil, I think we can be encouraged that they’ve even done it for carbon emissions.


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