The Hidden Cost of Our Oil Dependence
By Bill Moore
A one-on-one conversation with Milton Copulos, president of the National Defense Council Foundation.
April 23, 2006
When Milton Copulus speaks in Washington, D.C.'s corridors of power, people listen, the most recent example being his appearance before the influential Senate Foreign Relations Committee.
In his March 30, 2006 testimony, he presented an updated report of the National Defense Council Foundation's original 2003, in-depth analysis on total economic cost of the nation's growing dependence on imported oil. That original report involved the evaluation of "hundreds of thousands of documents" over more than an 18-month period, the findings of which were "rigorously peer reviewed" he told EV World in an exclusive interview.
"At that time, we determined that the total of these hidden costs, which include things like the cost of defending the flow of oil in the Persian Gulf, the loss of domestic jobs and investment, the uncertainties that enter the economy and the costs related with oil supply disruptionsâ€¦ We came to $304.9 billion annually, which equates at that time to adding $3.60 to the pump price of a gallon of gasoline.
"But in that year we were only spending about $99 billion on imported oil. Since that time, a lot's changed."
I'll say. As I write this, the futures price of a barrel of oil is within pennies of $75 and as the summer driving season nears, it appears headed north of that. (Just as I was finishing this article, the price hit $75).
When Copulos did his original analysis the refinerâ€™s cost of a barrel of oil was just over $28 a barrel.
"We were paying $99 billion for imports. We were spending about $49.1 billion defending the Persian Gulf. Oil prices are, of course, much , much higher than they were."
Since that original 2003 study, Copulos and his associates have "revisited" their
"Now this year in 2006, we're going to spend about $320 billion to buy imported oil. That's 3.2 times what we were spending three years ago. We feel that the average refiner price will be about $60 a barrel, not $28 and some change. And in contrast to the $49 billion we were spending in the Persian Gulf to defend oil supplies, that figure is now $132.7 billion. And when you add everything together and take the economic consequences into accountâ€¦that $304 billion in 2003 will increase in 2006 to $825.1 billion. That's almost twice as much as much as we're going to spend on national defense this year. It adds the equivalent of $8.35 to a gallon of gasoline when we look at the price that was posted yesterday (April 14, 2006), that means at the pump -- if you were paying the full cost -- it would be $11.06 per gallon, meaning that it would cost you about $220 to fill up a sedan and about $325 to fill up an SUV."
Because these cost are "hidden" in other forms of taxation -- largely by borrowing money from other nations and indebting our posterity -- Copulos doesn't see $3 a gallon gasoline as dissuading many Americans from their car buying or travel habits because compared to elsewhere in the world, our motor fuels are still relatively cheap. But $11 a gallon would have a profound impact, he agreed, if that was what we actually paid at the pump
"As high prices persist, attitudes may begin to change," he said, adding that at the last OPEC oil minister's meeting it was suggested that a floor of $55 a barrel be established, effectively ending the era of "cheap oil."
"That could create a tremendous impetus for all sorts of alternative fuel vehicles, including plug-in hybrids, hybrid-electrics and so onâ€¦"
According to Copulos, after giving his testimony, both Senators Lugar and Biden were, in his words, "stunned" by how much the United States was spending to defend the oil of the Persian Gulf.
"Senator Lugar actually had been aware of our earlier figure of $49.1 billion, but this $132.7 billion annual figure -- that's every year -- really kind of shook him up."
The obvious question, given the threat this poses to both U.S. economic competitiveness and national security, what do we do about? The answer, admitted Copulos has been elusive. When it was suggested to the Senators that the federal tax on gasoline be increased, the response was, "Are you out of your mind?"
"Any tax that would be sufficiently large to affect behavior is probably the swiftest way I know to lose your seat in Congress or the Senate. A nickel or dime or fifteen cents a gallon just isn't going to cut it."
Copulos suggested to the Senators the creation of a floor price for oil akin to what OPEC is considering, which would effectively prevent the price of oil imported into the U.S. from dropping below the point where investment in alternatives would be killed, as has happened in the past.
He thought a floor of $45-50 a barrel would be appropriate, noting that he doesn't think oil will every drop below that because of growing demand. Any revenues collected could be, he suggested, used for low income assistance. It would provide relief for the working man and sufficient financial incentives for investors to back the development and deployment of critically-needed, but expensive energy alternatives.
In testimony before the U.S. House of Representatives last year, Copulos reminded the committee members a prediction he made in 1978 that was quoted in the Wall Street Journal. Back then he warned that "if nothing were done" the United States would be importing 70 percent of its oil and paying $65 a barrel by 2010.
He'll be close on the percentage and probably low on the price.
"The operative phrase is, 'if nothing is done' and we haven't done anything. So, the trend lines are pretty clear.
"In terms of actual volume, we're importing more than twice as much oil as we did in 1973 when the first embargo occurred."
He predicted that by 2007, the U.S. will be importing 69 percent of its oil, doubling in percentage terms, the amount of oil that we brought into the country thirty-four years ago