March 30, 2006

U.S. Senate Hearing: The Hidden Cost of Oil

There are many "hidden costs" that are associated with fossil fuels. However, our slavish dependence on oil for gasoline creates, many would contend, unacceptably high risks for American foreign policy. So the U.S. Senate Committee on Foreign Relations conducted a hearing on March 30, 2006 to consider what those risks are and what "price" we pay for them.

A previous article of this blog deals with The Military Surcharge for Oil. The hearing dealt more specifically with:

  • the consequences of disruption of the oil supply either by accident or through intentional acts due to the political instability of the foreign sources of oil

  • the "social cost of carbon" - that is, the indeterminable costs that extraction, transport, refining, distribution, and consumption have in terms of damage to air quality and the potential for abrupt climate change due to greenhouse gas emissions.

    Below are excerpts from the opening statement by Committee Chairman Richard G. Lugar (R-Indiana).


    The Hidden Cost of Oil
    Senate Committee on Foreign Relations, Chairman Richard G. Lugar
    March 30, 2006

    With less than five percent of the world’s population, the United States consumes 25 percent of its oil. If oil prices remain around $60 a barrel through 2006, we will spend approximately $320 billion on oil imports this year. Most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism. More than three-quarters of the world’s oil reserves are controlled by national oil companies. And within 25 years, the world will need 50 percent more energy than it does now.

    These basic facts demand a major reorientation in U.S. policy aimed at reducing U.S. dependence onfossil fuels. Our goals must be to mitigate the short term costs of our dependence on oil, while pursuing energy alternatives that would reduce the international leverage of petro-superpowers, improve environmental quality, cushion potential oil price shocks, stimulate new high-tech energy industries, and ground the American economy on energy sources that will neither run out nor be cut off by a foreign supplier.

    There are at least six basic threats associated with our dependence on fossil fuels.

  • First, oil supplies are vulnerable to natural disasters, wars, and terrorist attacks that can produce price shocks and threats to national economies. This threat results in price instability and forces us to spend billions of dollars defending critical fossil fuel infrastructure and choke points.

  • Second, over time, finite fossil fuel reserves will be stressed by the rising demand caused by explosive economic growth in China, India, and many other nations. This is creating unprecedented competition for oil and natural gas supplies that drives up prices and widens our trade deficit. Maintaining fossil fuel supplies will require trillions in new investment – much of it in unpredictable countries that are not governed by democracy and market forces.

  • Third, energy rich nations are using oil and natural gas supplies as a weapon against energy poor nations. This threatens the international economy and increases the risk of regional instability and military conflict.

  • Fourth, even when energy is not used overtly as a weapon, energy imbalances are allowing oil-rich regimes to avoid democratic reforms and insulate themselves from international pressure and the aspirations of their own people. In many oil rich nations, oil wealth has done little for the people, while ensuring less reform, less democracy, fewer free market activities, and more enrichment of elites. It also means that the United States and other nations are transferring billions of dollars each year to some of the least accountable regimes in the world. Some of these governments are using this money to invest abroad in terrorism, instability, or demagogic appeals to anti-Western populism.

  • Fifth, reliance on fossil fuels contributes to environmental problems, including climate change. In the long run, this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability.

  • Sixth, our efforts to facilitate international development are often undercut by the high costs of energy. Developing countries are more dependent on imported oil, their industries are more energy intensive, and they use energy less efficiently. Without a diversification of energy supplies that emphasizes environmentally friendly options that are abundant in most developing countries, the national incomes of energy poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism.

  • Each of these threats comes with short and long term costs. As a result, the price of oil dependence for the United States is far greater than the price consumers pay at the pump. Some costs, particularly those affecting the environment and public health, are attributable to oil no matter its source. Others, such as the costs of military resources dedicated to preserving oil supplies, stem from our dependence on oil imports. But each dollar we spend on securing oil fields, borrowing money to pay for oil imports, or cleaning up an oil spill is an opportunity missed to invest in a sustainable energy future.


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