$100 A Barrel? What is the True Cost of Gasoline?

January 10th, 2008 - by admin

Environmental News Network – 2008-01-10 22:43:58


(January 8, 2008) — We’ve done it. We’ve finally reached the psychologically important $100/barrel oil. The recent surge that got us there is more likely due to the plummeting dollar than other factors, but nonetheless will ultimately impact the price paid for gasoline at the pump. But even as the price goes higher, there are additional costs that are not paid at the pump. What are they, and who’s paying them?

In addition to the internalized cost of fossil fuels such as gasoline and diesel we must also consider the many significant externalized costs. Of these externalized costs some are internalized by tax-payers (oil industry subsidies, military patrols of oil shipping lanes, etc.) while others are left for the global population and future generations to bear (climate change damages, global health effects, etc.).

Let’s take 2005 numbers because that’s what I have available (the thought process is what matters):

The average US retail gasoline price during 2005 was $2.240. During that same time period the retail price of US No. 2 diesel (on highway) was $2.402. Additionally, the subsidized rate for agricultural (off highway) diesel was $1.65 in 2005. Since agricultural diesel is essentially the same as on-highway diesel (except for the addition of red dye), the US government (i.e. taxpayers) subsidizes $0.752 of every gallon ($2.402 – $1.65).

In addition to this farm subsidy the US government subsidizes all petroleum fuel with over $49 billion in military expenses to ensure the flow of Persian Gulf petroleum resources, the equivalent of $1.17 per gallon. According to the International Center for Technology Assessment and the conservative National Defense Council Foundation, the true cost of gasoline and diesel is a minimum of $5.60 per gallon and over $5.20 per gallon, respectively.

Using the 2005 average US retail fuel prices mentioned above, regular gasoline during 2005 was therefore subsidized between $3.36 and $2.96, and diesel fuel is subsidized between $3.20 and $2.80, at a minimum. This also means that the total subsidy for agricultural diesel amounts to between $3.95 and $3.55 per gallon.

Since fuel is a variable input, the consumer is indirectly responsible for these additional costs relative to each purchase made. However, this burden is spread through society through taxation, based on income level, not purchasing habits. Since taxes are seen as a given (“two things are certain in life: death and taxes”) people do not realize the true cost of purchases that they make.

The truly externalized costs of fuel use, such as the cost of global climate change, are more difficult to quantify since the effects of today’s CO2 emissions may affect the climate for several years into the future. In fact, the estimated half-life (the time in which half of a given substance decays) of atmospheric CO2 is 38 years. However, very little data exists on the projected costs of today’s CO2 emissions in future years so we must rely on current data on emissions and global climate-change related damages.

In 2003 global CO2 emissions exceeded 7500 million metric tons (Mt) as atmospheric CO2 levels reached 376.3 PPM (0.03763%). Pre-industrial levels were around 280 PPM (0.028%). According to Senior UN official Klaus Toepfer the global cost of climate change in 2003 was $60 billion. Therefore the climate change related portion of the cost of CO2 emissions is $8.00 per ton ($60×109 / 7.5×109 t).

According to a World Health Organization (WHO) report human-induced changes in the Earth’s climate lead to at least 5 million cases of illness and more than 150,000 deaths every year. The standard insurance industry figure for the value of a human life is given at $1 million, making the global cost of human lives due to climate change $150 Billion. Therefore the human health related portion of the cost of CO2 emissions is $20.00 per ton ($150×109 / 7.5×109 t). There are additional health costs, such as those associated with asthma but it’s even more complicated to add them here.

According to the EPA, “a gallon of gasoline is assumed to produce 8.8 kilograms (or 19.4 pounds) of CO2” which, thrown into the math above ($28 per ton * 8.8kg) tacks on about 25 more cents to the gallon’s price.

This analysis is likely quite conservative and is meant as an illustration that gives light to the many hidden costs we are already paying out of pocket, if not at the pump. Google “True Price of a Gallon of Gas” for a variety of other estimates.

Posted in accordance with Title 17, US Code, for noncommercial, educational purposes.