Updating the economic costs of U.S. oil dependence
Posted September 7, 2010 at 1:40 pm 
Filed in: The year 2009 was generally one of reduced economic activity—and therefore reduced demand for oil—in the United States. Total oil consumption averaged just 18.7 million barrels per day (mbd) according to the BP Statistical Review of World Energy. That is well off of pre-recession levels near 20.7 mbd. At the same time, net oil imports were down to 9.6 mbd, a drop off of nearly 20 percent from their 2007 levels. Of course, benchmark oil prices were also down. The WTI average for 2009 was just $61.92 per barrel, a level not seen since 2005-2006.
And yet, according to recently released data from DOE’s office of Energy Efficiency and Renewable Energy, the combined economic costs of U.S. oil dependence remained well above historical norms at nearly $300 billion in 2009. That pales in comparison to 2008’s record $500 billion tab, but it still represents a significant drag on the overall economy.
The data are updated from a recurring analysis performed by researchers at the Oak Ridge National Laboratory Center for Transportation Analysis. (The original study is not available online, but the 2000 and 2005 versions can be found here.) The report finds that oligopolistic behavior in the oil market (that is, OPEC) leads to an inefficient allocation of resources and higher prices for consumers. Coupled with oil price shocks, this leads to three key economic costs for consumers, and the U.S. in particular:
- Transfer of wealth (the number of barrels imported multiplied by the cost of oil above a ‘free market’ cost);
- Dislocation losses (reduction in economic activity by businesses and households due to price volatility); and
- Foregone GDP (reduced national output based on higher fuel and raw materials costs, again due to oligopolistic pricing).
In reviewing the data, a few things are clear.
First, wealth transfer is currently the most significant factor. This is made sense in 2007 and 2008 but is somewhat surprising for 2009, because $62 per barrel should not be widely off the mark of a ‘free market’ oil price. It is certainly more than the marginal cost of production in a country like Saudi Arabia, but it’s probably a good estimate of complex, non-OPEC projects like Canadian oil sands or U.S. deepwater production. Then again, $62 per barrel is still roughly double the price paid by refiners as recently as 2003.
Second, price volatility is extremely damaging, almost regardless of how high oil prices go. According to the data, oil price volatility—separate from high prices—cost the U.S. economy $111 billion in 2009. Households will put off purchases (like automobiles and plane tickets) when oil prices are volatile, and businesses hold off on investing in capital or hiring new workers. Uncertainty is an economic killer. (In that sense, yesterday’s proposal by the Obama administration to allow businesses to expense capital more easily seems to make a lot of sense.)
So where are we headed in 2010? Benchmark crude oil prices have been trading in a very narrow band between $70 and $80 per barrel almost all year, so volatility may be less of a factor right now. Meanwhile, net U.S. oil imports have averaged 10.1 mbd through August, but oil prices are expected to average $77.37 in 2010, an increase of nearly 30 percent from 2009. So transfer of wealth will again likely be significant.
Other links:
- BP revitalizes Alaska asset sale.
- Iran has enough fuel for 2 nuclear warheads, report says
- After last week’s pipeline announcement, is Russia increasingly looking East?
- Or are Asian economies accelerating their efforts to lock-up new energy supplies?
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