Omaha, Ne Gas Prices on 21-Apr-2006
Gas prices at filling station near EV World editor's home in Papillion, Nebraska as of 21-April-2006. According to Pentagon consultant Milton Copulos, if the 'hidden costs' were included, the price would be well over $11 a gallon.

The Hidden Cost of Our Oil Dependence

A one-on-one conversation with Milton Copulos, president of the National Defense Council Foundation.

By Bill Moore

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 disruptions… 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 refiner’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 numbers.

"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 account…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 on…"

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.

"It shows that we have not taken the matter seriously, because had we done so, we wouldn't be importing oil today."

I asked Copulos to breakdown the $132.7 Persian Gulf protection numbers and he explained that they are based on the Pentagon's "order of battle" which spells out what each part of the military, down to the battalion-level, is assigned to do, including supplemental appropriations for special missions and the pre-placement of military supplies and hardware in Doha, Qatar and on the Indian Ocean island of Diego Garcia. He noted that because Centcomdirects operations in the Persian Gulf, as well as Afghanistan and the Horn of Africa, his team deducted the costs of operations in Somolia and Afghanistan, focusing just on expenses related to Middle East oil.

It is Copulos' view that the primary reason the U.S. invaded Iraq was because Saddam Hussein "threatened the region's oil supply".

"I would suggest to you that if all that was there was sand, we wouldn't be paying so much attention to the area."

Not included in NDCF's numbers are the ongoing and future costs of treating U.S. military veterans injured in combat either physically and/or psychologically.

His figures only include the on-going operational costs of "shooting people and blowing things up, not to put too fine a point on it."

He did estimate that the on-going cost of treating combat casualties runs about $1.5 million per soldier, sailor and airman.

Prior to founding the NDCF, Copulos was the principle energy analyst for the Heritage Foundation. He was also a member of the National Petroleum Council for 12 years, as well as spending 18-months in the Reagan White House. He said he's advised about half a dozen U.S. Energy Secretaries and briefed various Secretaries of Defense, along with two directors of Central Intelligence.

The work of the NDCF is considered authoritative and is based on rigorously researched data from government and other highly respected research organizations including the Rand Corporation and Stanford Research Institute or SRI.

"We've never had anyone dispute our figures," he stated.

When I asked him what are the consequences economically on the nation of this $825 billion oil debt, he replied that it immediately means the elimination of 2.25 million jobs in America.

"It means jobs, it means investments, it means there are two and quarter million people who would otherwise be comfortably able to send their kids to college, own a home, feed their families, take a vacation once and a while, and they're not able to do so because of this enormous burden. The jobs that would be there for them are not there. It means that state and local governments lose tax revenue . It means that all up and down the line at every level of society there is an impact.

"And there is even a more serious impact, I think if we look at the long-term implications of this and why our foundation has been so adamant in promoting the development of alternatives. The simple fact is if you look at global demand and what's going to be required by 2025, there's not sufficient oil that could be discovered to take care of that. We simply can't meet demand from conventional sources. It's not possible.

"As a consequence, we could be faced with a Hobson's choice between economic collapse and global resource war if we don't do something and fairly quickly. The consequences of that sort of conflict would be incredible. We don't want to see that happen.

"It also means that we are held hostage to the whims of a small group of foreign despots who just happen to control countries that sit on top of that oil. And I don't think that as the world's largest democracy(1) it is appropriate for us to be held hostage to these people's whims."

He reminded me that some portion of every dollar we spend on imported oil ultimately ends up in the hands of terrorists.

"In effect, we are paying for both sides of the war in Iraq." Commenting on this massive transfer of national wealth, Copulos observed that "we have met the enemy and he is us."

Referring to an article he wrote for American Legion magazine, that if the United States truly got serious about this problem and deployed every resource at its disposal, we could cut oil imports by 40 percent in just five years time. Within ten to fifteen years, it could drop by 75 percent and "entirely within a generation."

These measures would include in the first five years an aggressive program to produce and use biofuels.

In addition, there would need to be equally aggressive incentives to quickly turn over our current automotive fleet replacing them with flexible-fuel vehicles including, conventional and plug-in hybrids. Instead of a tax credit, he'd substitute a tax rebate that would be used to buy down the difference between hybrids and conventional vehicles.

He would also promote exploitation of conventional fossil fuel resources offshore and in Alaska.

He'd "require" that all hybrids be capable of burning flex-fuel blends of ethanol and gasoline, as well as requiring carmakers to offer flex-fuel conversion kits for existing vehicles, which he estimates would add about $125 to a new vehicle's price and about double that to convert an existing vehicle.

"Hopefully, by the time we're seven years out, all new cars sold would be either a hybrid or a plug-in electric powered by alternative fuels.

"The whole thrust of our suggestions and what we are recommending are to ensure that as much of what we are spending on energy remains within the domestic economy. For every one dollar we spend on imported oil, we lose one point six dollars in domestic economy, and that's an extremely conservative estimate.

"Ultimately you're talking about transforming our economy or one of the most fundamental elements of the economy, which is fuel."

When I asked him if anyone was actually listening, he responded that yes, the message is beginning to gain political traction in Washington.

"At the Congressional level, we're getting interest." He added that he's also encouraged by the level of interest from various state officials, which is where he believes much of the change has to take place first. "The states are… the incubators of democracy."

We wrapped up the interview by my asking his forecast on oil and gasoline prices. He sees it's possible, though not probable that oil will go to $100 a barrel in two years. Depending on this year's hurricane season, the price at the pump on a national average could be $3.50 by mid-summer.

Add in the hidden costs and that $75 a barrel of oil today really cost all of us $480, he concluded.

Welcome to the future!

Be sure to listen to our complete interview using our web-based MP3 players, or feel free to download the file to your computer for transfer and playback on your favorite MP3 device. This interview will also be available through Apple's iTunes podcast service.

(1) The United States is considered the oldest, longest-running modern democracy, but India could, in fact, lay claim to being the largest with a population more than three times that of the U.S.

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Published: 23-Apr-2006


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