How Much Does a Gallon of Gas Really Cost?

Friends Committee for National Legislation, Washington Newsletter

September 2006


The price we pay for gasoline at the pump, although it seems high today at $3-plus per gallon, doesn't begin to cover the full social cost of our oil consumption.

Burning petroleum fuel fouls the air, increasing illness and pre-mature death for hundreds of thousands of people due to respiratory ailments. The greenhouse gases that are emitted contribute significantly to global climate change, the costs of which will be borne by future generations. Arguably, the root causes of the wars in Iraq and Afghanistan can be traced to U.S. and global oil dependence.

None of these extra costs are included in the price we pay at the pump. Thus, the full costs of petroleum consumption are not necessarily paid by the people who consume it. Instead, others pay the extra costs-those who are most susceptible to respiratory ailments, the victims of oil wars, taxpayers, and future generations.

So, how much do these "externalities" cost? Estimates vary widely-from zero to more than a trillion dollars per year. Loren Cobb has provided a helpful analysis ("Oil Addiction: The External Costs of Petroleum Use," The Quaker Economist #142, Cobb estimates:

* Health costs of air pollution from petroleum use (estimated using damage function method): $300 billion per year,

* Government spending on roadway construction, maintenance, and research (beyond those funded through fuel taxes, tolls, and registration fees): $75 billion per year, and

* Net economic impact of petroleum-related global warming (excluding discounted future effects): $25 billion per year.

To this analysis, we at FCNL would add:

* Approximate military cost of securing the flow of Persian Gulf oil (National Defense Council Foundation): $49 billion per year.

* Approximate military cost of the wars in Iraq and Afghanistan: $100 billion per year.

By this estimate, the total annual costs that are not included in the price of gasoline (and other petroleum-based products that we use) are roughly $550 billion. According to the Department of Energy, in 2005, the U.S. consumed about 317 billion gallons of petroleum (20.6 million barrels per day). This means that for every gallon of gas (or diesel, jet fuel, heating oil, plastic, etc.) consumed, society paid an extra $1.74 per gallon.

Congress should consider shifting these costs to petroleum consumers through increased taxes on petroleum products, phased in over time, while providing offsets for low-income households during an initial period of adjustment.

An additional $1.74 tax on oil could bring about a number of social benefits. Consumers and industry would conserve and invest in energy efficiency. They would demand and develop more fuel efficient vehicles and renewable fuels. More people would seek places to live where they would not need to own a car. Demand for public and alternative transportation would increase. Urban air quality would improve. Greenhouse gas emissions would decline. The U.S. would save the hundreds of billions it now spends importing oil. U.S. foreign policies would no longer be driven by the imperatives of oil dependence. Military spending could be cut. And that's just for starters!

Oil watch

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