The purpose of this paper is to explore the topic of the externality costs associated with rising U.S. oil consumption that are not easily quantifiable by strictly economic or monetary calculations. These hard to measure externalities include the strategic and diplomatic costs that, particularly since the attacks on the US on September 11, 2001, have heightened relevance in American foreign policy debate. They also include the rising cost of US military intervention of the protection of the flow of oil to the international community, both in terms of dollar expense and human lives.
While it is hard to put an absolute number on what Americans pay for our overwhelming dependence on oil as a transportation fuel, clearly the gasoline price at US gasoline stations does not reflect the real cost to the American taxpayer. This paper is aimed to heighten awareness that oil is not as “cheap” as it seems to the average American motorist. Rather the seemingly higher costs of alternative fuels may not be so out of line with the cost of gasoline when juxtaposed against the real cost for depending on foreign oil that includes the taxpayers’ bills for US expanded military operations abroad as well as the diplomatic and security challenges associated with this dependence.
For the past two decades or so, United States international oil policy has relied on maintenance of free access to Middle East Gulf oil and free access for Gulf exports to world markets. American policy in the Persian Gulf is not designed, as conspiracy theorists might argue, simply to keep the price of US gasoline cheap or to make sure that American companies get handsome oil exploration contracts. Neither of these goals would likely merit the intense level of US intervention in the region.
Rather, America ensures that oil flows from the Persian Gulf are available to fuel international trade and economy as part of its global superpower responsibilities. More simply put, the physical oil needs of the US economy can certainly be met fully by protecting oil flows closer to home, from Canada, Mexico, South America, the North Sea and Africa. But the United States must consider the health of the overall global economic system since a massive shortfall of oil elsewhere would not only effect the price of oil everywhere but almost certainly collapse the global economic system.
The Persian Gulf today represents 25-30% of world oil supply. Saudi Arabia is the world’s largest oil producer and controls the majority of the world’s excess production capacity, which it uses to stabilize and control the price of oil by increasing or decreasing production as needed during times of market crisis or instability. The sudden loss of the Saudi oil network would paralyze the global economy. Thus, the United States has a concrete interest in preventing any hostile state or internal groups from gaining control over the Persian Gulf region and using this control to amass power or blackmail the world community.
But this strategic and economic reality is costing the United States dearly in terms of military operations, diplomatic freedom and national security. At $20 billion a year in military expenditure to protect the flow of oil, the US taxpayer is spending roughly an extra hidden $4 to $5 a barrel for the crude oil beyond its market price.
Continued dependence on Middle East oil can potentially place costly constraints on the US freedom of maneuver in international relations. Such constraints are evident already in such areas as terrorist financing, human rights, political reform in the Middle East and the status of women. In important areas of national security, such as the US campaign in Afghanistan, Middle East sensitivities were relegated to a lesser plain, but it is not out of the question that the United States could face, one day, a tough choice between the global economic hardship of a destabilized oil market and a foreign policy or national security imperative. Similarly, in a tight oil market, an important oil producer could try to use access to its exports as a lever to attain access to sophisticated military hardware or technology from a major oil-consuming nation.
Finally, high dependence on Middle East oil has been cited as a troublesome factor in shutting down dangerous state-sponsored terrorism, terrorist financing and proliferation of weapons of mass destruction. Many important US analysts argue that oil sales proceeds can be directed by authoritarian governments to fund terrorist organizations or to aid regional governments that harbor them. Some foreign policy analysts are now arguing that low oil prices – in addition to providing substantial economic benefits for the US and global economies – will reduce the revenue available to oil states, which sponsor terrorism or pursue the acquisition of weapons of mass destruction. This argument has powerful logic, but raises the question as to whether the link between oil rents and terrorism is really bonafide. While the link between terrorism and oil is neither necessary nor sufficient, as this paper will discuss, several oil states remain on the US Department of State terrorism list, and there are also private donors to terrorist groups who benefit from the trickle down of oil budgets into several key Middle East, Asian and North African societies.