SECURITY
OF SUPPLY:
A MAJOR
NEGLECTED FOSSIL FUEL SUBSIDY
A.J.
Cavallo, 289 Western Way, Princeton, NJ 08540 acavallo@eml.doe.gov
Summary
Various groups have attempted to
set a monetary value on the externalities (that is, those costs not reflected
in the market price) of fossil fuel usage based on damages caused by emissions
of particulates, sulfur dioxide, and oxides of nitrogen and carbon. One externality that has been neglected in
this type of analysis, however, is the cost of maintaining a secure supply of
fossil fuel, in particular of petroleum from the Middle East. Military expenditures for this purpose are
relatively easy to quantify based on US Department of Defense and Office of
Management and Budget figures, and amount to between $1 and more than $3 per
million Btu, based on total fossil fuel consumption in the US. (These costs should be compared to the
average price of about $2.40 per million Btu paid by US utilities for oil and
natural gas[1] in
1993.) Open acknowledgment of such
expenses would, at the very least, have a profound effect on the perceived
competitiveness of all non-fossil fuel technologies.
Introduction
It is now widely accepted that the
market price of fossil fuels does not reflect the total burden they place on
society. Costs imposed beyond this
price are termed externalities; some examples of collateral damages from fossil
fuel use include forest and lake destruction from acid rain, the ravaging of
the land for coal mining, health problems caused by smog, and climate
modification due to greenhouse gas emission.
Conventional economics ignores the cost of these destructive side
effects.
Finding mechanisms by which the
market is forced to acknowledge these burdens has proven to be extremely
difficult and contentious for a variety of reasons. While the benefits of fossil fuels are immediate and local, the
burdens are often only evident at a much later date or far from the point of
usage or by people who are powerless to demand compensation. In addition, it is often hard to quantify
the damages in any conventional sense. For
example, acid rain has caused widespread destruction of remote forests and lakes
in central New York, New England, and Canada. Since these are not used to
provide lumber or fish, but rather mostly for recreation, their exact value to
society is not easily defined.
Greenhouse gasses from fossil fuel burning will almost certainly modify
the earth's climate in the next century, but it has not yet been possible to
agree on if or how much the present generation should invest to minimize
this.
Utility regulators in
Massachusetts and Nevada have attempted to set a monetary value on the damage
caused by power plant emissions of particulates, methane, volatile organic
compounds and oxides of sulfur, nitrogen, and carbon. This would increase the cost of electricity from advanced natural gas combined cycle plants by
$0.0137/kWh (see Table 1). These
"environmental adders" are used to compare the cost of power from
these plants with alternatives such as increased efficiency and other
generation options. It must be
emphasized that these figures have not been widely accepted[2]. For example, the cost of damage from CO2 emission
is based on a charge of $100/ton for carbon emission, which is equivalent to an
increase in the price of natural gas of $1.45/mmBtu. This would nearly double the current US market price. To even have a chance of being widely
accepted, such a fee would most likely have to be based on clear scientific
evidence; this evidence is lacking at present, and may come too late to prevent
major damaging changes from taking place.
|
Table 1 Cost of
Externalities (Electricity Production from a Combined Cycle Gas Turbine) |
|||
|
Pollutant |
Cost
($/lb) |
Cost
(¢/kWh) |
|
|
NOx |
3.4 |
0.21 |
|
|
SOx |
0.78 |
0.00 |
|
|
CO |
0.45 |
0.01 |
|
|
Particulates |
2.09 |
0.02 |
|
|
Volatile
Organic Compounds |
2.77 |
0.02 |
|
|
CO2 |
0.012 |
1.11 |
|
|
CH4 |
0.12 |
0.00 |
|
|
Total |
|
1.37 |
|
Source: Reference 1.
There is one other externality,
however, which is almost always neglected in these discussions, and that is the
cost of providing a secure supply of fossil fuels. The United States is dependent on petroleum to meet 39 percent of
its primary energy needs, of which imports now cover more than 50 percent. During the Cold War, much of the cost of
protecting the source of these imports could be rationalized as a part of
countering the threat of world domination by the Soviet Union and its client
states. The collapse of the Soviet
Union has removed this threat, yet oil supplies remain menaced by other
countries and ideologies, and the US military budget remains near its Cold War
level[3] in some
measure to guard against any interruption in the supply.
Moreover, these costs should be
viewed as a subsidy not only to petroleum consumers, but to all US consumers of
fossil fuel. It is clear that, unlike
the situation in 1973, it is now technically feasible in many cases to
substitute natural gas or even electricity for petroleum as a transportation fuel. Concern for air quality in large
metropolitan areas is already making natural gas and battery automobiles much
more appealing; any doubt about the reliability of petroleum supplies would
enhance this appeal. Large scale use or
even the promise of such use would without a doubt put significant upward
pressure on natural gas prices, and to a lesser extent coal prices. Thus, the past practice[4] of
assigning military costs exclusively to petroleum, neglecting the interlocking
relationship of all fossil fuel prices and the possibility of fuel
substitution, should be viewed as part of an incomplete analysis.
US military and other expenditures
What portion of current US military
expenditures[5] can be
assigned to the maintenance of fossil fuel supply security? The most credible relevant analysis to date
has been done for the 1994 military budget of $278 billion by the Center for
Defense Information and the Brookings Institute[6]. Here, spending was apportioned according to
the deployment of forces as reported by the Department of Defense; the costs
that could be assigned directly to the Middle East were $73 billion, about 26
percent of the total military spending[7].
It should be noted that this methodology
is severely flawed; for example, during the Persian Gulf War, many units
assigned to Europe were sent to the Middle East. Yet, from Figure 1, the US appears to be spending $112 Billion to
defend Europe, even though its main adversary has vanished. Clearly, expenditures of this magnitude
could only be justified if they served to support vital US interests in nearby
regions. The $73 billion attributed to the Middle East grossly underestimates
the real outlays.
In addition, total current
military spending does not reflect total current other costs[8] which are
a consequence of this policy. For example,
interest on the national debt is about $203 billion (1994); a significant
fraction of this debt is due to deficit financing for military
expenditures. Veterans benefits were
$38 billion in 1994; again, a fraction of these expenses should be allocated as
being a consequence of this same policy.
Foreign military and economic aid to the Middle East is of the order of
$5 billion, reflecting that region's importance to the US.
Figure 1. Mission breakdown of 1994 US military
spending; total spending is $278 billion.
Sources: Brookings Institute, Congressional Budget Office, Dept. of
Defense, and the Center for Defense Information (CDI), Washington, DC; chart
prepared by the CDI.
To simplify matters, only costs
based on current military expenditures will be considered in computing the cost
of this externality. Current military
outlays that can be assigned to the security of supply mission can be given
maximum and minimum values (Table 2).
The lowest is $73 billion, based on the current disposition of forces
(Figure 1) and the highest $227 billion; the latter assumes that all costs
other than those for the nuclear forces and the defense of the US and Latin
America are assigned to fighting one war in the Middle East[9].
Figure 2. US Primary energy consumption in Quads (1015 Btu) by
category, 1994.
US Fossil Fuel Utilization
Total primary energy consumption[10] for the US
in 1994 is shown in Figure 2. Fossil
fuels provided 75.5 Quads, or 85 percent, of the 88.5 Quads of primary energy
consumption. Coal (19.6 Quads) is used
almost exclusively for electric power production, while natural gas (21.2
Quads) is used mainly for industrial, residential and commercial applications;
both of these fuels are supplied from abundant North American reserves. Petroleum provides by far the largest share
of fossil fuel consumption, 34.7 Quads, or about 46 percent, most of which is
used in the transportation sector.
Nearly half of all US oil consumption is covered by imports, about 50
percent of which are supplied by OPEC (Organization of Petroleum Exporting
Countries) nations.
It is clear that petroleum
dominates US energy consumption, and that supplies from the Middle East, with
two-thirds of known crude oil reserves, is critical in satisfying US
demand. Moreover, oil production from
the Middle East, now 40 percent of total oil production, is expected to
increase to 52 percent of the total shortly after the year 2010. Clearly, maintaining the stability and
control of this region is a significant issue.
Estimating the Cost of Security of
Supply
Based on the above range of
current military expenditures and current US fossil fuel consumption patterns,
a range of costs for providing for a secure supply of fossil fuels can be
calculated; these are listed in Table 2.
Costs are assigned to all fossil fuels, or to oil and natural gas, or to
oil only. Given current oil prices of
less than $18/bbl ($3.20/mmBtu), and current natural gas prices of less than
$2.00/mmBtu, it is evident that even for the minimum level of current outlays,
$73 Billion, and the maximum amount of fossil fuel considered to be affected,
75.5 Quads, the impact of this policy is significant.
Low market fossil fuel prices are
indeed an illusion if one includes the cost of maintaining secure
supplies. This adds[11] a minimum
of about $1.00/mmBtu to the cost of natural gas, compared to the 1993 average
price to utilities of $2.57/mmBtu; it adds $5.75/bbl of oil compared to the
current price of about $18/bbl, and about $20/ton to the price of coal which
currently costs about $29/ton. This
apportioning of costs is debatable to some degree; a larger fraction of the
costs might be assigned to oil and a smaller fraction to coal, given the large
demand supplied by imported oil and the relative lack of flexibility of coal as
a substitute fuel. It is clear,
however, that the real cost of fossil fuels to US citizens is much higher than
that which is reflected in their market prices, and that an externality
reflecting the subsidy required to insure security of supplies should be
included in any discussion of the cost of energy.
The range of per unit costs and
cost allocations in Table 2 is extremely large. In order to better define the debate, it is proposed that costs
be apportioned over all fossil fuels (75.5 Quads), rather than over one or two
categories. This would lessen US
regional friction by providing a unified approach to the problem. A surcharge on coal is evidently the most
difficult to justify, given its large domestic reserves and limited ability to
substitute for petroleum. This could be
handled by mandating that a large fraction of the charge be returned to the
coal mining regions to rehabilitate lands that have been destroyed by strip or
underground mining, and to compensate miners and their communities for the
occupational diseases associated with coal mining.
It is also proposed that the sum
of $150 billion be taken as what might reasonably be allocated to the mission
of providing for a secure supply of fossil fuel. Given the other current costs of debt service, veterans benefits
and foreign aid cited above, as well as the size of the military budget, this
estimate is certainly to be regarded as quite conservative. Even with a proposed military budget of
about $260 billion in 1996, which both the current administration and Congress
are pledged to increase, the $150 billion estimate is easily justified.
Therefore, a surcharge of
$2.00/mmBtu on all fossil fuels should be considered as equitably reflecting
the cost of providing for a secure supply of fossil fuels for the US.
|
Table 2 Maximum-minimum
security of supply costs (1994) |
|||
|
Military
Costs ($Billion) |
Maximum
(One War) 227 |
Minimum 73 |
|
|
Fossil
Fuel Category |
Maximum
Per Unit Cost ($/mmBtu) |
Minimum
Per Unit Cost ($/mmBtu) |
|
|
All
Fossil Fuels |
3.1 |
1.0 |
|
|
Oil and
Natural Gas |
4.2 |
1.3 |
|
|
Oil Only |
6.7 |
2.3 |
|
There are several compelling
advantages to framing this issue in terms of a monetized externality:
• It is non-confrontational. It has been, is, and will continue to be US
policy to intervene in the Middle East.
This is recognized; the only concern here is to assign the costs of this
intervention in a rational manner.
• It is non-judgmental. It does not question the wisdom of this
current policy.
• It builds on language that is
accepted and acceptable. The
environmental community has spent several decades educating the public on the
costs of externalities. This approach
takes advantage of this excellent work.
• Costs are verifiable. Unlike the case for global warming, no
complex models are needed to compute the cost of the imposed burden. Costs are available from the Department of
Defense and the Congressional Budget Office.
Conclusions
The recognition of the military
cost of providing for a secure supply of fossil fuels would have important implications for other current US public
policies such as utility restructuring, stranded utility investments,
industrial competitiveness, competition within the utility industry and between
this industry and independent power producers, as well as the competitiveness
of many supply side and demand side technologies. The real cost of fossil fuels to US citizens is certainly much
higher than that which is reflected in their market prices; a value of
$2.00/mmBtu for the provision of security of fossil fuel supplies is fully warranted.
Open acknowledgment of the costs
associated with this policy would also provide a transparent rationale for an
energy tax on all fossil fuels. This
would substantially enhance the competitiveness of non-fossil fuel technologies
and also provide a well-justified stimulus to sustainable development policies.
ACKNOWLEDGMENTS
Discussions with Marcus Corbin of
the Center for Defense Information (Washington, DC) on the apportionment of
Pentagon costs were most instructive.
REFERENCES AND NOTES