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The real cost of cheap oil

When petroleum's external costs are internalized, the real cost of cheap oil has a price tag few of us are willing to pay
By Ron Kotrba | January 28, 2015

Another National Biodiesel Conference has come and gone, and it was great to see so many of you in Fort Worth, Texas, last week. This was my 10th show now, and I increasingly value the time spent and story ideas gathered talking with you on the tradeshow floor, in the hallways and outside the convention center. I also had the pleasure of moderating an investment panel during the show, so thank you to the NBB for inviting me as a moderator, and to those of you who attended. The familiar faces at these events are welcoming, and the new ones are inspiring.

Of course, RFS uncertainty, the biodiesel tax credit and low oil prices set the tone of the event, and one couldn’t escape hearing about those issues while at the conference.

I attended a session about energy security and biodiesel at the event where some provocative concepts were discussed.

A good part of the discussion centered on low oil prices. David May with the Iowa Department of Transportation served in Desert Storm—the first Iraqi war in 1990. May is a compelling orator who gave his point of view on the situation. “We are in the Middle East to help stabilize the region, and Saudi Arabia is at economic war with the U.S. by trying to crush and bankrupt our domestic fracking operations,” he said. “We should put tariffs on Saudi oil to keep prices up so domestic industries can survive [these valleys].”

I find it fascinating that when oil prices are too high, people want the government to step in and do something about it—investigating price gouging for instance—and when prices are too low, the government should also intervene, such as May’s suggestion that tariffs be imposed. I can’t imagine that those whose domestic fracking operations are on the line would object higher oil prices through tariffs. And this is especially interesting because the oil industry is typically telling government to stay out of its affairs and reduce its heavy-handed oversight. I suppose it’s simply natural to reject governmental action when it impedes our own success and call on it when we stand to benefit, or when we need it to survive. But for whatever reason, in the oil industry’s case it is particularly distasteful.

If the Saudis are trying to bankrupt U.S. fracking operations, and if they have the ability to sustain rock-bottom prices for up to three years, then they are effectively trying to kill two birds with one stone since the value proposition for renewable fuels changes dramatically when oil prices are as low as they are.

It was said during the breakout panel on energy security that Americans have short attention spans and we tend to forgo hard-fought efforts to reduce reliance on foreign oil and increase energy security when oil prices drop this low. It is imperative, however, to look at the big picture and realize this phenomenon is just a blip on the radar, an anomaly in time, and the historic trend of rising oil prices will prevail.

Another thread of discussion during the panel, initiated by an audience member from France, focused on the real cost of petroleum not reflected in the price at the pump: the military expenditures to secure supplies abroad, the human capital costs when soldiers and civilians die for this cause, the toll on our planet’s resources and environment, the effects on human health in breathing carcinogenic emissions and drinking fouled water. These are all externalized costs of cheap oil that the oil companies are not accountable for. Instead, the ones who pay the price are you and me, and the children of our children’s kids. If these costs were internalized in the price we pay at the pump, we would see self-imposed rationing and an all-hands-on-deck determination to quickly scale commercial industries like biodiesel that would rival efforts made in the U.S. during World War II to conserve resources and enlist a citizenry workforce at a record pace. Only this time the enemy wouldn’t be Nazis, it would be antiquated, costly fossil fuel.

Perhaps the most provocative idea talked about on the energy security panel at the National Biodiesel Conference was that of “indirect tissue use change” put forth by May. If the concept of indirect land use change is applied to biodiesel but not to the oil industry, then May suggested considering an alternative approach. When the U.S. sends troops overseas to stabilize regions in its interest of keeping oil supplies secured, and these military personnel find themselves in harm’s way and have the gravely unfortunate experiences of losing limbs, mobility or in extreme cases their lives, these appendages that are left on the battlefield would have surely been put to better, more productive use as a functioning part of the soldier who lost them—being able to embrace their spouses, for instance, or using those limbs for work as a more productive member of society. “We are asked to look at tree stumps in the case of indirect land use change,” May said, “but when we look at human stumps, we should give recognition for the fact that, were it not for the cost of petroleum, which is missing in that calculation, that tissue might have been used in a much more productive way.”