Brittany Sowacke / Bloomberg / Getty Images

The lethally high price of cheap oil

Consumers may be saving now, but we’ll pay huge costs down the line without better policies

December 9, 2015 2:00AM ET

The incredibly cheap gasoline we enjoy comes at a stiff price, though the costs we bear are not so obvious as the figures posted at the pump. Now would be an excellent time to choose to pay a smart price, which includes a tax for carbon, because that which is cheap often proves very expensive in the long run.

Nationwide gas costs about $2.16 per gallon now, according to the Department of Energy, down from its peak, adjusted for inflation, of $4.61 in summer 2008.

That’s an annual savings of about $245 billion or $765 per American, a tremendous boost to people’s disposable income unless they decide to replace a fuel-efficient car with a gas-guzzler. Each penny drop in the price of gasoline translate into about $1 billion less per year spent on gas.

Heating oil and natural gas prices are also low right now, another boon to pocketbooks in the coming months, especially in the Midwest, Great Lakes and Northeast with their subfreezing winter temperatures.

Cheap gasoline and home heating fuels help explain why, despite a Congress focused on social issues instead of employment, the economy continues expanding with a record 69 months of private sector job growth totaling 13.7 million added jobs.

But just as every solution creates new problems, every drop in price comes with a cost. 

Budget shortfalls, unrest

We pay the price of cheap oil and natural gas in many ways, some immediate and some very long term.

Immediate costs include the loss of every 12th job in the oil extraction industry, about 16,000 well-paid jobs eliminated over the last year.

Another cost is a sharp drop in tax revenues in the oil states. Alaska state revenues plummeted 71 percent in the first nine months of its 2015 budget year, from $2.1 billion to just $623 million. Louisiana is looking at a hit of $260 million or so to state revenues. Glenn Hegar, the Texas state comptroller, expects Texas state revenues from oil and gas to drop by $2.6 billion for the two-year state budget of 2016 and 2017.

Then there’s the unrest we risk around the world, especially in Russia, where energy accounts for an astonishing 98 percent of big company profits. President Vladimir Putin uses state-controlled broadcast media to persuade Russians that Western governments conspire to make them miserable, shifting attention from his disinterest in diversifying the economy so he can pursue his absolutist and imperial ambitions.

Cheap oil should also produce lower jet fares, but having fewer airlines works against that. At Delta, fuel prices fell more than 41 percent from last year to this, but company disclosures suggest ticket prices came down only 5 percent, reminding us that when oligopolies replace robust competition, consumers pay more.

Then there are the unpleasant conditions and extra costs caused by cheap gasoline. No matter how carefully you drive, potholes and bumps proliferate across America, where car realignments often run $100.

We pay for roads through a gasoline tax, a form of rough justice that spreads the costs based on the wear-and-tear each vehicle causes. But because the tax per gallon has not been adjusted in more than two decades, and today more people drive fuel-efficient cars, the tax does not generate nearly enough money to maintain roads and highway bridges.

Its not as if we cannot afford quality roads — well built with solid bases beneath thick surfaces of asphalt or carefully cured concrete that will last for decades.

Cheap gasoline is great at the pump, but it comes at a big cost.

The roads I traveled on in urban Argentina, Brazil, China, Europe, Japan, South Korea, Singapore and China as well as rural Norway and Eastern Europe were all in much better shape than ours. How can we not afford quality roads?

Lower profits, investment

Cheap gasoline will not last. It never does. Oil prices have always been volatile. The long lines at gas pumps in 1973 and 1979 gave way in 1986 to $10 oil ($22 in today’s dollars) and to market manipulations that made the price of oil (and gasoline) soar from 2008 into 2014.

Three important elements explain today’s cheap gasoline and heating fuel:

  • fracking technology makes extracting small pockets of carbon from deep in the Earth economically viable, especially if we ignore the costs of polluting underground water supplies.
  • President Barack Obama opened more American territory, onshore and off, to conventional drilling where large underground carbon pools are anticipated.
  • Saudi Arabia and other OPEC countries did not cut oil production despite lower prices, flooding the world with more crude than needed.

Low prices mean lower profits, which means less investment in finding new supplies. American onshore oil companies now spend 80-cents out of each dollar of cash flow on interest and paying back loans, almost double their debt service cost three years ago.

The number of working American oil rigs is down from 1,920 rigs a year ago to just 737 rigs last week, according to Baker Hughes, an oil drilling service company.

For the 46 domestic oil producers whose finances the federal government tracks, cash flow shrank by a third in the last year. More ominous for cheap gasoline, those 46 companies wrote off more than $115 billion of investment in the past 12 months.

“Large write-downs — also called impairments — as well as reduced cash flow suggest that investment spending will continue to decline absent a meaningful increase in crude oil prices,” the federal Energy Information Administration says.

This year increased production from new wells did not offset declining production from existing wells. That suggests that in time the surplus supply should evaporate and prices should rise.

Lethally high price

As we use up a fixed supply of stored carbon, built up over eons of time from the residue of plant life, oil will be costlier to extract.  Wells will have to be deeper, with more drilling offshore in areas of deeper and rougher waters, while the quantities each well extracts are likely to diminish. The reservoirs we tap will be smaller and, as we see with fracking, quickly go dry. Costs both in terms of investment and pump prices as well as environmental damage will only grow over time.

But if we added a carbon tax when prices are low we can discourage wasteful use, encouraging investment in both efficient engines and in renewable energy. We can also enjoy better, safer roads and highway bridges, making commerce more efficient while creating more jobs for construction workers whose healthy paychecks will further encourage economic growth. We will get big benefits in return for our tax dollars.

If instead we buy big-engine cars and trucks and don’t invest in public transportation and infrastructure, we will add to the human behavior that is speeding up the natural cycle of global warming and cooling. More CO2 will mean more heat, making both frozen tundra and glaciers melt, releasing even more carbon into the atmosphere, making sea levels rise and displacing millions from low lying lands.

Cheap gasoline is great at the pump, but it comes at a big cost. When you consider the entire price, not just what appears at the pump, the price is lethally high.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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