Kenneth D. Gartrell

By: Kenneth D. Gartrell

Radical left political claims about the current level of oil prices place the blame on two things. First, it blames global consumers for profligate wasteful life-styles and second, it blames irrational speculators. Regardless of these claims, the single largest element of today’s price is the political cost of the global environmental agenda.

The largest component of the price of a barrel of oil on the markets today is the actual present cost and expected future cost of environmentalism. There are three general components of environmental/political costs. In relative order, the largest component is the exploratory constraint. Second is the threat of US cap-and-trade legislation. The third is the combination of taxes and related US Federal subsidies for untested and speculative alternative energy sources.

The current price of oil on the global market is above $120 per barrel after the recent correction for lower tensions in the Middle East and after the removal of the executive ban on offshore drilling. About one third of the current price is accounted for by the cost (with related profits) of exploration, refining and distribution. A reasonable estimate of the cost of drilling inhibitions for the continental United States, offshore and in the area of ANWR (keeping in mind that the drilling fields in ANWR are not actually in the reserve, but border on the reserve itself) is probably in the range of $50 per barrel. Announcement of a plan of unrestrained US drilling and a lift of these environmental bans would probably lower the current market price by as much as $40 per barrel in the immediate future. There is no explanation, other than election year politics, why the US Congress refuses to act on the will of the 80 plus percent of Americans who poll in favor of lifting all drilling and exploration bans.

Another $36 per barrel or so is related to a single large environmental constraint. It is sufficiently large to single out. Namely, the effect is the likely impact of carbon emissions cap-and-trade regulations pending in Congress for passage in the early stages of the next administration and Congress which will take office in 2009. Experts estimate this legislation adds as much as 40% to the hypothetical price of oil — if and when it becomes law. 40% in the area of $120 per barrel is as much as $48 per barrel. The estimate of $36 per barrel reflects a 75% chance the cap-and-trade regulations will become law and go into effect in 2009.

Finally, gasoline taxes represent about $10 per barrel of oil. Included in these taxes are highway construction funds and several well known and inefficient subsidies for ethanol and other alternative energies. Most of these programs are regarded as unfruitful and wasteful, but little has been done to challenge their existence.