Oil Slickers: How Petroleum Benefits at the Taxpayer's Expense

Part Two of Three

EXPENDITURES DESIGNED TO PROTECT OIL SUPPLIES

Currently, the United States imports 1.4 million barrels of oil a day from Persian Gulf countries; one-quarter of the world's oil supply comes from the region.[34] Even more telling, two-thirds of the known oil reserves lie in the Gulf - the largest supplies in Saudi Arabia, the next-largest in Iraq.[35] Much of the rest of the world's petroleum supply comes from other potentially politically unstable countries.

Given our dependence on the continuing supply of foreign oil, we have undertaken a number of measures designed to insulate ourselves against disruption.[36] Most notably, the U.S. maintains a military presence - which it is willing to use in combat -- in oil-sensitive areas. We also maintain a large reserve of crude oil in tanks around the country. In addition, we devote Department of Energy funds to petroleum research.

All of these programs come at taxpayer expense at a cost of $26.6 billion to $70.7 billion per year, with a greater probability attached to the high end of the range.[37] Table 4 details the various costs associated with protecting petroleum.

Table 4
Annual Costs of Protecting Petroleum Resources
($ million)

Military Expenditures
Routine maintenance of troops and equipment	25,200-63,000
Annualized cost of combat	300-6,300
Strategic Petroleum Reserve
Routine maintenance	201
Annualized cost of moving	5-10
Foregone use of funds	724-1,035
R & D costs	180
TOTAL	26,610-70,726

Routine Maintenance of Military Forces In 1996, the total requested funding for military operations by the Defense Department is $252 billion.[38] How much is devoted to protecting petroleum? Hard to say. Even without the presence of oil, some troops might be stationed in oil-rich areas for other reasons. What is more, troops can be mobilized worldwide if necessary. Knowing the number of soldiers present in a given region does not necessarily tell us what we would like to know: the incremental cost of maintaining and equipping military personnel solely because we want to protect oil supplies. Direct calculation of such a cost is virtually impossible.

Indirect calculation is, however, possible. According to a former Assistant Secretary of Defense for Economic Security, we currently have about 17,000 troops in the Persian Gulf.[39] This represents just over 1 percent of military personnel; the same percentage in budgetary terms is about $2.8 billion annually. By comparison, 42 percent (about 660,000 troops) served in the Gulf during the Desert Storm Operation.[40] In February 1991, the Congressional Budget Office estimated the annual (post-war) cost of stationing on-shore active forces in the Persian Gulf at $3.89 billion.[41] Of course, we maintain off-shore forces, troops in other oil-sensitive areas, and administrative personnel as well. Plausible estimates of the annual expense devoted to routine protection of oil resources might therefore range from 10 to 25 percent of the annual military budget -- $25.2 to $63 billion.

Most researchers have estimated annual expenses toward the high end of this range. In a comprehensive survey of the literature on the subject, the Congressional Research Service found that analysts' estimates ranged from about $56 billion to $73 billion (in current dollars) annually devoted to defense of the Middle East/Persian Gulf.[42] Many experts have estimated the security costs of protecting petroleum at $50 billion or more per year.[43]

The Cost of Combat In addition to routine maintenance of troops near oil-rich areas, we have fought bloody battles - Desert Storm and Desert Shield are only the most recent. Estimates of the incremental cost of those conflicts vary, ranging from $57 billion to over $100 billion.[44] Our allies paid some of the cost - commitments are about $54 billion, but actual collections are more like $37 billion. The total costs of this war to U.S. taxpayers were therefore $3 billion to $63 billion. Naturally, none of these figures count the costs of pain and suffering to U.S. soldiers, nor costs to our adversaries.

We don't fight such wars every year. One Defense Department official speculated that the Gulf War might keep things quiet for up to 10 years.[45] At that rate, the annualized cost to U.S. taxpayers of combat to protect petroleum ranges from $300 million to $6.3 billion.

Petroleum Reserves The bulk of U.S. oil reserves - about 575 million barrels as of August 1, 1996 -- resides in the Strategic Petroleum Reserve. The cost of maintaining the reserve is about 35 cents per barrel per year - over $200 million annually.[46]

Not only do taxpayers pay to maintain the reserve, they currently face a $100 million tab for decommissioning and moving part of it because of water intrusion and contamination. In all likelihood, other such moves will be necessary later on. Assuming that similar moves might take place every 10 to 20 years, the annualized cost would fall between $5 million and $10 million.

Yet a third - and much larger - cost to taxpayers is the foregone interest on the value of the reserves. Because we have billions of dollars tied up in barrels of oil rather than ready for use, we are giving up between $724 million and $1,035 million per year. Some of this loss could be offset if oil increased in value; over the life of the reserve, the value of petroleum has actually fallen.[47]

In addition to the Strategic Petroleum Reserve, we have Naval Petroleum Reserves. These Reserves were instituted to help the Navy convert from coal to oil. The budget request for 1996 to maintain the reserve is $208 million. Because public law has already authorized the sale of these reserves, (and because the oil produced there has been sold competitively on the open market), it is not included as a cost to taxpayers.

Research and Development Expenses The Department of Energy receives funding for research in fossil energy. In 1996, $180 million will be devoted solely to petroleum R & D.[48]

Conclusion The total costs for protecting our access to oil is $26.6 billion to $70.7 billion. Given the number of respected analysts who have concluded that the figure is around $50 billion, we have used that as our best-guess estimate. This translates into 19.2 cents per gallon.