'Hidden costs' bring US oil import bill to $825 billion:economist

Washington (Platts)--30Mar2006

An economist told the Senate Foreign Relations Committee Thursday the
cost of waging war in Iraq should be considered part of the US' overall bill
for importing oil this year since, he claimed, the war is meant to protect
Washington's oil interests.

Milton Copulos, president of the National Defense Council Foundation,
said that while the US' actual expenditure for crude oil imported from abroad
will be about $320 billion this year, "hidden costs" such as the military
budget in Iraq add over $500 billion to that total.

"If all costs are amortized over the total volume of imports, that would
be equivalent to adding $5.04 to the price of a gallon of gasoline," Copulos
said.

Meanwhile, Hillard Huntington, executive director of the Energy Modeling
Forum at Stanford University, told the committee that Congress could attempt
to adopt policies that would try to minimize or break up OPEC's control over
the market. Reliance on OPEC oil, he said, added about $5 per barrel, or about
12 cents per gallon, of "hidden costs" to the nation's oil bill.

Huntington estimated that in the next decade, the odds of a major foreign
oil disruption that doubles the price of oil over a three-month period and
pushes the US economy into a recession were about 80%.

Such a disruption could carry a price tag as high as $8 trillion, far
more than the $2.3-$2.5 trillion impact estimated for the supply disruptions
of the 1970s, added Copulos.

Persian Gulf countries other than Saudi Arabia and several countries
along the Atlantic Basin, such as Nigeria and Venezuela, pose the greatest
risk of a major disruption in the next 10 years, Huntington said. A major
disruption, he explained, would be a surprise geopolitical, military or
terrorist event that takes at least 2 million barrels/day off the market and
causes prices to spike for more than a few months or a single winter heating
season.

Huntington urged the panel to seriously consider ways to reduce US
consumption of oil, rather than US dependency on foreign oil, noting that
because the market is interconnected globally, a shock in one region affects
the price in another.

"Since reducing our imports with our own production does not sever our
link to that giant [international oil supply] pool, disruptions will cause
prices to rise for all production, including that originating in the United
States," he said. "More domestic supplies do not protect us from these price
shocks."

Gary Yohe, an economic professor at Wesleyan University, estimated the
"hidden social costs" of climate change at between $5 and $10/barrel for 2006,
and he urged the Senate panel to immediately begin to address the issue to
minimize the huge outlays needed in the event of climate-change-induced
emergencies.

"Adopting a risk-management (hedging) approach to minimize the costs of
future policy adjustments is therefore an appropriate, economically rational
way to think about the social cost of carbon," Yohe said. "Moreover, it makes
uncertainty a reason to act immediately rather than a reason to
procrastinate."

--Cathy Landry, cathy_landry@platts.com

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