The Fuse

Trump Tweets, Fuel Economy and the Military Cost of Oil Dependence

by Leslie Hayward | September 21, 2018

The six-country OPEC/non-OPEC monitoring committee meeting is gathering on Sunday in Algiers to assess the implementation of the agreed 1 million barrel per day (Mbd) increase agreed to at the June OPEC meeting. With timing that has now become predictable, Donald Trump tweeted yesterday morning that he wants the producer group to “get prices down now.” Trump targets OPEC in his tweets when prices get too close to $80 per barrel and often just before an OPEC meeting.

The response from energy twitter and analysts has been to quickly point out the following:

  • Trump isn’t mentioning that his move to reimpose Iran sanctions, set to hit on November 5th, will take up to 1.4 Mbd offline (Platts), and Iran has additional capacity to bring to the market.
  • Trump is primarily concerned with rising gasoline prices which will impact sentiment heading into the midterm elections, as red state voters are disproportionately impacted when oil prices rise.
  • OPEC isn’t a monopoly. (Duh, it’s a cartel).

Less attention has been placed on the beginning of Trump’s tweet, which focuses on the “protection” of countries in the Middle East. Trump’s concerns about the United States footing the bill for the geopolitical interests of other countries is clear in comments he’s made about NATO and other multilateral agreements. Without breaking down the specifics of the military alliances between the United States and countries in the Middle East, we do know that the United States pays an enormous amount of money each year to protect the global oil supply. In a new analysis released yesterday, SAFE provides a literature review of studies on the military cost of oil dependence, supplemented by the perspectives of members of our Energy Security Leadership Council, a group of retired four-star admirals and generals who have seen first-hand the human and financial cost of oil dependence .

In a new analysis, SAFE provides a literature review of studies on the military cost of oil dependence, supplemented by the perspectives of members of our Energy Security Leadership Council, a group of retired four-star admirals and generals who have seen first-hand the human and financial cost of oil dependence .

Based the reviewed studies, at minimum, approximately $81 billion per year, or 16 percent of Department of Defense (DoD) base budgets, is spent by the U.S. military protecting global oil supplies. Spread out over the 19.8 million barrels of oil consumed daily in the United States in 2017, the implicit subsidy for all petroleum consumers is approximately $11.25 per barrel of crude oil, or $0.28 per gallon of petroleum consumed.

A more extensive estimate by two highly-regarded economists, Linda Bilmes and Joseph Stiglitz, suggests the military protection costs could be greater than $30 per barrel, or over $0.70 per gallon. Bilmes and Stiglitz, examined the full budgetary and economic costs to the U.S. of the wars in Iraq and Afghanistan, and estimated the microeconomic and macroeconomic impacts which are not considered by standard budget-based models. In 2012, they concluded that the true costs of these conflicts “…may well be in the range of $4 to $6 trillion, or even higher, once the long-term budgetary and economic costs are factored in.” Among other things, these costs include payments for veterans’ lifetime healthcare and disability expenses, the accelerated depreciation and replacement of military hardware, large and negative U.S. workforce impacts, and other macroeconomic affects such as increased oil insecurity, oil price volatility, and the effects of the war on monetary policy. The reviewed literature demonstrates that protecting the global oil supply has significant opportunity cost Even if the scores of billions of dollars, would not be returned to taxpayers, these funds could be reallocated by the U.S. military for  other critical defense priorities. Notably, even in the 2012 fuel economy rulemaking, the federal agencies acknowledged that this cost exists in their sensitivity analysis, but they do not account for it when conducting the cost-benefit analysis in their regulatory impact analysis. SAFE and its ESLC strongly believe based on firsthand experience that the military cost of oil dependence is substantially greater than zero, and argue that a cost of at least $0.28 per gallon should be used by EPA and NHTSA in their military cost/benefit analysis for the fuel economy standards program.

Right now, NHTSA is accepting comments on its Notice of Proposed Rulemaking (NPRM) for the new standards through 2025. The agency supports freezing standards at 2020 levels, a move that will increase oil consumption by 500k barrels per day by the early 2030s, in their estimation. The NPRM contradicts itself in the military cost implications of this increase.

Initially it states, “If U.S. demand for imported petroleum increases, it is also possible that increased military spending to secure larger oil supplies from unstable regions of the globe will be necessary.”

Then later, the document reads: “While the U.S. maintains a military presence in certain parts of the world to help secure global access to petroleum supplies, that is neither the primary nor the sole mission of U.S. forces overseas. Additionally, the scale of oil consumption reductions associated with CAFE standards would be insufficient to alter any existing military missions focused on ensuring the safe and expedient production and transportation of oil around the globe.”

SAFE’s hope is that this issue brief provides information that helps the federal government more accurately assess the military implications of the rulemaking. In addition to seeing limitations on the nation’s foreign policy from fears of disrupting global oil supply, members of SAFE’s ESLC argue that reducing oil use in the transportation sector allows for the possibility of shifting U.S. military priorities toward more critical strategic threats.

“If we reduced our oil consumption by half, [the U.S. military] would act differently,” says ESLC member Admiral Dennis C. Blair, the former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command.

General Duncan McNabb, the former commander of the U.S. Transportation Command and also a member of SAFE’s ESLC stated: “If we can reduce our dependence on oil, we could reduce our presence in the Gulf and use the funds for other critical military priorities, like cybersecurity or hypersonic weapons. The same funds could support different security priorities. We would make different choices, that would make us safer and more secure.”

What we can control is how efficiently we consume oil, and we are at a decision point that will set the country on a trajectory that worsens our position, rather than strengthens it.

This week’s tweets from Donald Trump, as well as efforts last week by Energy Secretary Rick Perry to meet with Russian and Saudi energy ministers urging them to increase oil output, reflect the President’s concern over rising oil prices heading into the midterm elections. Ironically, one week ago the Energy Information Administration reported that the United States is producing more oil than either Russia or Saudi Arabia. Domestic production is insufficient to give the United States control over global oil prices. What we can control is how efficiently we consume oil, and we are at a decision point that will set the country on a trajectory that worsens our position, rather than strengthens it.

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