When gas prices hit $4 at the pump earlier this summer, a lot of motorists were crying "Uncle!" They'd be crying all the louder if they realized those first four bucks didn't cover half of it. It's just that the remainder is hidden in your tax bill.
The prospect of $8 a gallon may send shivers down your spine, but the truth is, you're actually already paying this for every gallon of imported oil, refined into gasoline and pumped into your gas tank. Here's how the math works.
Start with the Crude
In 2011, America used 6.87 billion barrels of oil. Now, according to Bloomberg, oil is currently trading for about $92 on the Nymex for a barrel of crude. So assuming people don't drive their cars much more than they did last year, and that oil prices hold steady, we're looking at a total annual oil bill of about $632 billion.
Add in transportation, refining costs, and a small profit margin for ExxonMobil (XOM) and its friends, and by the time this oil makes it to your local filling station in the form of regular unleaded, it all adds up to about $3.80 a gallon today.
There is, however, one key cost of getting oil all the way from Saudi Arabia to your gas station that is not included in this price at the pump. It's the cost of supporting friendly (and not-so-friendly) regimes in the oil-producing Middle East. There's also the cost of defending shipping lanes from even less friendly regimes and from ocean-borne pirates, and of maintaining a general regime of Pax Americana around the globe.
In short, it's the cost of America's defense budget.
Next, Add Your Tax Dollars at Work
America's defense budget for 2011 was $708 billion. Now, granted, not all of this money was specifically used to protect the flow of dinosaur juice from the Mideast to America's Midwest. But a lot of it was.
To cite just one glaringly obvious example, the U.S. defense budget for 2011 included $159 billion specifically earmarked for military operations in Iraq, Afghanistan, and Pakistan. (And that was a significantly smaller sum than we've spent in the region in years past, primarily in oil-rich Iraq.)
If you were to add the cost of IAP operations to the amount we spent on oil alone, therefore, you'd be looking at a true cost of oil about 25% higher than what goes into the price at the pump: $791 billion for the oil, or about $4.75 per each gallon of gas.
Well, That Doesn't Sound So Bad ...
But here's where the intricacies of global economics come into play, and things get tricky. We import a lot of oil here in America, but we also produce a lot of our own, and we even export a bit. According to the Department of Energy, America imported 60% of the amount of oil it used last year, but net of exports, it imported 45%.
Now if you think about it logically, America's homegrown oil industry is pretty secure. We probably don't need to build a lot of tanks, stealth fighter jets, and aircraft carriers to defend the supply chain from Houston to New York City. Logically, therefore, whatever portion of our defense spending is attributable to defending oil supply lines is being spent defending imported oil -- about half the oil we consume (taking a rough midpoint between 45% and 60%).
Without trying to be too exact, let's quickly run some numbers and see what happens to the cost of a gallon of $3.80 gas when we earmark, say, half the U.S. defense budget to getting it here, and when we further apply this earmark to just the 50% of gasoline that comes from imported oil.
If you take half the U.S. defense budget ($354 billion) and add it to our annual spending on oil per se (again, that was $632 billion), Americans' true "cost of oil" rises to $986 billion. Apply this 56% markup to today's gas prices, and between the price you pay at the pump and the money you pay the IRS to help ensure the gas gets to your pump in the first place, you're really paying a combined $5.93 a gallon.
But again, this is on oil as a whole. Since defense spending really only goes to protect imported oil, the cost of each incremental gallon on "imported" gasoline is costing you north of $8 a gallon.
This isn't the price you see up on the ExxonMobil signboard, true. But it's in every gallon you pour in your tank.
Rich Smith is a contributing writer to The Motley Fool.
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