One might ask whether I should account for the fact that some of the
money the United States sends abroad for oil comes back through
purchases of goods and services by oil exporters, thus reducing the net
cost. Strictly speaking, my guess is that the answer is yes. I'm going
to ignore it, though. Other U.S. trading partners will also transfer
wealth to the oil exporters as a result of the higher oil prices. The
net impact will be more U.S. exports to the the oil exporters but fewer
to other trading partners. Since most oil exporters have trade patterns
tilted away from the United States, I'm basically underestimating the
cost of higher oil prices.
But enough with the costs. What about the benefits of higher oil
prices? Greenhouse gas emissions are the obvious place to start. If we
assume that global elasticity of oil demand is -0.4, and that a barrel
of oil is on average associated with about half a ton of greenhouse gas
emissions, we get incremental damages of about 4 million dollars a day.
Greenhouse gas emissions are not, of course, the most significant source of damages. A National Academy of Sciences study recently estimated that the non-CO2
damages due to transportation are about 1.4 cents per mile traveled,
due to things like conventional pollution, accidents, and congestion.
(They actually presented a range, but I'm using a central value.) Let's
say that the average U.S. vehicle (including heavy trucks) gets 15 miles
per gallon. This translates to damages of nearly 9 dollars per barrel
of oil, roughly the same as from climate change. Unlike in the case of
greenhouse gas emissions, though, the impact is restricted to U.S.
(rather than global) oil consumption. The consequence thus ends up being
about a million dollars a day. (I've actually overestimated this a bit -
One quick note before moving on: it isn't clear that it's
self-consistent to include global climate change damages while counting
wealth transfers as costs. To put a sharp point on things, I'm basically
saying that if higher oil prices enrich Africa through their oil
exports, that's a cost to the United States, but if they enrich Africa
by reducing climate change, that's a benefit. Self-consistency suggests
that I should either ignore at least part of the wealth transfer costs,
or ignore part of the climate benefits, but that I shouldn't include
both in full. For now, though, I'm going to stick to what I've already
done; I'll circle back in a moment.
We can now take a look at the net impact: $15 million in costs and $5
million in benefits for every dollar increase in the price of oil. With
this set of assumptions, at least, expensive oil looks bad for the
What happens if I vary some of the basic assumptions? Let's take a look at each one that might plausibly be wrong: