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Sunday, July 4, 2010

The economics of oil dependence

Here's an analysis that's a rehash of an analysis I had previously posted 2-13 on on the high costs associated with car dependence, purely from an economic perspective. Today being independence day, and there being many cartoons pointing out our current lack of independence from oil (FWIW, President George W. Bush said that "America is addicted to oil"), let's look at the numbers again.

Note: I would have liked to start with one such cartoon, but I cannot due to copyright restrictions.

Total number of miles driven annually in the USA - 2 trillion (2 * 10^12)
Assume that each vehicle gets an average of 20-25 miles/US gallon
So 80-100 billion gallons of gas were burned to move the cars.
If each car lasts 150,000-200,000 miles on average, that means that 10-13 million cars were "spent"

Now let's suppose that each car costs (including insurance, maintenance, registration, etc.) $15,000 to $30,000. Let's assume that gas costs $2/gal, excluding taxes - taxes are excluded because they fund the government to some degree.

So the total money spent on cars in a year is between 310 billion to 590 billion dollars. Notice how I've excluded environmental effects (e.g. pollution, sprawl) as well as the health effects of a sedentary lifestyle. If we assume that a typical family has 4 people, and a total US population is roughly 300 million people, each family spends between $4100 to $7900 every year, or $11 to $22 each and every day including weekends and holidays on such.

Of course cars have their utility. Things like traveling long distances, hauling large quantities of things, and so forth are difficult if not impossible without a car. But car dependency is a form of addiction, and is a very costly habit. Imagine if biking and walking (and mass transit!) were realistic alternatives for a majority of trips, how much money would be saved.


  1. Nelson,
    Since you excluded the less tangible cost to society, here is an excerpt from the Annals of Emergency Medicine, Jan, 2007, analyzing the medical costs of suburban sprawl.

    The roads cost even more to operate than they did to build: New Urbanist architect/planner Andres Duany, citing the data of Hart and Spivak counts the total annual subsidies doled out to US automotive and road-related industries at $700 billion with subsidies for highways and parking alone amounting to 8-10% of the gross national product. This inefficiency is passed along to every citizen through taxes and increased prices for products, whether or not that citizen drives a car. Gasoline prices that reflected the full social costs of auto dependence, such as pollution and emergency medical treatment, Duany states (using Hart and Spivak’s 1993 dollar figures), would have to include a tax of $9 per gallon.

    So taking the lesser of your 80-100 Billion gallons of gasoline per year it is 720 billion dollars per year in cost to the society. About the same as the Federal bail out of the financial system. No one would tolerate a repeat of that every year.

    This also relates to Sarah's question as to how to answer the challenge to our right to use the roads when gasoline taxes pay for the roads. Were that only the case.

  2. The $9/gal cost though I think may be exaggerated. One thing I did for the bikeforums analysis was compute the carbon dioxide emissions, and put a price on it. Much to my surprise, if we used the current European carbon price, each gallon of gas should cost "only" $0.17 extra. I am thinking how a lot of the $9/gal figure comes from the very high military expenditures, which are supposedly necessary to secure "our" oil. I find the claim questionable, simply because oil is a commodity; sellers have every incentive to sell to whoever will pay them the most for it, military or no military. (Unless one were to suggest that we're implicitly threatening invasion and war to whoever won't sell us oil cheap, which I doubt is the case even with GWB.)

    That being said, yes there are other costs from sprawl and such that I did not include because they're hard to put numbers on.

  3. Nelson,
    Here's the link to the article that has supporting references. The $9/gal seemed high to me also. This is a peer reviewed journal though I doubt any economists are on the peer review board.