Print This Post
The Full Cost of Oil
J. Peter Lynch, author of the essay posted below, is not the famous former manager of Fidelity’s Magellan Fund named Peter S. Lynch. Nonetheless he has addressed an important topic, the full cost of our use of fossil fuels.
I find the most seriously compelling indirect cost of oil is the national security cost. This essay addresses primarily the military aspect of the national security costs of our global oil-protection policy, which is truly enormous. Beyond that is the potential cost associated with the risk that the oil to which we have become addicted may not be available to us at some future date for some reason such as a war. If such a risk were to eventuate, the economic costs could be even more vast than the on-going military ones we bear every day without thinking about them.
It is unfortunate that there are two (maybe more!) Peter Lynches who both seek to spead their views and both have a background as investors. But I guess a guy can use his own name without being obligated to avoid confusion with someone else of the same name who is infinitely better known to the public.
Anyway, here is the essay. Frankly, I might not have published it and I doubt many would have paid much attention to it had we all known the true identity of the author and had not been misled by my initial mistaken identity. On the other hand, the main idea is important and the essay contains much to contemplate.
What is the Real Cost of Fossil Fuels?
By Peter Lynch
Exclusively for InvestorIdeas.com
June 13, 2008
In my opinion, “Energy” is the number one problem facing the U.S and the world as we move forward into the 21st century. In fact, I think that it may be the greatest problem that mankind has ever faced. All the other “problems” we hear about on the evening news – health care, social security, housing crisis, credit crunch etc. are ALL “small change” compared to the looming worldwide energy crisis. The problem facing us is so large that I am really beginning to believe that people, as well as, governments are simply in mass denial and refuse to believe the magnitude of the approaching problem. Keep in mind that reasonably priced, available energy is what gave birth to our mighty industrial revolution and is what separates the U.S. and the rest of the developed world from becoming third world countries.
This is a problem that CANNOT be ignored and must be addressed rapidly, with a detailed long term plan that MUST be based upon a comprehensive accurate evaluation and assessment. There is still time to move forward, but time is running out and we have to stop with the politics as usual and start to focus on what we ALL need to do for the common good.
What is the price you pay to purchase a gallon of gasoline for your car? Depending on what part of the country you live in, it is probably between $4.00 and $4.50 per gallon.
But what is the “real cost” of that gasoline? Does it count ALL of the direct AND indirect costs to the consumer, society and the nation of our continued and insane dependence on fossil fuels?
I think not.
Everyone knows the posted price, but very few realize or stop to think about the true costs. There are a number of “hidden” costs that most of us do not realize. It may not be obvious but we are quietly paying these additional costs every day. These additional indirect costs actually make the “real” cost of the gasoline and all other fossil fuel related items many times higher than it seems at first glance.
Unfortunately our government does not utilize all of the necessary cost components in order to arrive at an accurate “true cost” number. As a result, they are using a faulty equation, which, of course, will result, EVERY SINGLE TIME, in an incorrect answer and subsequently a fault ridden policy that is based upon error after error.
“Socialism collapsed because it did not allow prices to tell the economic truth. Capitalism may collapse because it does not allow prices to tell the ecological truth.”
Oystein Dahle, retired VP of Esso Norway
The Hidden Costs of Dependence on Fossil Fuels
Some of these costs and associated penalties:
- Health Related Costs
- Air Pollution
- Water and Land Pollution
- Thermal Pollution
- Macro Economic Costs
- National Security
- Global Warming
Health Related Costs
As we all know, the costs of adequate (not excellent) health care are rising every year. In fact, it is the single largest and fastest growing item in state and city budgets across the country. These costs are out of control and are rapidly becoming a major fiscal problem. I am totally convinced that a significant part of this is due to the food we eat, the air we breathe and the water we drink. The widespread and growing use of fossil fuel based fertilizers, engine and power plant emissions and fuel related water pollution all makes its way to humans through what they eat, drink or breathe.
Your penalty: Higher state and local taxes, increased pollution clean up costs and higher medical costs for you and your family.
Air Pollution
I don’t know about you, but when I was a kid growing up I never saw an inhaler (used for asthma and other respiratory problems in children and some adults) until I went to college. Now, I see 25% to 50% of the kids in my daughter’s high school with inhalers. Asthma cases have increased 160% over the past 15 years and over 5 million children in the U.S. now suffer from asthma.
On some days have you ever heard the weatherman mention that it is “unsafe” to breathe the outside air? Or that air quality is “unacceptable”? So what is the recommended course of action given this forecast, NOT breathe?
What could it be? What could be the cause of this huge increase in respiratory problems?
Well, to put it bluntly, it is the air we breathe. What else could it be? Are you aware that a person living in a city downwind from a coal plant has a 16 percent greater chance of dying from lung cancer? You may not be able to see it, but the problem is there, in the air we breathe.
Fossil fuel use produces huge amounts and different types of particulates, including dust, soot, smoke and other very fine suspended matter, much of which is not visible. These respiratory irritants may not seriously affect a fully developed mature adult; however, they do have serious and lasting effects on children and their developing respiratory and immune systems.
Your penalty: Higher healthcare costs, sick kids and higher taxes.
Water and Land Pollution
Oil spills cause massive water pollution problems along our coasts and rivers. Fossil fuel based fertilizers are washed into the ground water and cause numerous health problems. Coal mining, especially strip mining, destroys the landscape and the acid in coal causes huge water waste and pollution when the coal is washed in preparation for transportation and processing.
Your Penalty: Destruction of land, killing of aquatic life, increased water pollution cleanup costs, potential poisoning of local drinking water and higher local taxes.
Thermal Pollution
When fossil fuels are burned to produce electricity it also produces heat energy. Because much of the current processes are inefficient, much of the excess heat is released into the atmosphere or into nearby water sources. This increased heating of water, once returned to rivers or lakes can dramatically upset the aquatic ecosystem by raising the average temperature and adversely affecting fish and plant life. For example, an average nuclear plant heats the output water over 15 degrees higher than the incoming cooling water. At the Indian Point Nuclear plant on the Hudson River in New York this has resulted in the killing of BILLIONS of fish over the years.
Your penalty: “Dead” lakes devoid of aquatic life, increased clean up costs, higher local taxes and destruction of our recreation areas.
Macro Economic Costs
Every recession in recent history has been immediately preceded by an oil or natural gas price run up. These “oil shocks” result in the loss of hundreds of billions of dollars for our economy and the economies around the world. These problems can be politically driven or supply driven, but in either case it is the result of our excessive dependence on a non-renewable source of energy.
This repeated volatility of oil prices is a major “hidden” cost and a very significant risk factor for the stability of the world’s economies. Currently the U.S. is spending approximately $1.75 BILLION PER DAY on imported oil this is a huge drain on our economy, adds to our budget deficit and severely impacts the confidence levels of consumers everywhere.
Your Penalty: Economic downturn, increasing national deficits, lower stock market, loss of jobs, higher taxes
Nation Security
In these times of increasing political volatility it makes absolutely ZERO sense to have our county held hostage to the unstable oil countries in the Middle East and their constant turmoil.
The annual cost to the American taxpayer of keeping our military forces protecting our oil supply runs in the tens of billions of dollars, if not hundreds of billions. This is NEVER reflected in any “cost” of using fossil fuels, but it is coming out of YOUR tax dollars. This situation will only get worse as the rest of the world advances economically and needs more oil.
It is totally unrealistic (actually insane) to think that the hundreds of millions of people in India and China who are rapidly approaching middle case status will voluntarily decide that they do not want a new car, a new home and the higher energy use that comes with rising affluence. If you believe that, I have a bridge for you in New York, about 100 years old, but I can get it for you REAL CHEAP with an all cash transaction.
Over the past 35 years every single American President has promised to reduce our dependence on foreign oil imports. What have the results of these “efforts” been to date? The amount of oil we import has NOT gone down at all, in fact, it has doubled as a percentage of the oil we use this is a truly miserable track record and a growing nightmare for national security. Currently we now import 2 out of every 3 barrels of oil……….this is a very serious national security problem.
Your penalty: Higher taxes, a significant decrease in national security, military causalities and less money devoted to domestic non-military uses in this country, such as: highways, urban infrastructure, education and health care and a dramatic increase in the probability of worldwide “resource wars”, such as the current one in Iraq.
Global Warming
Last but certainly NOT least is the scientifically proven fact that the burning of fossil fuels causes global warming. So, in effect, even if we had unlimited and secure fossil fuels (which we don’t) we could not continue to burn them at the current rate of use. The planet we all live on cannot support the current level of fossil fuel use, let alone any increased use. We must turn to renewable energy sources and build future economies upon sources that create opportunities and not sources that destroy our land, our drinking water, our planet and the future of our children.
Your penalty: Worst case, worldwide climate change, economic chaos, mass starvation and the end of our way of life, as we know it now. These are very serious penalties and every American should be acutely aware of this situation.
We have to wake up and realize that we need to turn to renewable sources of energy now. Not in one year, not in 5 years, not in 10 years and not when it clearly “profitable”, whatever that means. Since when is it “profitable” or “cost effective” to destroy the ONLY planet upon which we live?
We cannot afford to wait for a “crisis” to happen, we have to plan ahead and be aggressive and preemptive. There is time to address this problem; there is no time to hide from the problem. These problems will NOT go away, they will only get worse.
“There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.” - John F. Kennedy
We cannot keep depleting the planets natural “capital”. It is, by its very definition - not replaceable or renewable.
We have to muster the political will and change the tax codes to reflect the “real” cost of all alternatives. If our elected officials remain “unconscious” to the growing problem, then they will have to be removed and new leaders, public servants NOT politicians, be elected who are intelligent and conscious and have the energy problem as their PRIMARY FOCUS and are willing to create a plan to address it NOW.
When you look at ALL THE NUMBERS it is abundantly clear that we have to accelerate the sustainable path and we have to do it now. At that point people will clearly see and finally realize that renewable resources are by far the cheapest “real total cost” alternative and also the best for them, the planet and future generations.
“Human history becomes more and more a race between education and catastrophe” H.G. Wells, The Outline of History
In Conclusion
We can lower our healthcare costs, reduce our air, water and thermal pollution, develop a more stable economy, create an enormous number of U.S. based jobs and become a far more secure nation if we just begin this inevitable process of evolution toward renewable energy sources - solar, wind, biomass, ocean power, energy efficiency and conservation.
We need to educate the American people about the real truth of the current situation and then apply, what has always been America’s greatest “assets” - technical ingenuity, creative innovation and our “can do” attitude.
Now you can see what the “real costs” of our addiction to fossil fuels are. We need to be preemptive and undertake this NOW, before we find ourselves in the midst of a worst-case scenario.
J. Peter Lynch has worked, for 31 years as a Wall Street analyst, an independent equity analyst and private investor, and a merchant banker in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977and is regarded as an expert in this area. He is currently a financial and technology consultant to a number of companies. He can be reached via e-mail at Solarjpl [Email address: Solarjpl #AT# aol.com - replace #AT# with @ ].
Tags: peak oil energy investments
Print This Post
26 responses so far ↓
1 Lou Grinzo // Jul 5, 2008 at 6:46 am
Jim: Thanks very much for highlighting this article, which I somehow missed on my own. I will post about it and link to it from my site, The Cost of Energy (http://www.grinzo.com/energy/).
(For those who don’t know, when I chose that name for the site about four years ago, it was an explicit attempt to get people to focus on the question Lynch stresses: “What is the true cost of our energy use?”)
2 KV // Jul 5, 2008 at 6:49 am
Thanks Jim for Peter Lynch’s article. He got it! This is why drilling for 10 extra years for maintaining unaccounted lifestyle is wrong.
Bush/Cheney motives are to strip the national wealth and give it to a few of their choosing. You or I or oru children do not benefit.
SUV explosion came about because of misguided tax deduction under Bush. Auto companies rode the wave, and now pay by job loss and family life destruction. We, as a society, will pick up the tab.
I really have been forced to conclude that Republican policies are not inducive of more perfect union; they create class societies of haves and have-nots. And that breed revolutions faster than anything else.
My only regret is that Mr. Lynch did not begin with energy efficiency and conservation. By my reconing, the world will reduce the oil consumption by 1/3.
3 paultaut // Jul 5, 2008 at 6:59 am
Finally, a post that spells it all out in detail and very concisely.
The first paragraph is all that’s necessary.
The Rest just explains the Facts of Life to those who will just blame the Oil Companies and Commodity Speculators for all of the Current and soon to be exacerbated problems.
It is a Conspiracy, no doubt about it. Look in a mirror to see one of the Conspirators.
Do you own a HDTV Plasma or LCD? Look at the energy usage specs and compare them to the Energy usage of your refrigerator, the energy used is roughly twice as much. Add a home theatre and you still wonder why energy is skyrocketing…
We may drive less but have to have the latest gadgets which drive energy usage ever upward. What do you you think all of the Billions of cell phones are made of?
I have a Samsung 56 inch LED DLP without all of the unnecessary additional accoustics.
You want to help save the Planet, buy a DLP and keep the Cell you have until you have to have it fixed.
4 paultaut // Jul 5, 2008 at 7:04 am
PS
The article will be read and still people will blame everyone but themselves.
Just count the comments.
5 Robert Sczech // Jul 5, 2008 at 10:29 am
An excellent article by Peter Lynch, although I am disappointed that he did not answer the rhetorical question in the title (”What is the real cost of fossil fuels”).
Given that humanity needs energy for its own survival and given that fossil fuels are going to run out in 30 t0 100 years, there is only one sensible answer to Peter’s question: The price of fossil fuels must be higher than the price of the equivalent amount of renewable energy (wind, solar, biomass etc).
Right now 1 barrel of oil costs $140. That barrel of oil contains 5,800,000 BTU (British Thermal Units) of energy which is a touch less than 1,700 KWH of electricity. At present costs of solar energy, 1,700 KWH would cost more than $500 (assuming a low estimate of 3o cents per KWH). So $500 per barrel of oil is the absolute minimum one barrel of oil should sell if our society would be sane. We burn a nonrenewable asset at prices below equivalent cost of a renewable asset.
There is no hope that we will change our ways in the future. Politicians are not responsible for the mess we are in. After all, we put them into office and ask them to make sure that gasoline prices are low. We silently approve our military attacking countries like Iraq and Afghanistan knowing that these countries have cheap oil or access to cheap oil (in the case of Afghanistan). The actual pressure to continue as usual comes from the common people not only in the US, but allover the world.
There is no hope for sanity to prevail. The ultimate problem is the growth of human population. In many ways, the US is overpopulated. How can it be that we used up most of the natural resources this continent was equipped with in less than a few centuries? Is human history really only to be measured in centuries?
6 Jack Marino // Jul 5, 2008 at 10:53 am
Lynch says’”It’s a proven
scientific fact that the
burning of fossil fuels
causes global warming”
Baloney,burning fossil fuels may contribute to global warming,but
they don’t cause it.He
says up ” to 25% of the
students in his kid’s class have asthma inhalors as opposed to
hardly any from his
generation”.Where does
his kid attend school-
in a coal mine?Lynch
must have big positions
in solar and wind stocks.
The global warming
controversy re fossil
fuels has never been debated in the media.Just one theory
after another.The fossil
fuel antagonists keep
mentioning ‘carbon
footprints’ from burning
these fuels.Water vapor from oceans,clouds,etc.
releases 24,000 times
more carbon each year
than industrialized
countries total carbon
output,so someone
explain to me how the latter causes global
warming.
7 Jim Kingsdale // Jul 5, 2008 at 10:57 am
Robert, you offer a fascinating comparison of the costs of oil vs. electricity. I have no idea if your numbers are correct and would love to hear others corroborate or opine. But assuming the comparison is both correct and practical, it points to where the price of oil must go in order to obtain a market-based movement toward our inevitable electric future.
You are generous to the politicians in putting the blame for lack of leadership on the populace. But whatever the past may be, we certainly need more leadership now if we are to avoid having to wait until oil is $500 a barrel before we try to chance our transport infrastructure.
Incidentally, last year I predicted that in five years oil would sell for $500. It is starting to look as though I might have been a little too conservative.
8 James A. (Jim) Stehr // Jul 5, 2008 at 11:25 am
Jim Kingsdale: Just a note of deep and sincere thanks for posting this article and many others so informative on your website. Your website is TRULY a fine source of the larger perspective as well as immediately useful information. -JAS
9 James A. (Jim) Stehr // Jul 5, 2008 at 11:31 am
CLARIFICATION PLEASE: The trailer gives bio for “J.” Peter Lynch, but that important distinction is omitted from the headlines. I trust it is indeed “J” Peter.
10 James // Jul 5, 2008 at 2:43 pm
Yes, this “J. Peter Lynch” is not THE Peter Lynch. Check out the bio and past articles at investorideas.com for confirmation.
11 richard warren // Jul 5, 2008 at 5:02 pm
Frankly, I saw nothing new in Lynch’s message. We already know about the long term solutions. The problem is they are 10-20 years out.
Oil at $200; $400; $500? What does Peter Lynch think will happen at those prices?
What we need is a solution to high cost liquid fuels NOW!…before our airlines, automakers, truckers, and virtually every business shuts down if it depends upon liquid fuels…and add in horrific consequences to rural communities and farms. We must have a short term solution.
Absent that, we are going to see demand-destruction’ and society-destruction on a scale we havn’t yet imagined.
Wars have been fought for reasons less critical to countries.
12 Drexel Agner // Jul 5, 2008 at 8:42 pm
yes, yes we need cheap liquid fuels now-and then what? If history is any guideline the U.S. will go back to their SUVs and freeways clogged single occupant vehicles.
. And will there be an energy policy that does anything except try to bring more cheap fossil fuels to the market-NO. Will there be an effort to incorporate renewable energy into our energy policy-maybe some token effort. Global warming? -just some liberal scheme by the tree huggers, no baby let the good times roll.
13 paultaut // Jul 5, 2008 at 9:31 pm
I rest my case.
14 dennis // Jul 6, 2008 at 3:23 am
So this is not the “real” Peter Lynch?
Global warming is untrue and a whipped up mass hysteria. Google Greenland and NY Times and you will find that last week the NYT said Greenland is not “melting” after all
Asthma? Air pollution is much less than 30 years ago. More inhalers are used by children because they are made of weaker material than when I grew up in 1950s. More junk food too is consumed by them and they don’t get outside enough. More kids with eyeglasses too
So this guys solution is “we have to turn to renewables now” Does he know that environmentalists kill all new hydro electric projects and many wind power ones too
My solution is to allow more drilling everywhere in USA and our waters
Also dig up low sulfur Western coal and burn it in a lot more places to make electricity and use this electric to run more automobiles
I hear good estimates for our natural gas reserves too
Den
15 Drexel Agner // Jul 6, 2008 at 8:20 am
Den, you should be in Congress with that stupid of an outlook. Let’s tear the shit out of the scenic wild areas of our country and have a few oil spills on our Coastal beaches for a few more years of cheap hydocarbons-yeah baby, u rock!
16 Mark L. // Jul 6, 2008 at 11:26 am
Most of the health issues facing Americans, especially Asthma, are not a result of environmental pollution factors. Most kids are raised on unhealthy, prepackaged, highly refined foods that are devoid of anything healthy. Doctors prescribe antibiotics for everything. All which weaken a person’s immune system. Then if there is increased pollution in the sky resulting in illness and asthma attacks. The underlying problem for most of the health issues is NOT environmental pollution (which in and of itself is not healthy); it is the ill American diet.
(former asthmatic)
17 dennis // Jul 6, 2008 at 11:40 am
Mark L
You are correct about diet! America is wealthy enough to clean up most pollution and our air is much cleaner than 30 years ago. Go to a 3rd world nation to see a really trashed environment
Drexel will be begging for drilling everywhere when gasoline hits $8/gallon. You will learn only the hard way
D
18 Robert Sczech // Jul 6, 2008 at 1:47 pm
Jim: except for the cost of solar energy (which I estimated at 30 cents per KWH), all my figures are taken from http://www.eia.doe.gov/kids/energyfacts/science/energy_calculator.html
Please double check my arithmetic by visiting this page. It takes only 1 minute and and a pocket calculator.
Richard: Peak oil by itself is not the greatest problem. Our real problem is the delusion so many people subscribe to that we can continue wasting precious fossil fuels by powering inefficient trucks, cars, planes etc for many more years to come. The truth is, the sooner we stop this nonsense and start building a sustainable future, the less pain we will have to endure in the end. If we do not follow that advice, there will be lots of pain and chaos. Peter Lynch tried to make that clear in his article. His language was still restrained.
19 Andrew // Jul 6, 2008 at 2:21 pm
25%-50% is quite a bit of hyperbole for the use of inhalers. That is a disappointment when trying to drill down and discover the complex facts.
Growing up in the ’60s and ’70s it certainly seems that the Jersey Shore and Chesapeake Bay are much cleaner today than then but that is anecdotal.
We also know that as soon as Bush it out of office politicians will take a look at this issue in a massive way, re-instituting tax credits and driving forward from there.
Here is a link to a spreadsheet Energy Cost Calculator developed by a professor at Penn State.
http://energy.cas.psu.edu/costcomparator.html
20 Andrew // Jul 6, 2008 at 2:30 pm
Seems to me we need to spend money at developing process technologies in the manufacture of silicon so that we can grow from a single crystal much more efficaciously and/or in the sawing slicing of ingot silicon into wafers. Further developing battery technologies like A123 has and McCain wants to do and thin film solar development. All of these things are happening and should be further encouraged.
BTW Sunpower things are are a lot closer to dollar cost parity with coal energy than has been stated in these comments.
21 ccrawford // Jul 7, 2008 at 6:45 am
Peter Lynch is a great investor, but he offers us a little more than environmental platitudes here. Of course, there are externalities for every form of energy. Despite rising longevity, many armchair analysts pretend to see a healthcare crisis. The asthma stats are irrelevant, for instance, because they ignore contrary evidence about causation. As anyone older than 50 knows, the air in the US is much cleaner now than it was in the 60’s. Many researchers now think that asthma may be a disease of prosperity, caused by insufficient exposure to certain allergens in childhood. And don’t get me started on “global warming”, a convenient crusade for power-seeking politicians everywhere. Energy externalities can be managed or mitigated, but the increase in worldwide poverty that would result from “enviromentalists” interfering in the economy would be a disaster of the first magnitude. The free market will eventually provide a solution that we cannot now envision. As a point of reference, a famous British economist named Jevons (sp?)wrote a book called “The Coal Question” in 1865 saying that Britain would soon run out of coal, which would bring the industrial revolution to an end. As oil production wanes, other energy solutions will be found - unless government imposed “solutions” destroy the global economy first.
22 wrigley // Jul 7, 2008 at 12:59 pm
why compare to solar, you should equate price per barrel to nuclear
23 Roger Lilly // Jul 7, 2008 at 1:05 pm
I thought Peter Lynch was smarter. I am sooooo disappointed.
24 Gob // Jul 7, 2008 at 5:57 pm
I thought this would be an article from Peter Lynch, former manager of the Magellan Fund.
Who the f*ck is J Peter Lynch?
25 dirtsimple // Jul 7, 2008 at 8:15 pm
Rising health care costs have nothing to do with what we eat, drink or breath. They have everything to do with lawyers, insurance companies and the latest burden of uninsured illegals on our health care system.
I’ll start to worry a little more about global warming when someone shows that (1) CO2 rises AHEAD of temperature instead of lagging it, (2 )that earth’s temperature is unrelated to changes in solar activity, and (3) when earth’s temperature exceeds that experienced during the medieval period. As recently as mid-seventies, we were worried about returning to the little ice age! It’s tough enough getting tomorrow’s temperature forecast correct, and we think these global warming guys have it right for the long run? What a scam!
26 Steve Nystedt // Jul 8, 2008 at 8:42 pm
Interesting group of comments, in response to a thought provoking list of possible impacts. I hope the doubting Thomas’s think about the invisible auto exhaust pollution they are breathing the next time they pull up closely behind another car. There are many impacts that are occuring; just think about how the US would operate if there suddenly was a 50% reduction in available gasoline. I’d suggest that anyone interested in the impacts of Corporations go to their local library, and look for a Canadian Documentary called “The Corporation”. My son and I saw it two summers ago, when on a fishing trip in Canada. He subsequently saw it also in one of his college ethics shows. It will make all of you think about the impact, directly and indirectly of the huge dependance on energy, and even moreso on the impacts of the current Corporate system that only encourages short term thinking. Congress needs to pass legislation that provides for long-term incentives to address our energy needs; in efficiency improvements, alternate fuel types, storage capabilities. Hopefully everyone saw T Boone Picken’s ad on TV this afternoon, pointing out that we will send $500 Billion dollars to others in the world, in just one year, to buy oil.
Leave a Comment