Recently, BP Managing Director Robert Dudley was asked if he felt his company’s oil spill in the Gulf of Mexico could cause the public to lose faith in offshore drilling.  He responded that there is a tradeoff between making drilling “completely safe for the entire industry” and the need for “affordable energy.”  Transitioning to renewable energy is often considered too expensive.  But how “affordable” is oil?

We will not know the total bill for the Gulf disaster for some time.  Its entire fishing industry, worth $3 billion a year in Louisiana alone, is threatened not only this year, but for perhaps a generation.  Tourism is threatened from Louisiana to Florida for years to come.  While BP has said it will pay “reasonable claims” resulting from the spill, Gulf residents and American taxpayers will bear the brunt of the damage far into the future.

If these impacts were factored into the price of gasoline, it would appear far less “affordable.”  But we don’t do that.  These costs and many others are externalized, giving the impression that oil is far cheaper than it is.

The true economic cost is hidden by a combination of mechanisms that have subsidized the industry for decades.  As Paul Roberts notes in The End of Oil, oil companies receive special deductions lowering their effective tax rate to about 11 percent, compared to 18 percent for non-oil industries.  This has cost American taxpayers an estimated $200 billion since 1968, and with soaring industry profits in recent years, is growing at an ever-increasing rate.

In the 1980’s, the Interior Department slashed the average price of drilling leases to $263 an acre – a staggering 88% reduction.  In 1995 Congress began exempting oil companies from royalty payments to incent expanded deep water drilling, which could cost taxpayers $55 billion over the life of the leases – or more, depending on well performance and oil prices.

Taxpayers also pay for the U.S military presence abroad required to keep international oil supplies secure.  Our troops in the Caspian, West Africa, South America and Middle East (except, debatably, Iraq) serve mainly to keep oil flowing to America.  In his book Blood and Oil, Michael T. Klare estimates that the total bill for military support and other aid to oil producing countries may exceed $150 billion per year.

Because taxpayers bear these costs, gas prices remain artificially low.  But we still end up footing the bill.  Moving the costs back to oil producers would significantly increase the price of gasoline at the pump, but would not impact the true cost borne by society.  This change would create the appropriate price signals, helping consumers act more rationally.

Congress can address this by removing oil tax breaks and subsidies, and restoring the price of leasing rights to previous levels.  Congress should also levy a surcharge on oil imports to recoup expenditures to secure those supplies.  By announcing this plan immediately, but phasing it in over several years starting in the middle of the decade, oil companies and consumers have time to adapt.  Within ten years these costs would be fully internalized.

While the actual price increases would not take effect for several years, simply announcing this plan would immediately shift behavior.  Oil drilling becomes less desirable.  Choices on automobiles, housing and office locations would be altered – all long-term investment decisions that have a significant influence on our environmental footprint.  We saw the impact on behavior when gas prices reached $4 per gallon in 2008.  Prices would move beyond that after this plan was enacted. 

Again, this would not alter the total cost borne by American society.  It would simply reflect prices differently, in a way that gives Americans much greater control. 

No plan will satisfy all constituencies, but this one has elements that appeal to a broad spectrum of interests.  It will reduce oil use, address our budget deficit and allow markets to function better, which appeals to environmentalists, budget hawks and free market champions, respectively. 

This plan would likely face opposition from both sides.  Fossil fuel supporters will object because it will accelerate the structural shift away from oil and gas, and reduce industry profits.  Environmental advocates will complain that, because it does not include environmental costs, the plan does not go far enough.

But this approach contains elements that appeal to several factions.  It is simple to explain and straightforward to calculate, making it more politically palatable than other options such as cap-and-trade legislation or a straight carbon tax.  And while not a substitute for tougher safety requirements or comprehensive energy policy, it would immediately begin to alter behavior to more desirable outcomes.

Click here for the version of this Op-Ed piece published by The Oregonian (along with a less-than-flattering photo of Jon).