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Oil Price Fantasy: The True Cost of Crude

Persian Gulf Oil Costs $543.00 a Barrel

Written by Brian Hicks
Posted September 21, 2010

Like most Americans, I often wonder what the world would look without our dependency on the free flow of oil from the Persian Gulf.

Of course, this has always been something of a national fairy tale...

But it's still fun to fantasize.

Ever since the gas lines of the 1970s, Middle Eastern oil has become the ultimate global hobgoblin — a thorn in the foot of the industrialized world.

And every day this geographic lottery treats us to a never-ending stream of bad news from an area of the world that we will never completely understand — or conquer.

Without the region's abundance of black gold, I think I can safely say that what is happening in the Middle East would be as interesting to us as what's going on in, say, Borneo.

By the way, the big news in Borneo these days is that wildlife rangers have successfully rescued a few endangered Pygmy elephants that recently went astray.

While this news may be interesting to some folks, most Americans could probably care less. And I think that's how most of us would feel toward the majority of news coming out of Syria, Iran, and the places in between — if it weren't for the size of those oil fields.

Absent the crude, it would be a giant and collective: "Who cares?" or, "Saddam Hussein? Never heard of him... "

The true cost of oil

But that's simply not the hand the industrial world has been dealt. By fate, the majority of oil is in places where instability is something of a way of life.

And while I do understand that oil is not the only reason we involve ourselves “over there,” I think we all instinctively understand that crude is at the root of it all.

But hey — so long as the price of a gallon of gas is still under $2.90, most people live with the devil in the details. After all, if there's one thing that nearly every American driver makes his or her business, it's the price of gas...

I don't know about you, but I can easily name at least 10 people who routinely drive across town to save a penny or two at the pump. Whatever floats your boat, I guess.

But what if I told you — or them — that this "bargain gas" is nothing more than a mirage, since it doesn't actually capture all of the input costs? Would that change your mind about a few things?

That's because the price of a barrel from the Middle East is the real fantasy here. Its spot price may be about $74/barrel; but the reality is that the true cost of a barrel is much, much higher — we simply pretend that it's not.

How much higher, you ask?

Try $469.00 per barrel higher, if that crude comes from the Persian Gulf...

That means that the true cost of a barrel of Middle Eastern oil is not $74 as is widely believed; but a hefty $543.00 — or 7.3 times its spot price.

And that's why the spot price of a barrel of oil is a completely insufficient measure of its cost. Spot price only involves the unit price, failing to take into account all the costs associated with keeping those millions of units flowing.

And as we know, in the bloody and turbulent world of the Persian Gulf, it is both American blood and treasure that keeps it all going — for us and for everybody else. We pull the wagon and the rest of the world comes along for the ride.

Although we could never even begin to calculate the value of the lost and broken American lives created by this struggle, we can examine the cost of oil in defense dollars. That's the share every American spends to subsidize this charade.

And it's how I came up with the "true" price for a barrel of oil from the region.

The uncounted cost of oil

According to estimates, we spend nearly half of our entire $685 billion defense budget protecting and ensuring the free flow of the approximately 730 million barrels of oil that we import annually from the Persian Gulf.

And given the realities created by such terrifically large numbers, this means we spend an additional $469.00 on each of these units in order to bring them safely to market.

So while we can all now happily fill up at a mere $2.70 per gallon, the actual price of that gas is much higher, once you figure in the cost of the defense dollars necessary to bring it all to market.

Add to that its cost in blood — and its true price is off the charts.

Even when you average out the high cost of Middle Eastern oil with the rest of our imports, you arrive at a true cost of $152.00 a barrel — almost twice its spot price.

Maintaining the illusion of cheap oil is considerably more costly than we think.

So what's the real cost of a gallon of gas?

By my reckoning, it's about twice as much as we think it is — about $6.50/gallon. That means your 22-gallon fill-up rings in at around $143.00.

That's why I can't understand the adverse attitudes some folks maintain toward alternative energy.

Energy independence has to start somewhere. And the truth is that if we pursued these goals as vigorously as we work to defend the free flow of oil, we would already be that much closer to the day when we leave the Middle East behind.

Now that is a future worth thinking about, even if it may take a long time to realize.

Of course, none of this is new to our team of analysts. When it comes to the energy curve, we pride ourselves on being one step ahead of the herd.

In fact my colleagues Nick Hodge and Christian DeHaemer have tracked down two new energy plays that promise to early investors a fortune. To learn more about these opportunities, click here and here.

Your bargain-hunting analyst,

Steve Christ
Editor, Wealth Daily


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