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What is the Real Cost of Fossil Fuels?

By Peter Lynch
Exclusively for InvestorIdeas.com
June 13, 2008

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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@aol.com.

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