Hidden Subsidies and Risks Pump Up Real Price of Oil
By Senator Richard G. Lugar
As submitted to nature
January 2007

Congratulations on your excellent report regarding the development of biofuels. Not only is this an important topic for scientists and environmentalists, developing energy products that move the United States away from its over-dependence on oil is a critical national security priority.

There are many exciting possibilities for expanding renewable fuels in the United States and around the world. Today’s ethanol from corn and sugar will be complemented by cellulosic ethanol from many energy-crops, next generation biodiesel, and perhaps other renewable fuels that have yet to be developed. Moreover, these renewable fuels will complement liquid fuels made from abundant coal reserves.

While I agree that markets need to determine which fuels emerge as the most competitive, we should recognize that these new fuels are not today competing on a level playing field with oil. The true costs of oil to our economy and national security are much higher than the price paid at the pump. Most of the oil in the world is controlled by governments, many of which are authoritarian regimes that increasingly use their oil resources for political gains. In addition, the price we pay for oil does not cover the risks to the economy from delivery disruptions, price spikes, environmental hazards, and the vast expenditures required to protect supply routes and infrastructure. Public testimony before the Senate Foreign Relations Committee reported that the minimum military subsidy Americans pay to protect Middle East oil trade routes is $50 billion a year.

Consequently, Congress is debating a variable price floor for alternative fuels so that oil producers cannot use temporary price cuts to undercut new fuel technologies that make America more secure. Such a floor should allow all fuels to compete, so the best ones may emerge.