The Cost of Transportation’s Oil Dependence

The societal costs of oil dependence do not fit neatly into the definition of a market externality. Though oil dependence costs have some of the features of external costs, result from what most would agree is a market failure, and almost certainly demand some form of public policy action, the paradigm of the public good externality fails to capture the essence of the problem. The essence of the oil problem is as follows: 1) the geographical concentration of oil resources in a relatively few countries creates the potential for significant market disruptions, most especially the exercise of monopoly power by a cartel; 2) the inelasticity of oil supply and demand, especially in the short-run, confers enormous monopoly power even on a cartel holding less than half of the world market; 3) developed and developing nations, especially their transport sectors, consume enormous quantities of oil making them vulnerable to oil price shocks and price increases.