Monday, September 8, 2008

Should we "drill, baby, drill"?

While the current political debate focuses a great deal on particular policy choices, we don't (in my opinion) spend enough time thinking about how we should make those choices. What are the acceptable costs and benefits associated with various decisions?

In July, a Gallup Poll on energy prices found that:
"57 percent of Americans would support drilling in the nation's coastal and wilderness areas that are currently closed to exploration—if it helped reduce gasoline prices and if the drilling were conducted under strict environmental safeguards." [emphasis added]
A similar poll from June found that 67% of Americans favored offshore drilling (not including wildlife areas) and 64% believed that it was at least somewhat likely that drilling would decrease gas prices.

A new study takes a look at drilling in ANWR and addresses the gas price issue:
"Domestic oil prices are determined in a world market and would be unaffected by the relatively small annual flows from ANWR. Moreover, the quantity of oil in ANWR, 7.06 BBO, is merely 0.55 percent of the proven reserves worldwide... Analysts also recognize that even if ANWR's supplies were large enough to affect world prices, the Organization of Petroleum Exporting Countries (OPEC) would countermand the increase in production and thereby negate any price effects... It is also clear, with ANWR accounting for a maximum of 3.2 percent of domestic consumption in 2025, that something other than drilling in the Refuge will be necessary to substantially reduce out dependence on foreign oil."
Ben Muse summarizes the study's other interesting findings:
"Kotchen and Burger estimated that the oil had a value of $374 billion (writing in July 2007, they assumed a long-term price of $53/barrel), but that it would cost $123 billion to extract and market. The net return of $254 billion is divided consists of industry rents of $90 billion, Alaska tax revenues of $37 billion, and Federal tax revenues of $124 billion...

Welfare benefits to U.S. oil consumers? There aren't any, except in their role of taxpayers. That's because development would have little impact on oil prices (or energy independence)...

Job creation? Some in Alaska, but with full employment there would be no net job creation; jobs created on the North Slope would be taken from other industries and places.

There would also be costs. The costs of actually exploiting and bringing the oil to market have been accounted for above - those benefits are net of production costs. However, there would also be significant environmental costs..."
While we can't directly measure how much intrinsic value the median voter places on ANWR or other areas that may be opened to drilling, we can directly consider both the total benefits and their distribution. The real winners will be the oil companies that win drilling rights and the Alaskan State and Federal governments. So from the perspective of voters, the benefits are not that great.

Despite arguments to the contrary (and my usual support for these arguments) the polling data suggests that voters have a rational decision making model on the drilling issue: open restricted areas to drilling only if there is a net benefit to consumers and if there are appropriate environmental safeguards. The question is whether politicians and media sources will provide the facts and or if voters have the incentive to seek them out.

Then again, it looks like these people have already made up their minds...

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