Offshoring is a Dubious Policy, When the Question is Oil Drilling

President Bush yesterday eliminated a 27-year executive moratorium on off-shore oil drilling (NYT, 7/15/2008, p.A13), a move also supported by presidential candidate John McCain.

'The Democrats responded:'

'(1) that this was an election-year stunt, '

'(2) that the move would be too small to make a difference '

'(3) that it would bring no downward pressure on oil prices at the crucial short-term horizon, and '

'(4) that it would not ultimately help move the country in the direction of energy security.
'The Democrats have the right answer, but are perhaps giving the wrong reasons.'

No doubt they are right that it is a political stunt. 'A Congressional ban on offshore drilling has been in effect since 1981, so the President’s action is moot. 'But making a political point in this way is in itself fair game. 'The Republicans are trying to blame high oil prices on the Democrats. 'Similarly, the Democrats’ response could well be the right one from the viewpoint of political gamesmanship.'

But I should try to stick to economics in my blog, rather than politics. 'The issues can be slippery; but let’s take the bit in our teeth and drill down on what would make for good for policy.'

On grounds of good economic policy the Democrats’ chosen arguments seem to me beside the point. 'It is true that the oil in the offshore sites would not be enough to have much effect on the world price. 'It does not amount to much as a percentage of world reserves, which is the relevant metric for determining the effect on price. “The Department of Energy estimates that there are eighteen billion barrels of technically recoverable oil in offshore areas of the continentail United States that are now closed to drilling…[A]t current rates of consumption, eighteen billion barrels would satisfy less than seven months of global demand.” (The New Yorker, Aug. 18, 2008, p. 28.) 'But if one believed there were no cost to more domestic oil drilling, then one should conclude that every little bit helps. 'Basic economic theory tells us to judge proposals by the ratio of benefits to costs, not by the absolute magnitude of the benefits.'

Regarding point (3), both parties are responding (unsurprisingly) to the American public’s great sensitivity to short-term prices for gasoline (in the summer) and home heating oil (in the winter). 'No doubt high prices are causing a lot of hardship. (And even if it takes ten years to develop new oil reserves, the knowledge that the oil was coming should put a bit of downward pressure on prices today.) 'But market prices are high today for a reason. 'What is the market failure that would call for government intervention in the oil market?''

The most obvious market failures are the externalities that characterize air pollution and emission of greenhouse gases. 'These of course are reasons for higher prices, not lower. 'I am struck every time I see an article on politicians’ commitment to action on global climate change sitting side-by-side in the newspaper with an article on their opposition to oil price increases. '''' '

I realize that higher energy taxes are politically out of the question at this point. 'But I could imagine legislation that would automatically raise energy taxes if and when oil prices fall, thereby putting a floor at recent levels and providing industry with the clear incentive to undertake the long-term investment in energy-saving equipment and technology that we badly need. 'Rebate the proceeds by fixing the AMT, or removing the payroll tax on low-income Americans, one answer to the income distribution point. 'In any case McCain’s proposal for a gas tax holiday is a spectacularly bad idea.'

The other obvious market failure that might justify government intervention in the market is national security, and here we come to argument number (4), and the central point of my post. 'While Americans need to recognize that achieving complete energy security is an impossible goal, it should indeed by a national objective to reduce our dependence on imported oil. 'We could thereby reduce our need to fight messy wars in the Mideast and to coddle unpalatable autocrats worldwide. 'But, in the first place, conservation — not new drilling – is the largest and most sustainable component of such a strategy. 'In the second place, as high as world energy prices are now by historical standards, this is not the worst-case geopolitical crisis that we should be seeking to protect our economy against. 'That worst-case scenario is a prolonged loss of world access to Gulf oil stemming from some combination of military conflict with Iran, anti-Western popular uprisings in the region, terrorism, and/or nuclear or radiological weapons. '''

Once the long-term goal of "energy security" policy is properly seen to be amelioration of the economic effects of such a disaster, the Republican policy of “Drain America First” is seen to be precisely the wrong response.

The British made this mistake: when they found oil and gas in the North Sea, they pumped it out as fast as possible. This was in the 1980s and 1990s, when they didn’t particularly need it. The result is that today — when the UK is trapped in an unwanted war in Iraq and world oil prices are far higher — North Sea reserves are largely depleted.

''We don’t want to maximize current domestic production. 'Rather we want to increase conservation, leaving much of the remaining oil underground (or underwater) for decades, until we really need it, until we are so desperate that the economic benefits really do outweigh the costs. 'The big costs are chiefly environmental, of course.'''

''The ban on off-shore drilling was originally enacted in response to damaging coastal oil spills; in the years since then we have also learned that the atmospheric damage from oil consumption is far greater than we had realized.

But the Republicans have sometimes been keen on giving oil companies access to nationally owned reserves at prices that are even below market costs, let alone market costs plus an appropriate premium placed on environmental externalities. ('Same as hard-rock mining for mining companies, subsidized water for farmers, and grazing rights on federal lands for ranchers. 'But the hypocrisy of the self-reliance rhetoric in Western states — “get Washington off our backs” – is another story for another time.)'''

'Any readers wishing to post comments are asked to go to: ''http://www.rgemonitor.com/us-monitor/253003/offshoring-is-a-more-dubious-policy-when-the-question-is-oil-drilling/'.'

.