Offshoring Is a Dubious Policy When the Question is Oil Drilling

by: Jeffrey Frankel July 15, 2008    

Jeffrey Frankel

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

President Bush yesterday removed a long-standing executive moratorium on off-shore oil drilling, 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 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. Let’s drill down on what makes sense for policy.

On grounds of good economic policy the Democrats’ chosen arguments are beside the point. It is true that all the oil in all the offshore sites adds up to “a few months of national consumption.” It would not amount to much as a percentage of world reserves, which is the relevant metric for determining the effect on price. But if one believed there was 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 five 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 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 goal 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 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. We don’t want to maximize current domestic production. Rather we want to leave the 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 costs are chiefly environmental, of course. But the Republicans have often been keen on giving oil companies access to nationally owned reserves at prices that are even below market costs. Same as hard-rock mining for miners, subsidized water for farmers, and grazing rights on federal lands for ranchers. But the hypocrisy of anti-Washington self-reliance rhetoric in the Western states is another story.)

Thus the Democrats have it precisely backwards. The problem with Republican proposals to re-open domestic oil drilling is not that we desperately need the oil right now, whereas new oil discoveries would not come on line for 5 years or more. Rather it is that we might truly desperately need the oil in 20 or 30 years, and so don’t want to use it up over the next decade.

Related Articles

This article has 37 comments:

  •  
    Jul 15 10:48 AM
    Well written and thoughtful.

    A few comments: 1) the biggest contributor to high oil prices is probably Ben (republican) Bernacke's weak US dollar. 2) High oil is not ALL bad; at least it's pried soccer moms out of their Road Dominator SUV's 3) The future is about electric or MOSTLY electric cars. Windmills ASAP. And maybe nukes....
    Reply | Link to Comment
  •  
    Jul 15 11:05 AM
    We can't live without oil. Apart from transportation fuel, which is impossible to replace (I hear electric cars BS for 30+ years now), modern world produces about 300000 different products from oil and oil byproducts. So we need to drill. Now.
    Energy security is not an economic term. It's a military one. And the solution is military, as well. And it's here and now: for the last 30+ years, at least one US aircraft carrier is parked in or around Persian Gulf. Any attempt to block oil traffic from Gulf would be crashed. The only serious threat is an oil embargo, like in 1973, but I don't think it's politically possible now.
    Reply | Link to Comment
  •  
    Jul 15 11:13 AM
    "I hear electric cars BS for 30+ years now"

    Crawl out from under your rock. The differences between NOW and 30 years ago are that 1) now, the incentive is better 2) the batteries are better 3) It's actually beginning to happen (e.g., the Hybrids, like the Prius).

    You are correct about oil being a critical feedstock for plastics, etc. But I think that reinforces Mr. Frankel's position; not yours. And, coal could be developed into a replacement feedstock, if necessary.
    Reply | Link to Comment
  •  
    Jul 15 11:13 AM
    It's "Ben Bernanke."

    As to the future, electric cars are great, until the batteries run down. After which, they must be charged. How do you plan to do that?

    Windmills are great, provided the wind blows just right (not to heavy, and not too light). Generally speaking, it does not. Thus storage of power to match demand must be undertaken if wind were to be relied upon for anything but a small fraction of supply. That is a non-trivial problem,

    And nuclear has been a viable solution, and has been advanced as one, since the 1970's. Politically, it has proven impossible (due to Democrats, I might gratuitously mention). Why would things be different now?
    Reply | Link to Comment
  •  
    Jul 15 11:28 AM
    "Politically, it has proven impossible (due to Democrats, I might gratuitously mention). Why would things be different now?"

    Umm-- because they don't emit greenhouse gases?
    Reply | Link to Comment
  •  
    Jul 15 11:29 AM
    We need to get "some" drilling underway to zero in on where the best new driling sites are. If we start some new oil driling now we can begin to see some retention of our oil dollars & not send so much to the middle east. This will set us up for more rapid expansion before the day comes that 4 dollar oil sounds good. I also note that this 10+ years to get to meaningfull production is not realistic. Oil companies have technologies that did not exist 10 or 15 years ago. (I.E. horizontal drilling.) We need motorized transportation fuels as batteries will serve only a small portion our overall transportation needs in the next 20 years -or more.
    Reply | Link to Comment
  •  
    Jul 15 11:41 AM
    Tom, that is correct, nuclear does not emit greenhouse gases. But in the 1970's, the argument was that nuclear did not omit sulfur dioxide, which (we were told) causes deadly acid rain. Yet it still went nowhere, amidst visions of nuclear melt-downs (recall Jane Fonda's starring role in "The China Syndrome").

    So again, what has changed?
    Reply | Link to Comment
  •  
    Jul 15 11:47 AM
    Great article, thanks.
    Reply | Link to Comment
  •  
    Jul 15 12:20 PM
    Legalize offshore drilling or get what you desire, namely higher oil prices. I really don't care if Democrats want the commodity price of oil to go higher because I profit from their stupidity and ignorance.

    Unfortunately for Democrats, hydrocarbons are infinite and renewable. Hydrogen is the most common element in the universe and carbon is the fourth most common element in the universe.

    oilismastery.blogspot..../
    Reply | Link to Comment
  •  
    Jul 15 12:42 PM
    When you engage in ball sports, the first thing the coach tells you is "never take your eye off the ball" That is what happened.

    We don't need to drill anything anywhere. All we need to do is recognize that is in the ground IF we need it and the price will plummet within two weeks. The average lift cost for all liquids is approx $28 per barrel. Double that so reasonable money can be made and you get $56. The entire run up from approx $56 is PSYCHOLOGICAL based upon the never ending incessant scare mongers constantly shouting China, India and Peak Oil. The lazy observants fall for that crap in a nanosecond and the manipulators take advantage.

    Look for yourself at REAL global demand, Look at the average of the 24 reputable research reports on global peak and look at what year that will be. Look at the massive amount of money/brainpower the venture guys are throwing at this.

    It's divide and conquer. The manipulators got us all yelling at each other while they rob everybody blind. They TELL us the situation is bleak but actual hard to research (but out there) says it isn't the case.

    If oil breaks back below $100, how will this be explained? What -- suddenly China and India aren't such a big deal? The analysts like Murti will just throw up their hands and say "oops my bad"

    The truth is right in front of us people but we don't see it because the talking heads have us looking directly at something else while we are at each others throat.

    This whole thing is ridiculous...
    Reply | Link to Comment
  •  
    Jul 15 01:01 PM
    @ microtrend and Tom B

    I'm a Republican and I'll do everything I can to make sure that supposed "nuclear renaissance" never happens.

    1) when you add the cost of decommisioning the plant back into the equation thennuclear energy is the most expensive from we can use. It is a financial disaster and even Wall St. isn't interested. Forget insuring it other than you and I through our taxes.

    2) It isn't safe. It ISN'T safe. I'll assume you've heard of the probability of one. The POB states that if you do something long enough with enough frequency eventually it will happen. This means we will have another Chernobyl sized accident. It will happen under the auspices of POB. The problem with POB is that it could happen in the next 30 seconds or the next 100 years. But this just adds to the instability of proceeding. We were this damned close to possibly emptying large parts of Europe because of a recent disaster. Crap we just a serious accident last week.

    www.spiegel.de/interna...

    news.bbc.co.uk/2/hi/eu...

    Forget it. It's never going to happen. Not the old technology or even the new technologies. The people won't be able to differentiate and the storage will still be a huge issue.

    The other thing people need to realize is that the Iranians will use this as explosive political capital around the world by saying "Those Imperialist Americans will build 100's of new nuclear plants yet we the Iranians are unable to build even one for the betterment of our people. It is an example of the Americans trying to control us and blah blah blah" We all know that is crap but you know damned well they will use it against us and even (some) reasonable intelligent people will sit up and agree with them.
    Reply | Link to Comment
  •  
    Jul 15 01:14 PM
    Short-Mid term, Oil's going down one way or another... The market trend is on the cusp of confirming that we're facing a global recession, and a major recession in the USA itself. This itself will massively destroy demand in the short term for oil.

    Oil is currently staring into the abyss as far as I'm concerned. Who is going to buy it at 150, 200, 250, 300 when the world's economy collectively collapse and demand drops in aggregate?

    Crazy thing is, the whole thing runs on a lag due to the limited refining capacity acting like a really long pipe with long delay. By the time the global demand slowdown shows up as drop in crude demand, the continued recession will already be well under way.

    Oil futures can speculate all they want. Someone is going to get burned badly.
    Reply | Link to Comment
  •  
    Jul 15 01:27 PM
    us oil exploration and production should have been implemented at least 20 years ago. we would not be inn the mess we are now if our production were up.. To the brainless people that say drilling is not the solution i say this: do they ever read international news? While congress insists in hiding under the drilling is no solution moniker, the rest of the world is engaged in E&P with both hands. transocean just signed up 4 rigs contacts with Petroras totalling 22 rig years work. Gazprom is negotiating to buy lybia's oil and gas production, china and india are cutting E&P deals all over the world. We deserve what we elect.!!!
    Reply | Link to Comment
  •  
    Jul 15 01:39 PM
    "The other thing people need to realize is that the Iranians will use this as explosive political capital around the world" Who listens to Iranians?

    You make excellent points about nukes. I've flip-flopped on nukes over the years...
    Reply | Link to Comment
  •  
    Jul 15 01:43 PM
    "While congress insists in hiding under the drilling is no solution moniker, the rest of the world is engaged in E&P with both hands."

    Our oil fields are smaller. Ask any geologist.
    Reply | Link to Comment
  •  
    Jul 15 02:05 PM
    To Tom B in response to "ask any geologist."

    If anyone wants to know about hydrocarbons and the universe we live in, the last person they should ask is a geologist.

    "Geology is the prisoner of several dogmas that have had widespread influence on the development of scientific thought." -- William R. Corliss, 1975

    "It is a singular and notable fact that, while most other branches of science have emancipated themselves from the trammels of metaphysical reasoning, the science of geology still remains imprisoned in 'a priori' theories." -- Sir Henry H. Howorth, 1895

    oilismastery.blogspot..../
    Reply | Link to Comment
  •  
    Jul 15 02:14 PM
    "If anyone wants to know about hydrocarbons and the universe we live in, the last person they should ask is a geologist. "

    well, pardon me. I'll consult my astrologer.
    Reply | Link to Comment
  •  
    Jul 15 02:23 PM
    I am a geologist and have you heard of the Bakken play in the Williston Basin? The USGS says it is the largest field they have ever quantified. Not to mention the unknown reserves offshore Atlantic and Pacific US because the industry has not been allowed access to assess the potential in decades. As for the author's claim as to environmental reasons, I say it is political...there are already hundreds of wells in the GOM. During hurricanes Katrina and Rita there were 200 mph winds with 100' waves and no spillage from the oil infastructure.
    Reply | Link to Comment
  •  
    Jul 15 02:47 PM
    Before rushing headlong into the brick wall, we should be accounting for all costs.Offshore drilling will not come cheap. Total Rig capacity on and offshore is around 97%. Offshore deep drilling rigs are $2 billion +, and leasing for $300 K +/day. Only the big boys will be able to play in this game due to our failing banking infrastructure.

    I suspect big oil is wanting to lock up the mineral rights to the easily accessible crude, so we won't see any decrease in the price of crude. Just like back in '77, when they said we would have 35 cent gas again when the Alaska pipeline opened.

    Not to mention trying to keep that crude warm enough to flow through 15000 ft of pipe in cold sea water. Or the virtual certainty
    that tourism and fishing will suffer for our oil addiction, just as they are still paying the price in Prince William Sound.

    Depending on Hurricane Alley for our oil needs is like voting for Alfred E. Neuman for President. Damn! I did that once.
    Reply | Link to Comment
  •  
    Jul 15 03:07 PM
    Thought provoking article.

    Global supply and demand constraints are causing oil to rise. Yes there are speculators and always will be, but oil will continue to rise long-term. I don't think people realize that the oil we can drill off our shores will not have any major long-term impact on the price of oil globally. You have major exporters such as Mexico, Venezuela, and Russia having supply constraints. Global economies are expected to grow faster than the US. This means that yes long-term, demand in emerging markets will continue to rise as it becomes much harder for us to drill for the remaining half or so of oil that is estimated to be left on earth. Even if we are only 1/3 of the way through oil, it is a fact that it will continue to take more capital and technology to get the remainder.

    Just think of India's car market. Last I heard, less than half of Indians owned cars. With India's population, and as their economy becomes more and more developed, demand for oil will increase. Mexico is expected to be an oil importer in 5 years or so. I don't know why people refuse to believe in supply and demand with any commodity that WILL run out. Predicting exactly when is difficult. But we are finally about to see world oil production barely meet world oil demand. The excess margin continues to shrink.

    Noticed I am giving a longer term outlook. The reasoning is, as with anything that trades, it gets momentum. There are catalysts that exist for a pullback in oil short-term, primarily a global recession. It is overbought. But by no means should you believe oil will be below $100 5 or 10 years from now. $4 a gallon is going to be normal.

    Eventually, we will have alternative energy sources such as Solar and Wind take up more market share. But this will take a very long time. The global oil and gas infrastructure is not going anywhere. Even if alternative sources account for 30% of world energy production in 20 years, I still believe supply and demand points to higher oil.

    People need to get over this whole U.S. drilling. Frankel brings up an interesting point that we will eventually ABSOLUTELY need it. But if anyone actually believes that drilling for our oil will have a significant impact on what is going to happen to oil long term, they are wrong. Maybe it provides temporary relief, but who knows, we may be exporting that oil to Mexico before you know it.
    Reply | Link to Comment
  •  
    Jul 15 03:10 PM
    Bizarre arguement. Lets not drill offshore for oil since the reserves may be needed in the future. Obviously it is better to drill for oil now so that the reserve estimates can be updated now rather than later.

    Secondly, oil is "not" a non renewable resource contrary to popular opinion and the implicit belief of the author. Unless the author is prepared to disprove the 2nd law of thermodynamics he should reverse his argument.

    An article published in the journal Proceedings of the National Academy of Sciences in August 2002 called

    "The Evolution of Multicomponent Systems at High Pressures: VI.
    The Thermodynamic Stability of the Hydrogen-Carbon System:
    The Genesis of Hydrocarbons and the Origin of Petroleum."

    makes a myth of the theory of the biological source of Hydrocarbons


    www.gasresources.net/i...



    Reply | Link to Comment
  •  
    Jul 15 03:15 PM
    >>>During hurricanes Katrina and Rita there were 200 mph
    >>>winds with 100' waves and no spillage from the oil infastructure.

    This talking point never dies.

    44 oil spills found in southeast Louisiana
    Largest is nearly 4 million gallons, most big ones are on Mississippi River

    The Coast Guard estimates more than 7 million gallons of oil were spilled from industrial plants, storage depots and other facilities around southeast Louisiana.

    That is about two-thirds as much oil as spilled from the Exxon Valdez tanker in 1989. But unlike the oil from the Valdez, which poured from a single source, these oil spills are scattered at sites throughout southeast Louisiana.
    www.msnbc.msn.com/id/9.../
    Reply | Link to Comment
  •  
    Jul 15 03:35 PM
    The writer admits that all investments must be made based on a cost-return basis. Our 100 years of petroleum use provide quantifyable metrics of return. How does conservation hold up? Ask the people of the late seventies and early eighties. Even Jimmy Carter had the balls to start Syncorp. That used that dirty coal product that the environmentalists and far left Democrats today say is ruining our globe! Al Gore also pitched this in 1999 when running for President as well, and it was encourage by the Bush Administration who all of a sudden became 'evil' for wanting to tap into that nasty coal also.

    Democrats are so easily led about by the nose, such irrational emotional, blind followers of pied pipers that have ulterior motives. So now Al Gore saw the light and started the carbon credit business so all energy besides wind which will not even dent transportation energy sector needs has to be built out immediately? THINK MAN.

    The Democratic party of even Jimmy Carter's day is gone, we have far left loonies on the Hill and Congress approval rating of 9% is all that really needs to be said in any event.

    The solution is ALL options, where our politicians grow some spine and tell there lobbyists to kiss off, loosen regulations and let the free market go to work. What's the matter Frankel, afraid you might see an oil rig 50 miles out to sea with your binoculars? What's the cost-return ratio of doing nothing for another 30 years? Put those numbers up and you will have earned my lifelong respect. Afraid you might bump into some dead field mice in that wasteland called ANWR? How about Solar? Vote in on that moratorium too lately?

    What can we do Frankel? Walk to our jobs 30 miles away? Should we all live in eco-friendly pods crammed into cities like Japan? Seems telling that the Democrats like to associate with Fidel Castro and Hugo Chavez. We like THERE model better then ours? The Russians and Chinese? Get a grip man and stop advocating insanity. Gods and clods government systems have been shown to fail for thousands of years but Ted Kennedy says socialism will work if only HE can try it? He refuses to have a windmill at Marthard's Vinyard. Why? At least he is honest about the debate.
    Reply | Link to Comment
  •  
    Jul 15 04:19 PM
    To Brian27: Try posting your abiotic articles from the National Academy of Sciences on Wikipedia and watch how fast they get censored and you get banned...LOL.

    The vitalist/biogenic "fossil" fuel cult is afraid of the National Academy of Sciences just as the Cardinals were afraid of Galileo: www.pnas.org/content/9...
    Reply | Link to Comment
  •  
    Jul 15 04:33 PM
    To Brian27: I too have heard the abiotic thesis for the origin of oil. As to those who dismiss it, and eagerly adopt the thesis that coal and oil must have a biological origin (principally transformed plant matter), how can there be any concern with global warming caused by increasing levels of atmospheric carbon dioxide? After all, isn't the burning of hydrocarbons simply returning to the atmosphere the carbon that was previously there?
    Reply | Link to Comment
  •  
    Jul 15 04:48 PM
    Wow. This guy is just plain wrong-- what else can one say? I invite anyone to do your own research on the amount of recoverable oil off the East coast of the US-- the 'left' always puts forth the 'known amounts of oil' to describe Anwar, the Gulf of Mexico, and now the Continental shelf-- areas where even exploration has been illegal, but where oil has been found literally every place one looked. Do your own research- you will learn that the scientific opinion of geologists is that there are likely the same vast oil resources off our east coast as exists off the east coast of South America (PBR anyone?-- and I'm not talking Pabst Blue Ribbon!). The same for Anwar-- we find oil everywhere we look. The environmental lobby blocks exploration, then claims that 'we don't know of any oil'. Classic.

    As for greenhouse gases, do your own research. You will find that even remaining scientists that sign on to 'global warming' (fewer in number by the day) admit that the earth has not warmed since 1998. Why not? They don't know. Scientists not blinded by zealotry say that the solar cycles are much more important in affecting global temps, and we are entering a secular cool period.

    The bottom line is that we have loads of easily recoverable oil in this country and just offshore. Will we sit and watch China and other countries set up rigs in international waters to our east, or will we do the even easier drilling in shallower water, closer to shore but still far enough out so that the rich liberals don't have to see the rigs from their sailboats?

    This guy is just wrong-- find out for yourself. Go to the scientific sources of your choosing-- not an editorial page or a rag like the NYT. Read what science says about global climate change-- as things have changed since Al Gore made his movie. The good news for those of us who do the research is that the cooling trends will become obvious in another 5-10 years. Then the only question will be, will Al give the prize back?
    Reply | Link to Comment
  •  
    Jul 15 08:45 PM
    Mr. Frankel. I read your article. You are an idiot. Besides that you are not honest for you said "all the oil in all the offshore sites adds up to a few months of national consumption." On it's face you are dishonest and even mock truth that dominates the consideration.
    Reply | Link to Comment
  •  
    Jul 16 08:32 AM
    in 1974 everybody was all steamed up about solar, wind, tides, waves, you name it, then interest died. part of the answer has to be bituminous-coal conversion to liquid transportation fuels via 2-stage hydroliquefaction. this was recognized in 1980 but then all the projects were killed by r.reagan on orders from his houston oil millionaire buddies.
    > jack
    Reply | Link to Comment
  •  
    Jul 16 09:04 AM
    John, which buddies were those? Are you cliaming that R. Regan had the power to call up UCLA, for example, and order them to cease research into alternative energy sources? I never knew the President had the power to quash inventive ideas. Or was it that R. Regan killed the millions of government money spent on nonproductive projects? If the ideas were so great, why isn't (or wasn't) private money behind them? I suspect they were then, as now, promises made of far distant benefits
    Reply | Link to Comment
  •  
    Jul 16 10:42 AM
    You are right. Stick to economics. If you can prove global warming is in fact the threat you suggest, I will buy you a merlot.
    Reply | Link to Comment