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Thursday, January 22, 2009

Domestic Oil Drilling Still Is The Answer

Dramatic increases in domestic drilling were offered as the answer to many of our economic problems last summer when gas was approaching $4 per gallon. Even Democrats were forced to recognize the need to open up some offshore drilling, and pressure was building to drill in ANWR in Alaska. Yet Barack Obama is in the process of cutting back on the small increases which were agreed upon.

Now that gas is down below $2 per gallon, drilling is still the answer, and even more so.

Domestic drilling in an economic downturn makes even more sense, because there is no global demand to soak up increased production, so the effect in lowering prices should be more dramatic than in strong global economic times. The low prices and weak global economy also make it difficult for OPEC countries to cut production because so many OPEC countries rely on oil revenue almost entirely; it is not feasible for these countries to cut production unless the cuts increase oil prices, which will not happen in this global economic environment.

Lowered oil prices provide a direct and immediate financial stimulus for American families without any cost to the U.S. Treasury. The most obvious benefit of increased domestic oil production is lowered gas prices, which saves families hundreds of dollars a month. Lowering gas prices will do more for American families than the $1000 tax "rebate" checks Obama wants to send to people who don't pay taxes, putting money in the pockets of lower income families without turning almost half the population into welfare recipients.

Lowered oil prices also lower prices of goods that require shipping by truck, such as food, and products based on oil, such as asphalt for roads. Businesses that rely on car travel or equipment that uses gas also benefit. From the food shopper to the construction worker to the taxi driver, Americans at every level -- but particularly the middle class -- will benefit from increased domestic production. The increased economic activity will create permanent jobs, not just short term make-work jobs which have no economic justification.

Domestic drilling, and the lowering of oil prices, also helps in foreign policy. The regimes in Venezuela and Iran cannot meet their budgets at the current oil prices, and even lower prices at a minimum will hamper these countries from exporting their anti-Americanism. Russia also is highly dependent on oil revenue, and lower oil prices may inhibit Vladimir Putin from his increasingly hostile path. It is very possible that an all out push to lower oil prices will bring down hostile regimes without firing a shot.

Increased domestic drilling is not the only answer, but it is an important part of the answer. And it beats destroying the dollar and socializing our economy through trillions of dollars in new government spending programs.


  1. Thanks for mentioning this. It's past time to realize that if we do nothing now, we are simply asking for a repeat of $4/gallon fuel in the (not so distant) future.

  2. Professor Jacobson,

    You've overlooked a few important points:

    1. Crude oil in the United States isn't a nationalized resource: no matter if the crude comes from Texas, Nigeria or Saudi Arabia, it's extracted by multinational companies and placed onto the world market for anyone to purchase. Increased domestic production simply puts more crude on the market.

    2. Assuming we were to open ANWR and start producing crude today, OPEC would simply respond by adjusting their production downward to allow for the increased market supply. That would keep crude prices stable.

    3. Domestic drilling makes the best sense when it responds to scarcity in the market: it means we can negotiate more favorably with oil companies on terms of leasing and production agreements. If scarcity is not an issue, and if it costs more for an oil company to produce a barrel of oil than it does to sell it, increased domestic drilling doesn't make economic sense.

  3. I hear you, but opening up new drilling areas sends a signal to the market about future supply, which affects prices. In the current global economy, OPEC does not have the pricing power it used to have, so adjusting their own output will not work as well as in the past. Also, many of the countries are caught in a bind. Normally, decreased production does not result in a revenue drop because of increased price, but now decreased production will result in a revenue drop. Opening up new areas for production is not the only answer, but it would help in both the short and long run.

  4. I disagree with your original post as well as your follow-up to Victor's post. I elaborate on my disagreements throughout. To begin, I'll paraphrase what Victor said and add to it a bit:

    >> Drilling for oil domestically simply puts more oil on the world market. Producers have no obligation outside of a nationalized oil industry to provide oil to the US at a rate less than the world market will bear.
    >> But what about a price drop from increased supply? First, OPEC can afford to reduce production to maintain supply at whatever equilibrium point they require - in other words, they are big enough to manipulate the market. It would take a long time to put enough domestic oil reserves into production to challenge OPEC's market strength. Second, there's no economic reason outside of a nationalized oil industry to combat OPEC's desire to maximize profit on oil. All players share the same incentive.
    >> Signals, as you mentioned in your response, are short-lived. They are market reflexes at best. The long, slow ramp to substantially higher domestic oil production and the reluctance of Americans to nationalize industries is well known. Considering that estimates for ANWR are between 5-10 years (as I recall) to bring online, you can probably measure in decades the amount of time required to realize the level of production you're referring to.
    >> Increased demand is inevitable. If countries such as China, Brazil, India, or Russia become "superheated" in the next 10+ years, they will have every reason to bid the price of oil up, which represents a demand shift ... a price shock. That will send a signal as well, but not one that consumers will like. It's reasonable to assume one of these maturing economies will have a few strong bull years at some point and each one will be a demand shift towards higher prices.

    Where I disagree with you is that the particular signal you mentioned is effective and changing the price level. Suppliers may move the needle a bit upon announcement, but there's a big difference betwen an announcement and having the near-term ability to put millions of barrels of oil per day on the market.

    You say OPEC does not have the pricing power it used to have. OPEC is 40% of the market and is projected to increase its market share. Betting against OPEC's pricing power is, frankly, unwise.

    We need to rely on oil long enough to wean ourselves off of it. If that's what you're saying, then conceptually we are in agreement. I'm open to the idea of increased drilling if it's part of a plan to ultimately reduce our oil dependence; that's the extent of my interest in it. I think technical and business ingenuity in solar, wind, and hydro as well as investments in nuclear are essential. Converting one of the major users of crude - cars - to electric and providing the infrastructure to handle that conversion should be our number one priority. But it should only be the first of many similar steps to independence.

  5. Remove the artificial contraint on the market and see what happens. Let the market determine the right answer. Removing the restrictions on drilling is no cost. Removing federal subsidies for alternative energies is cost savings. If in fact, domestic drilling will not be profitable, then no profit-seeking entity will seek to exploit the opportunity to drill. Let the market function!