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Silly me
I'd like to repeat how surprised I am at the size of the gains from drilling, or at least what appears to be the best current estimate of such gains. What happened is simple. I read people writing "Price won't go down much from drilling, therefore the gains are small," in various ways. That is a non sequitur because there is producer surplus as well! I committed a simple error. Yet again. And I committed this error because it fit in with my (nonetheless largely correct) preconception of politicians as bozos who will say anything for political gain or to sound good on TV.
Addendum: An Op-Ed on the topic. And here's a skeptical Andrew Sullivan reader. Like me, it doesn't seem he ever tried to look for a number.
Posted by Tyler Cowen on September 5, 2008 at 07:31 AM in Economics | Permalink
Comments
Then shouldn't you have thought that the anti-drilling politicians are bozos too?
Posted by: Hei Lun Chan at Sep 5, 2008 7:48:46 AM
politicians as bozos
And don't forget their many bozo supporters (of both major candidates, btw). For a small demonstration, see the hundreds (yes, hundreds) of bozo comments to one of Tyler's first Palin posts.
Posted by: chug at Sep 5, 2008 7:56:28 AM
In addition just because the price falls by a little bit doesn't mean that the increase in consumer surplus is trivial. Remember, the reason the fall in price will be small is that it will be enjoyed by billions of people.
Posted by: Alex Tabarrok at Sep 5, 2008 8:10:43 AM
Yeah, but cui bono? Who gets how much of the wealth?
Posted by: Diversity at Sep 5, 2008 8:14:16 AM
Drill, baby, drill! Run, Sarah, run!
Posted by: Jim at Sep 5, 2008 8:49:41 AM
My main objection with ANWR drilling is that it extends our dependence on oil, period. This has the unnecessary, but proven (in this country) side effect of discouraging other forms of energy supply.
Taking this one step further, my main objection to our heavy dependence on oil is not even primarily ecological: I'm concerned about being behind the curve when oil does run out.
I would be much more open to drilling if there were a guarantee that a % of the profits go toward the building of hydroelectric, solar, wind (etc.) farms/plants.
Posted by: meter at Sep 5, 2008 8:52:20 AM
I found some great pictures of the pristine (i.e., empty) area that they want to drill in and the effects of current extraction activities on large animals (caribou grazing near a well, a bear walking on the pipeline):
http://atlasshrugs2000.typepad.com/atlas_shrugs/2008/06/i-received-this.html
Posted by: Jim at Sep 5, 2008 9:06:59 AM
My main objection to drilling is that the oil is not going to get any less valuable. It isn't as though not drilling means never drilling. It isn't as though we won't need oil in the future. It isn't as though oil will be less valuable in the future. In the future we will be able to extract oil in a less environmentally damaging way.
It's not even an objection really, I guess I would at the margin prefer not drilling now to see how global warming shakes out then later depending on new information we can drill later if it is prudent. I'm not a strong advocate of not drilling or anything. I very much doubt it would do much good or harm in the great scheme of things I just think it would probably do less harm if it happened later.
Posted by: Michael Foody at Sep 5, 2008 9:42:07 AM
It is a very common theme that discoveries around the world are small compared to global supply/demand but very large compared to any company's profits.
These are HUGE opportunities for somebody.
And sadly those somebodies can reap their rewards even as oil consumers around the world still seek "solutions." (Maybe that is the key in identifying political BS, whether drilling is pitched as good, or as a solution.)
FWIW, I liked Justin Fox's piece on "all of the above" strategies, resurrecting Amory Lovins and conservation/efficiency to the discussion.
Posted by: odograph at Sep 5, 2008 9:45:20 AM
BTW Tyler, you might like this factoid: The word "coal" was never used in last night's speech (McCain at the RNC). That might be a first-timer for Republicans, a national energy speech without coal, or clean coal, ...
Posted by: odograph at Sep 5, 2008 9:47:45 AM
I accept the proposition that global warming has already spelled the doom of the Arctic ice sheet; therefore, I don't see how ecological objections can be made to new drilling in the arctic. The habitat of the polar bears is doomed with or without drilling. Ecological objections just seem like closing the barn door after the caribou have gone.
Posted by: tedm at Sep 5, 2008 9:48:05 AM
tedm, sometimes I have a box of cookies and I'm trying to eat just a few after dinner ... when I notice the box is almost gone anyway ... so I finish it.
I recognize that is irrational, but luckily it is only a box of cookies, and not say our last domestic oil supplies, or our last-best domestic fisheries.
Posted by: odograph at Sep 5, 2008 9:54:29 AM
Tyler, You just don't care about the environment or climate change. I'm making this as an observation, not as a judgment. If someone doesn't care about the environment, then of course it makes sense to just open those areas up and let them be exploited if it is profitable to do so, regardless of any effect on oil prices.
You may just want to argue that the oil would otherwise come from elsewhere (I don't know if you'd argue this), but this assumption implies that the supply curve is flat, which I don't think you believe.
Posted by: John H at Sep 5, 2008 9:59:00 AM
Let's say we just allowed drilling. If it wasn't economically viable, would it come out of the ground? Why do we even need to know the numbers?
Posted by: Andrew at Sep 5, 2008 10:21:37 AM
I'd almost be willing to do what is suggested in the first addendum, and "give ANWR to a consortium of environmental groups." That would satisfy the John Muir in my soul.
Unfortunately, I don't think they'd be really interested in the strategic half of the question - this is oil on federal land and should be "spent" optimally for not just us, but children and grandchildren.
Posted by: odograph at Sep 5, 2008 10:42:20 AM
Andrew says: "Let's say we just allowed drilling. If it wasn't economically viable, would it come out of the ground? Why do we even need to know the numbers?"
We need the numbers because producers, when allowed access to ANWR, do not take into account the social cost of their actions. It's a standard externalities problem, which is why they do basic cost-benefit analysis. It's not just the accounting cost that is incurred to get the oil, but you also need to consider the cost to society (because some people place a value on protecting these places).
Posted by: C at Sep 5, 2008 11:26:56 AM
Odograph, from last night's speach:
"We will produce more energy at home. We will drill new wells offshore, and we'll drill them now. We will build more nuclear power plants. We will develop *** clean coal technology ***. We will increase the use of wind, tide, solar and natural gas. We will encourage the development and use of flex fuel, hybrid and electric automobiles."
Posted by: Tom at Sep 5, 2008 11:33:39 AM
My main objection with ANWR drilling is that it extends our dependence on oil, period. This has the unnecessary, but proven (in this country) side effect of discouraging other forms of energy supply.
I always find this argument particularly inane. Essentially, you're saying that we shouldn't be using the cheapest and most convenient form of energy today, because that stops development of other more expensive, less convenient forms of energy.
We are not "dependent" on oil, we choose to use it because it has the highest utility per dollar (largely because of energy density) of any readily available fuel. Choosing to use a less desirable product when a better one is available is just nuts.
There will likely be a day when oil is not the optimal fuel, and we will have natural incentives to use others. But until then encouraging the substitution of oil with something more expensive makes no sense.
Basically, what oil gets us is transportation, or mobility. Maybe you'd like to return to a world where the movement of goods and people is more difficult and more expensive, but I don't.
Posted by: bartman at Sep 5, 2008 11:45:02 AM
But wait, aren't the taxes mostly pigovian? So the government revenue we would get from drilling would be addressing the inefficiencies caused by the externality of air pollution (as well as the "dependence on crazy foreigners" externality). You are counting only benefits and not costs.
Posted by: me at Sep 5, 2008 11:49:59 AM
...producers, when allowed access to ANWR, do not take into account the social cost of their actions.
What, exactly, are the social costs of drilling oil wells in the coastal plain area adjacent to ANWR? (Not in ANWR proper, I might add.) Are the caribou worried about the aesthetics of drilling rigs? Maybe we need to perform a contingent valuation of the utility that accrues to elk from having an "unspoiled" view of the tundra.
Posted by: bartman at Sep 5, 2008 11:50:25 AM
...producers, when allowed access to ANWR, do not take into account the social cost of their actions.
What, exactly, are the social costs of drilling oil wells in the coastal plain area adjacent to ANWR? (Not in ANWR proper, I might add.) Are the caribou worried about the aesthetics of drilling rigs? Maybe we need to perform a contingent valuation of the utility that accrues to elk from having an "unspoiled" view of the tundra.
Posted by: bartman at Sep 5, 2008 11:52:48 AM
Was the UK smart to have drilled aggressively ? ANWAR oil should be drilled in 2108 .
Posted by: lowrie glasgow at Sep 5, 2008 11:54:37 AM
Except we export a great deal of our own oil. So no, price wouldn't go anywhere.
Posted by: craptacular1964 at Sep 5, 2008 12:08:26 PM
C,
I agree with your point in principle. However, noone is in a position to know the numbers on the oil side better than oil companies. And noone can know the numbers on the environmental protection side other than the "some people." Unless I'm mistaken, it's some of the "some people" who don't even want exploration to determine the numbers. Throwing out hypotheticals may move the political football a few yards, but I don't think it changes the game.
If there was not a major amount of oil, production would not go forward. If there is a major amount of oil, then we need a way to capture externalities. But, do we capture externalities from oil today in a rational manner? And what of the externalities imposed by environmentalists? I don't think one can argue on the one hand that it's trivial, so it should be done, but it's of such incredible importance that it shouldn't be done.
Posted by: Andrew at Sep 5, 2008 12:13:02 PM
Except we export a great deal of our own oil. So no, price wouldn't go anywhere.
You're living down to your name, craptacular.
Most recent import/export/production data (from the EIA):
Crude imports: 9,830 bbl/day
Crude products imports: 2,804
Domestic production: 5,109
Total supply: 17,743
Crude exports: 26
Crude products imports: 1,363
As you can see, crude exports are 0.15% of the total supply. Crude plus products exports make up 7.8% of total supply.
Most of the exports are to Canada and Mexico, but we are a net importer from both of those countries.
So, your claim that we export a lot of our own oil is easily demonstrable as, uh, crap.
Posted by: bartman at Sep 5, 2008 12:53:37 PM
