Energy

Drill, Baby, Drill?

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Many of this week's biggest applause lines had to do with drilling for oil. I, like Tyler Cowen, tend to assume that anything that comes out of a politician's mouth that involves economics (particularly anything in that category that induces a stadium of delegates to cheer) is probably dumb. But wait! Wouldn't it be great if someone had actually done a study to quantify the potential benefits of drilling? Ta da!:

The best estimate of economically recoverable oil in the federal portion of ANWR is 7.06 billion barrels of oil, a quantity roughly equal to US consumption in 2005. The oil is worth $374 billion ($2005), but would cost $123 billion to extract and bring to market. The difference, $251 billion,would generate social benefits through industry rents of $90 billion as well as state and federal tax revenues of $37 billion and $124 billion, respectively.

These figures are from 2007 when oil was roughly half the price it is today. Cowen updates the numbers for a rough estimate of $600 billion in benefits (minus environmental costs). That's, give or take, the GDP of Brazil.

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  1. So how long would it take to extract those tax…er, oil deposits?

  2. These figures don’t mean much without some perspective RE at what rate can it be extracted. It’s not as if they would be able to extract that 7.06B barrels all at once. Is that over ten years? 20 years?

  3. We need to drill anywhere so we get more cheap oil to run our nations fleet of SUVs on.

  4. Why don’t we just knock over some tin-plated Middle East country with lots of oil and use that? What could go wrong?

  5. The most disturbing thing:

    Assuming those numbers are correct that means that $251 Billion in oil profits generate $161 Billion in tax revenues. Two thirds of the economic benefits go to taxes? Ouch!

  6. Ok, that’s the number for the oil. What happens when you add in the natural gas, as well? Because they keep finding more and more of it up there, including recoverable gas hydrates.

  7. Continuing down Episiarch’s path, why don’t we treat Iraq as a giant piece of real property and sell it back to the Iraqi government. We’ll hold the note, since they can’t afford the full price, payable in monthly installments of oil.

    Problem solved! Rejoice!

  8. The oil will eventually be tapped. I have no doubt about that. What really gets me is when the candidates start plugging the idea in the cause of “oil independence”. Not only do we get to stick it to the Arabs, but but somehow all our petroleum needs will be met domestically. This is a pure magical alternative universe scenario on par with snake handling and crying over dead trees.

  9. Id like to see the same study for the Cali/Florida coastlines. Betcha it would be 6×8 times more…betcha we’d see 6×8 times less enthusiasm for drilling. Why?

  10. Shecky,

    Thanks for the shout out.

    And regarding “Energy Independence” – oil is a commodity, and bought and sold on the global commodity market. So doesn’t that mean there is not such thing as “domestic” and “foriegn” oil? Doesn’t the US export oil to around 70 countries itself? If we really did want to only buy oil from domestic sources, wouldn’t there have to be a special, US only market set up? Which would mean the price of “our” oil would go up?
    Am I crazy or does that sound crazy? Could somebody tell me if my econ 101 knowledge of this is wrong?

  11. How on earth could it costs $123 billion to extract? Jesus that seems like a large sum.

    The oil will eventually be tapped. I have no doubt about that.

    I think the breaking point is about $5.00 a gallon. At that point, most would tell Santa Clause to get out of the way if he was sitting on oil.

  12. I think the breaking point is about $5.00 a gallon. At that point, most would tell Santa Clause to get out of the way if he was sitting on oil.

    Looks like gas is going to go back under $3 before it hits $5. McCain is going to feel dumb for putting all of his economic policy eggs in this basket.

  13. Tax revenues are social benefits nowadays? How about just letting the oil companies take the oil directly to market, I rather pay a lower price at the pump, than have some Washington politician using the oil revenue for his own private pet projects.

  14. This should be a states’ rights issue. If the people of Alaska want to drill, so be it. I shouldn’t have a say in the matter.


  15. Looks like gas is going to go back under $3 before it hits $5. McCain is going to feel dumb for putting all of his economic policy eggs in this basket.

    I’d wondered about that. The prominent Repub rallying cry is “Drill!” Of course in the real world, drilling has a cost, not only financial, but environmental. People tend to not like developing when it isn’t really necessary. And a great deal on NIMBYism. The latter probably doesn’t much to ANWR, but certainly the coastlines of CA and FL. I’m not sure the breaking point has been reached as of yet, and falling gasoline prices might deflate McCain’s line of attack.

  16. That’s, give or take, less than a year’s supply of oil. After that, the gov’t will have to find something _else_ to steal from our children to keep the wheels turning and the masses voting…

  17. As an economic development initiative, creating all those jobs making all that money, restarting drilling could be a big deal.

    Selling it as the cure for high oil prices was always b.s., though. A b.s. argument about a contemporary threat that the Republicans used to sell a project they’d been wanting to do, for reasons wholly unrelated to their pretext, for years. Sound familiar?

  18. I gotta agree with Texas Conservative. Why do we have national parks/wildlife refuges again? Can’t the states run them just fine?

    I don’t think drilling will do jack shit for the price of gas but if the folks in crazy-go-nuts land (Alaska) want to drill, they can fucking drill.

  19. Let’s just annex Iraq (“East Carolina” has a nice ring to it), make them and Puerto Rico the 51st and 52nd states, and see about adding a few others over there.

  20. Hey, there may be some engdangered species of artic moss in ANWR. Or something. You can’t be too careful y’know. It is impossible to drill for and extract oil without completely despoiling the surrounding environment.[/snark]

    No, ANWR is not a panacea. No, the oil will not be on the market next fucking week. No, It will not eliminate the need for imported oil. Yes, it will cause some environmental damage.

    Yes, it will pump billions into the economy and billions more into that gaping financial hole, the federal treasury. Yes, the oil will start hitting refineries in 5-10 years when the price of gasoline will be ___. Yes, it will somewhat reduce our dependence on foreign oil. No it will not destroy the “pristine wilderness” known as ANWR.

  21. Pro Libertate, we are, and shockingly-enough for economics 101 clueless lefties, The Nation covered it pretty well,

    http://www.thenation.com/doc/20041101/klein

    despite a somewhat deceptive/partisan headline the problem is clearly bipartisan corruption — generally by those who call actual Libertarians “extreme” and libertarian ideas “unworkable.” Bipartisan corruption? Now THAT’S workable!!

  22. Californians and Floridians don’t want drilling because the revenues they’d make from oil are dwarfed (by an order of magnitude) by the amount of money they make from tourism. If you damage the Florida tourism industry, prepare to kiss those electoral votes goodbye.

    That, incidentally, is why noted oil man GW Bush extended the drilling ban in Florida. He didn’t want to screw over his brother.

  23. I think the argument that it would provide jobs and pump money into the economy is a better argument for drilling than it reducing the price of gas.

  24. This should be a states’ rights issue. If the people of Alaska want to drill, so be it. I shouldn’t have a say in the matter.

    Can’t really frame it as a state’s rights issue when ANWR is federally controlled, IIRC. I grudgingly suppose the Feds should have a say with that particular spot of land. Mining rights and such can get pretty weird sometimes.

  25. Nevertheless the Republicans chanting DRILL BABY DRILL! like they were getting massive erections from thoughts of oil rigs was pretty pathetic.

  26. The Extispicator,

    In the 70s, the Kurds offered themselves to us as the 51st state, but Nixon said no.

    The fact that they werent even a self-governing region at the time probably was part of the problem.

  27. States righs issue v. Federal land? Easy, it should be sold to the highest bidder and let the new private owner decide.

  28. Well, Tim, that’s the eventual solution. Baby steps, baby steps.

  29. In my dream world the federal government sells all the land it holds and uses the proceeds to pay off the federal debt.

  30. “In my dream world the federal government sells all the land it holds and uses the proceeds to pay off the federal debt.”

    I doubt the money would come close paying it off – particularly since the REAL federal debt total isn’t recorded on the feds books. Unlike publicly traded corporations that have to use accrual accounting, the federal government runs it’s books on a cash basis.

    I read somewhere that the Social Security and Medicare trustee reports said the unfunded liabilty for those programs calculated on an accrual accounting basis is somewhere around $100 trillion dollars.

  31. Gilbert-

    It would be a start. Obviously, more would need to be done, like abolishing about, oh, half of the federal departments which currently exist.

  32. BDB,

    In the early 1980s the federal government did try to sell off a lot of land – they didn’t get that many takers as I understand it. That shouldn’t be that surprising.

  33. I’ve wondered about it. Here in S. CA, there’s LOTS of federal land. But as far as I can tell, an awful lot of it is federal land… pretty much because it isn’t worth a whole lot to anybody.

  34. “It would be a start. Obviously, more would need to be done, like abolishing about, oh, half of the federal departments which currently exist.”

    I’d say about 75% to 80% of federal departments would be more like it.

  35. Well, heres what would go were I dictator:

    Everything but Department of Defense, Justice Department, State Department, Commerce Department, and Postmaster General.

  36. “In the early 1980s the federal government did try to sell off a lot of land – they didn’t get that many takers as I understand it. That shouldn’t be that surprising.”

    I don’t recall any details about that but any attempt to sell off huge amounts of land would have to be stretched out over time to avoid depressing prices that would severly impact the revenue received for the properties.

    Large mutual and hedge funds have the same problem if they try to liquidate a position in some stock they hold. They have to sell their position off piecemeal to keep from driving the trading price down significantly.

  37. I don’t think drilling will do jack shit for the price of gas

    I am intrigued by your ideas about the laws of supply and demand and wish to subscribe to your newsletter. do you accept carbon credits?

  38. These figures are from 2007 when oil was roughly half the price it is today. Cowen updates the numbers for a rough estimate of $600 billion in benefits (minus environmental costs). That’s, give or take, the GDP of Brazil.

    Before we go accusing politicians of being sloppy, we should note that these benefits would be spread over time and so cannot properly be compared to an annual figure like a country’s GDP. I’m no economist, but even I’m aware of that. Over 30 years, the benefits are $20 billion a year.

  39. How can the authors of the study claim any accuracy in their findings when modern topographical methods used for discovering crude reserves are not allowed in ANWR and other areas under moratorium? The only studies I see like these use primitive survey maps from the 70’s and extrapolate based upon tectonic divisions that arose
    hundreds of millions of years ago. What a joke.

  40. Gilbert Martin,

    Well, if I am not mistaken they were in many cases trying to sell directly to the resource users themselves.

  41. I’m sure that others have pointed out above all of the costs the “study” is ignoring. And, I’m sure they’ve pointed out that those costs include EnvironmentalCosts, the potential costs of cleanup, the costs to communities affected negatively, and so on.

    Why, without even looking, I’m sure that libruhtarians pointed out those other costs rather than ignoring them for $ome $trange Rea$on or other.

  42. Economic Retard-

    You have an appropriate name.

  43. I’ve wondered about it. Here in S. CA, there’s LOTS of federal land. But as far as I can tell, an awful lot of it is federal land… pretty much because it isn’t worth a whole lot to anybody.

    Really? How much do you think you could get for Camp Pendleton? I’m not a real estae expert but I’ve heard rumors that Southern California coastal real estate is fairly valuable.

  44. Longer answer-

    The amount of supply that would come from drilling is so tiny compared to consumption (and far down the line) and the amount of demand growing so quickly (China, India) that, at the end of the day, it would do jack shit (maybe a penny) to the price of gas–10 years later. It would be a drop in the bucket on the world oil market.

    But like I said, they can drill anyway. It isn’t any skin off my back and will provide some jobs.

  45. Does Bristol Palin count as a biologically sensitive area? In that case, Alaska’s been drilling them for awhile…

  46. Nigel FTW

  47. The Feds hold FAR more land than Camp Pendleton. Unfortunately, most of it isn’t coastal. If you don’t believe me, I’ll sell you a plot of federal land out in San Bernadino county for a good price. You could probably even homestead it for quite a while before anyone would notice.

  48. The amount of supply that would come from drilling is so tiny compared to consumption (and far down the line) and the amount of demand growing so quickly (China, India) that, at the end of the day, it would do jack shit (maybe a penny) to the price of gas–10 years later. It would be a drop in the bucket on the world oil market.

    That pretty much applies for every oil field. All you are saying is that a lot of oil wells already exist and a lot of oil is already being extraced. I knew that.

  49. Economic Retard-

    You have an appropriate name.

    Dude, I’m an acolyte of yours. I totally agree with everything you’ve said. Demand affects price, supply can only affect price by 1 cent, right?

  50. That pretty much applies for every oil field. All you are saying is that a lot of oil wells already exist and a lot of oil is already being extraced. I knew that.
    Could you explain it to the folks who just returned from the RNC, then, please? They seem to think it will set us free of foreign oil and give us free SUVs for life.

  51. shecky,

    I’m aware that a lot of federal land isn’t worth a whole lot. The feds own lots of desert that has no minerals worth extracting. They also own lots of forest that has shitloads of timber. I would love to see a comprehensive professional independent valuation of federal property.* From the Pentagon to ANWR. I find reliable numbers are kinda handy when discussing things like assets and debits. But that’s probably just me.

    * I’d be grateful for any links but I have serious doubts that appraisal has been performed and compiled.

  52. J sub D, I don’t dispute your point. I just wondered about the viability of putting such federal land on the auction block. For a good deal of it, there’s not a lot of worth to be had. And around here at least, lots of it has high value as publicly owned recreational use area. Hell, my favorite shooting spot is public land. It’s not as if the land has zero value. It just has little value to most private concerns.

    Another point, it’s not as if the holdings don’t produce some wealth. Federal lands in S CA are bristling with active mining claims. However, it seems most of the claims are not actively mined. Some seem to have started back up with the price of precious metals going up. If anything, I’ve been surprised at the lack of activity. The usual mode of business seems to suggest buying actual property and mining rights simply isn’t as economical as getting the rights alone.

  53. Over at MR, Alex Tabarrok made an interesting point that even if the price falls by only half a cent, you should still account for that because that’s a benefit that applies to everyone in the country.

  54. The best estimate of economically recoverable oil in the federal portion of ANWR is 7.06 billion barrels of oil, a quantity roughly equal to US consumption in 2005.

    And if you erect just one apartment building in New York, it will shelter only a few hundred people, not nearly enough for the entire nation’s housing needs.

  55. I love people who get to the demand curve on page 6 of a text book and think they’re educated.

  56. The United States uses 25% (currently) of the world’s oil. This figure is falling.

    If we assume 40 years to get that oil out (hugely optimistic, the Trans-Alaska pipeline is going to be moving oil for decades to come, and it’s nearly 30 years old), that’s 0.625% of global annual use. This assumes that China, India, the US, and everybody else stay at current levels.

    That’s an awful lot of money to make, but if you think getting to page six in Ekonomiks for Dummies is a good enough reason to proclaim that this is going to effect global costs, you really out to sign up for the spring semester of that class. And maybe take some math.

  57. joe, If one ANWR has zero effect on world price, then five, ten, or fifty ANWR sized fields coming into production would also have no effect.

    Of course it will affect the world oil market price. Not a whole heck of a lot, but some. Anybody with an IQ above room temperature realizes that.

  58. If drilling would provide so much relief and so many jobs, then why isn’t it already happening? According to lots of sources there are huge … tracts of land already leased by oil companies (at $2-$3 per acre) on federal lands, and hardly any of those leases are being exploited. Lying fallow, if you will.

    Why aren’t they drilling on land they already lease? And why make a play for the more sensitive areas currently off the table? Just to stir up the enviromasses?

  59. From AP:

    Even as more land is opened for leasing, it’s questionable whether the industry has the resources to explore it. The Cheney task force concluded that very few new onshore oil drilling rigs have been built since the mid-1980s, because of price volatility in the oil field supply and service sectors.

    A recent Wilderness Society study found that BLM has approved more than 25,000 drilling permits for public lands over the past decade, but the industry had drilled only about 19,000 new wells during that period.

    “Even without additional leasing, if the current inventory of non-producing leases were placed into production, the scale of drilling on public lands would increase dramatically, as would the degradation of lands where drilling is wholly inappropriate,” the report concluded.

  60. James,

    I don’t know why oil companies are or aren’t exploring their existing leases. There could be many different reasons for that, such as the quality of the oil to be extracted, difficulty, etc. Frankly, whether or not they actually drill the land is inconsequential to me, as it won’t really affect my life very much. The real issue here is that we shouldn’t be banning drilling in these oil rich areas as a government. Whether or not they sit on the land doesn’t really matter if it’s their land to sit on.

  61. “Assuming those numbers are correct that means that $251 Billion in oil profits generate $161 Billion in tax revenues. Two thirds of the economic benefits go to taxes? Ouch!”

    Not so bad if this includes roylties and bonus. If the land drilled is public land then the landowner (goverment) should be getting a large share of the value. Typical the landowner gets 1/8 or more the gross production plus a sweet bonus payment. The oil company assumes all the risk but they don’t own the oil and gas so they have to pay a dear price to there “partner” who owns the oil and gas rights (OGM’s). Taxes suck but since the goverment owns the OGM’s on most public land they should get as much as can for the leases.

  62. The Trans-Alaska pipeline peaked at about 2 million barrels/day in 1988. Now, it’s down to about 750,000 barrels/day. The minimum rate at which the pipeline remains viable is somewhere in the 200,000 to 400,00 range.

    If we don’t find additional oil sources up there to send through that pipe, it won’t be economically viable to keep ANYTHING flowing through that pipe.

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