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Brooks Wilson's Economics Blog: McAuliff on the Restarting American Offshore Leasing Now Act

Tuesday, June 28, 2011

McAuliff on the Restarting American Offshore Leasing Now Act

Michael McAuliff, a writer for the Huffington Post, seems to oppose the Restarting American Offshore Leasing Now Act, which would expedite drilling in Alaska and the Gulf, largely because he finds arguments offered by supporters as specious (“More U.S. Oil Drilling Won't Lower Gas Prices, Experts Say”). 

The Bill was sold as a plan to bring lower oil prices, move the country towards energy independence and create jobs.  McAuliff hits an easy target; politicians always oversell the benefits of their activities.  He uses Mike Lynch, an oil analyst for Strategic Energy and Economic Research, Inc. who identifies himself as a moderate Republican and Phyllis Martin, an analyst with the U.S. Energy Information Administration to evaluate the oversold benefits.Lynch and Martin argue that implementation of the legislation would not reduce oil prices now and would have little impact in the future.  Lynch believes potential production increases in the U.S. are too small to have much impact on world prices.  They also argue that increased production would not make us energy independent.  The analysts agree that new drilling in Alaska would create jobs, increase tax revenue, and earn a lot of people a lot of money.

I believe that the analysts are largely correct, but a little depends on your interpretation of key words.  Assuming that drilling in Alaska increases world production by one percent, that gas prices are $4.00 per gallon and elasticity of demand ranges between 2 and 3, prices would fall between 8 and 12 cents a gallon.  I would call that a significant project.  Drilling in other locations and increased use of hydraulic fracturing and other new technologies would further increase production and, holding other things constant, decrease prices.  I agree with the analysts that the U.S. is unlikely to achieve energy independence through increased drilling even if it would reduce the amount of oil we import.  McAuliff seems to have a problem with oil companies profiting from their activities.  I do not.  If big oil can create jobs, increase profits and reduce the price of gas and other oil-based products, I am all for it.

McAuliff seems to have an unstated argument--drilling increases pollution.  It is an argument that I respect.  There is a tradeoff of pollution and wealth.  Wealth enhancing economic projects increase pollution even when cost benefit analysis justifies a pollution causing project.  Some people value a more pristine environment than a little more wealth and for them, marginal costs would exceed marginal benefits.

1 comment:

  1. Morgan Heeke7/7/11 12:51 AM

    There are positives and negatives to this argument and I find it hard to agree with one side or the other. On one hand, this is what our country needs to get motivated to find other sources of energy. With gas prices so high,there is a stronger pull towards solar and electrical cars, which is better for us in the long run. It would help our economy in the short run, but it would harm society overall more in the long run.

    On the other hand, with the economy suffering as much as it is, this would be a boost that we need. We could create new jobs and generate more taxes, which would help us with our debt. We would be less reliant on the middle east for their oil and make us more independent.

    However, like you said, it comes down to a battle between pollution and wealth. In the long run, it would be better to not drill. For the time being, it would be better for us to drill in Alaska.