Offshore drilling is an easy call

By ROBERT HAHN & PETER PASSELL
Since the oil market is global, the effect of drilling on the price at the pump would be negligible, say the authors.

Barack Obama’s surprise announcement that he plans to open a big swath of coastal waters to offshore drilling apparently had little to do with energy security and a lot to do with the politics of a climate change bill. In search of congressional support, Obama is clearly hoping to pick off a few senators by attaching language to the new bill that would funnel lease royalties to the states.


We have no idea if his tactic will work, but early signs suggest it won’t. Democrats are wary of running afoul of the environmental lobbies, while Republicans seem bent on pursuing a scorched-earth approach to all Obama initiatives.


Still, you’re probably wondering whether more drilling is worthwhile on the merits.


Glad you asked. We’ve been looking at the economics of offshore drilling since the 2008 presidential campaign — when oil was selling for $140 a barrel and Sen. John McCain (R-Ariz.) and Sarah Palin got some traction with “drill baby, drill.” We ran the numbers then in a research paper and bringing them up to date doesn’t change much.


There is still a lot of oil and gas that could be lifted for far less than the market price — some 18 billion barrels of oil. This could add a million barrels a day to U.S. production by 2025.


But as big as that number sounds, a million barrels would represent just 1 percent of world oil production by the middle of the next decade. Since the oil market is global, its effect on price at the pump would be negligible — also around 1 percent.


But at least that oil would make the United States a bit more secure. Drilling could increase domestic production by roughly one-sixth, displacing an equivalent amount of oil from Canada or Venezuela or Saudi Arabia.


But that common sense idea doesn’t hold up to scrutiny. In a global market, oil goes to the highest bidder. So unless the United States has to fight World War II again, and is forced to ferry oil tankers across the oceans in convoys, where oil is produced matters little to consumers.


The real economic issue here remains whether the benefits of drilling — the value of the oil and gas extracted, less the cost of extracting it — exceed the costs — the risk of environmental damage and, in the case of Alaska, the loss of pristine coastline.


That’s still an easy call, at least by our calculations. Oil is worth about $50 a barrel less in 2010 than in 2008. But the costs of extracting oil from beneath relatively shallow coastal waters are low enough that it would be worth the effort — even at $80 to 90 barrel.


Indeed, what MBAs call the “present value” of the net benefits would still exceed $1 trillion, cash that would presumably be divided among state and federal governments and the oil companies.


In a rational world, you’d think all those cookies — and the prospect that the states would have a chance to stick their hands in the cookie jar — would sway some politicians. But, hey, rationality seems in short supply these days — at least in energy policy circles.


Bob Hahn and Peter Passell are the founders of Regulation2point0.org, which features original content and aggregation on economic regulation.