The EIA (Energy Information Administration) has released a report on the impacts of increased access to offshore continental supply of oil and natural gas in the lower 48 states. Their conclusion -- no significant impact and it would take quite a while to get these sources up and running. I don't know what the impact would be if you add in access to ANWR. I have to think the EIA has that info someplace, too; I just didn't go looking yet.

People do seem to have a great deal of trouble understanding the dilemma energy presents us. I just read a letter in my local paper saying the solution to high gas prices was to get rid of all the liberals in Congress because then all the currently off-limit sources of oil would be open to drilling. And then, gas would be cheap,he said. I think many people don't realize how oil is much more than gasoline for their cars in our way of life. When this ignorance is coupled with political absolutism, I think there's little chance of changing the way we do business.

Here's the EIA on impact of access to ANWR:

With respect to the world oil price impact, projected ANWR oil production constitutes between 0.4 and 1.2 percent of total world oil consumption in 2030, based on the low and high resource cases, respectively.17 Consequently, ANWR oil production is not projected to have a large impact on world oil prices. Relative to the AEO2008 reference case, ANWR oil production is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light (LSL) crude oil18 prices of $0.41 per barrel (2006 dollars) in 2026 in the low oil resource case, $0.75 per barrel in 2025 in the mean oil resource case, and $1.44 per barrel in 2027 in the high oil resource case. Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount.

"After all, why use numbers when we can say that this is just a question of values -- the environment or cheap energy?"

Hit the nail on the head there. The vast majority of Americans are mathematically illiterate, and that fact has become a lever of manipulation in myriad ways by many interests. Dean's 'crude numbers' are a start at wading through and finding 'truth,' but we need more than standard accounting in assessing issues such as wether to open ANWAR, etc. The 'work' the environment does is most often completely discounted because calculating it is considered to be too diffuse and subjective for the 'hard numbers' of economic calculus. Rather than devising a means of including this tremendous element of the equation into our calculations, both sides of the debate instead appeal to emotion. Systems ecologist Howard Odum went a long way toward developing an honest and complete means of accounting in such situations in the 1970s. It is tragic that his ideas have not been more widely disseminated. Economists and citizens in general would do well to understand his work and learn to apply a full accounting to our decision-making processes.

The EIA information posted by Aunt Deb gives lie to the notion being promoted that opening ANWAR, the coasts and any and all other areas to drilling will significantly lower prices at the pump. It will, however, increase the profits of the oil companies allowed to drill in such areas, who would like very much to increase the supply they can bring to market while counting on OPEC to keep the price where it is.

Dean: This is exactly right. And the real point is quite simple: why don't any journalists actually ask Bush/McCain how much the price of oil would come down and when, if we start drilling off Florida tomorrow? Just asking the question would help...

oilmonkey wrote,
It will, however, increase the profits of the oil companies allowed to drill in such areas...

Yep.

Thanks, Dean. And what about the other side of the equation? Dunno about quantifying the impact to the environment, but someone informed could cenrtainly make some qualitative observations about what such costs would be.

OK, then, how do you quantify the environmental risk? You are acting as if addressing one half of the equation solves the problem. What if, as is the case off the western Florida Panhandle, what is there is natural gas, not oil? Then, no effect on gasoline prices at all, but also much less environmental risk.

Do you apply the same logic to the effect on gas prices of releasing crude oil from the SPR?

Of course, every potential source of energy will meet only a small percentage of the total requirements. Should we reject all options that don't reach, say, a 10% threshold? 20%? Or would that leave us with nothing at all?

World use of oil at the currently-projected rate will require discovery and exploitation of deposits much larger than the known US deposits. This has happened in the past, but not for the last 30-40 years.

The issue is not really exploitation of known reserves, but whether a) huge new deposits can be found, or b) some alternative to oil can be developed. Coal is a possibility only if a technological solution to CO2 emissions can be found, or if global warming is ignored.

"The issue is not really exploitation of known reserves, but whether a) huge new deposits can be found, or b) some alternative to oil can be developed."

...or c) some alternative to an unsustainable economy dependent on perpetual growth and ever greater supplies of energy beyond which our limited planetary system can provide can be developed.

Dean, what's your view on the role of speculation in the current price of oil? I've heard the idea dismissed out of hand, and then heard it claimed that repeal of the "Enron loophole" would result in a quick price drop of 25% or more. How about some credible guidance on the subject?

I applaud the effort to evaluate the trade-offs involved. This is exactly the way it should be debated.

However, the goal of producing a resource is not to lower the price of the resource. It is to have the resource available to meet human needs. Price is an outcome, not a goal.

The market is telling us that a barrel of oil is worth $135. By this we now that people are willing to pay at least $135 for a barrel of oil because it meets at least $135 of their needs.

If you drill for oil, you get barrels of oil that people value at $135. If you don't you get a modestly nicer caribou reserve, or something along those lines.

Imagine there is a brieface in the ground with $135 in it. We could dig it up. Then we'd have something worth $135, but we'd also have a hole that a caribou might fall into. Which outcome is the best for society? I can avoid the hole, but it will cost me the briefcase worth $135. Does society prefer $135 or the hole? This is a subjective question over which individual members of society can disagree.

But notice that digging up the briefcase doesn't affect oil price at all. That doesn't prove it should be left in the ground.

diz wrote, If you don't you get a modestly nicer caribou reserve, or something along those lines.

Uh, wrong. You also keep the oil in the ground for future use if it's really needed.

Given that all evidence is that oil is going to become scarcer and scarcer, why anyone (any American, that is) thinks that exhausting the US's own supply of oil sooner rather than later is a good idea in terms of national policy is out of his mind.

It is not the media's job to present "information" to the public so that it can make "decisions." The job of the media is to bend over backwards not to appear biased, which translates into presenting Republican ideas and arguments as if they are not completely insane, utterly worthless, or laughably irrelevant.

I'll try again:

Given that all evidence is that oil is going to become scarcer and scarcer, why anyone (any American, that is) thinks that exhausting the US's own supply of oil sooner rather than later is a good idea in terms of national policy is beyond me.

diz wrote, Does society prefer $135 or the hole? This is a subjective question over which individual members of society can disagree.

Uh, no---it's actually an improper framing of the alternatives.

One of the alternatives is not digging now and realizing that gives us the option to recover the resource sometime in the indefinite future.

Preferably a future when the people who actually own the oil---viz, the citizens of the United States---are the ones who actually capture the value of the natural resource itself. (That is, minus the capital costs of its recovery.)

When it comes to offshore drilling, we are also messing with what amounts to a religious belief. We could sweep the whole debate under the carpet as long as we had an assured, unlimited supply of cheap imported oil. Since we can no longer be assured that is the case, we are starting to have the debate we've been avoiding for a generation.

Liberal makes a very good point. Sometimes drilling in the U.S. is raised as a national security issue, but in fact the logic is exactly the opposite of the way it is usually presented.

As long as the oil is in the ground, we have the option of drilling it out at some future date, if we decide that we need it badly enough. However, once we have pulled the oil out, we no longer have this option. If we are worried that our access to foreign oil will be cut off at some point in the distant future when we'll really need it, then it makes no sense to pull oil out of the ground today.

Taking a couple of EIA reports - one on ANWR and one of offshore and my back of the envelope calculations - I get about a $0.03 a gallon reduction after say 20 years (see Angrybear posts).

One of the alternatives is not digging now and realizing that gives us the option to recover the resource sometime in the indefinite future.

That is true. But now we are talking about a different issue. We have quite a few tools in finance to tell us the value of oil now versus oil later.

We could choose to leave the oil in the ground in hopes it would be worth more later, but in practice this is not what people who own reserves that can be produced economically tend to do.

If you want to leave something worth $135 today in the ground for 20 years if your discount rate is 10% it needs to be worth $908 dollars when you produce it to break even.

We can look at forward prices and see that there don't tend to be large expected returns for delaying the sale of oil. At least as far out as forward curves go.

As Einstein said, the power of compound interest is a bitch.

If, overnight, we could double the revenue of each family while keeping the price of oil at 135 $, or even 200 $, everybody would stop at once to complaint.

Wouldn't it be easier on the environment just to require that cars met some reasonable fuel efficiency standard--say 35-40mpg? That would save as much energy as turning the shoreline into a toxic waste dump.

"If we assume that it would take about ten years from the day of authorization to get to peak production and that most of the oil is pumped out over 30 years, this would translate into a bit over 1 million barrels of oil a day.

"That would be equal to about 1 percent of world production in a decade."

In all likelihood, 1 million barrels a day will constitute considerably more than 1 percent of world production ten years from now, as total world production declines. This is the essential information that neither candidate nor Dean are apparently willing to discuss. In the absence of that, all this semi-quantitative speculation about price is nothing but a meaningless diversion. I don't claim to know how precisely the decline
will proceed, but surely it is in order to report facts that the public is currently being seriously denied.

If there's one item whose continued neglect is by now inexcusable, it is the rapid decline of the Cantarell field in Mexico, as of a couple years ago the second most prolific field in the world and accounting for 60 percent of Mexico's output. This decline threatens to eliminate Mexico's capacity to export oil within 4 or 5 years.

By contrast, the most prolific deepwater fields produce at no more than a tenth Cantarell's peak rate and then decline rapidly.

Some of the comments also referred unquestioningly to OPEC's ability to raise production. There is much evidence that OPEC's claimed reserves have been hugely overstated for years, and given that each of the major producers is heavily reliant on a handful of old fields for the bulk of their output, their ability to maintain current levels of output for long is also seriously questioned by many - including President Bush, though this fact is also not being disclosed to a general audience.

As to the reference to U.S. coal reserves, while output on a tonnage basis has continued to rise in recent years, on an energy content basis, output peaked in 1998, according to EIA figures. Also the U.S. is rapidly losing its status as a net coal exporter, imports having tripled since 2000, exports having declined sharply over the same period.

If you drill for oil, you get barrels of oil that people value at $135. If you don't you get a modestly nicer caribou reserve, or something along those lines.

The thing is that we aren't going to drill for oil. We are either going to permit, or refuse to permit, oil companies to drill for oil.

Some proponents of permitting more drilling argue that we should permit more drilling because if we do that, oil companies will extract more oil, and sell it on the global market, which will reduce global prices. This will benefit us by reducing the amount we pay for oil.

As Dean Baker explains, to evaluate the value of this benefit, we need to know approximately how big the reduction in global oil prices will be.

diz wrote, We could choose to leave the oil in the ground in hopes it would be worth more later, but in practice this is not what people who own reserves that can be produced economically tend to do.

Silly. The concerns of "people who own reserves" are not in any way similar to the concerns of the US government, acting on behalf of its citizens.

diz wrote, We have quite a few tools in finance to tell us the value of oil now versus oil later.

LOL! Just like all those tools in finance properly valued mortgage-backed securities, or tech stocks at the peak of the tech bubble.

diz wrote, If you want to leave something worth $135 today in the ground for 20 years if your discount rate is 10% it needs to be worth $908 dollars when you produce it to break even.

First, what makes you think the proper discount rate to use is 10%?

Second, if we let the oil companies pump the oil out of the ground right now, it's quite clear the true owners of the oil---citizens of the US like me---will get very little of the value. So there should be no incentive of the owners to approve at the current time, until the way US treats the value of extracted minerals differently.

We can look at forward prices and see that there don't tend to be large expected returns for delaying the sale of oil. At least as far out as forward curves go.

Yeah. What did those curves say before the current price spike.

As Einstein said, the power of compound interest is a bitch.

Advice to a Prophet
by Richard Wilbur

When you come, as you soon must, to the streets of our city,
Mad-eyed from stating the obvious,
Not proclaiming our fall but begging us
In God's name to have self-pity,

Spare us all word of the weapons, their force and range,
The long numbers that rocket the mind;
Our slow, unreckoning hearts will be left behind,
Unable to fear what is too strange.

Nor shall you scare us with talk of the death of the race.
How should we dream of this place without us?--
The sun mere fire, the leaves untroubled about us,
A stone look on the stone's face?

Speak of the world's own change. Though we cannot conceive
Of an undreamt thing, we know to our cost
How the dreamt cloud crumbles, the vines are blackened by frost,
How the view alters. We could believe,

If you told us so, that the white-tailed deer will slip
Into perfect shade, grown perfectly shy,
The lark avoid the reaches of our eye,
The jack-pine lose its knuckled grip

On the cold ledge, and every torrent burn
As Xanthus once, its gliding trout
Stunned in a twinkling. What should we be without
The dolphin's arc, the dove's return,

These things in which we have seen ourselves and spoken?
Ask us, prophet, how we shall call
Our natures forth when that live tongue is all
Dispelled, that glass obscured or broken

In which we have said the rose of our love and the clean
Horse of our courage, in which beheld
The singing locust of the soul unshelled,
And all we mean or wish to mean.

Ask us, ask us whether with the worldless rose
Our hearts shall fail us; come demanding
Whether there shall be lofty or long standing
When the bronze annals of the oak-tree close.

From Advice to a Prophet and Other Poems by Richard Wilbur, published by Harcourt Brace Jovanovich. Copyright © 1961 by Richard Wilbur. Used with permission.

I was really excited when I read the headline to this story since, as Dean points out, nobody seems to discuss the trade offs involved. Then he discusses only one aspect, specifically what would additional supply do to the price of oil?

If you want to discuss trade offs, the you have to at least include what is the estimated potential for environmental damage and what is the value to the economy and national security of paying $135 for a barrel of domestically-produced oil.

Given the track record of offshore rigs (less spillage per year than an average C-store and no signifcant spills during Katrina/Rita) and the fact that these rigs are going to be waaaay offshore, I would opine that the environmental "cost" is minimal. (Not to mention that, re: Anwar, we already have a model using 30 year old technology on the North slope that hasn't caused an environmental catastophe). On the economic side, consider doestic high-paying jobs created, balance of payments, etc.
The national security aspect probably can't be quantified, but certainly should be part of the discussion.
Very disappointing, Dean.

There's evidence (that I've heard bandied about on the Diane Rheme (sp?) show) that oil is far less elastic than your estimate - which implies that the drop in price would be quite a bit larger. Also, best case estimates are 3 million/day - though those estimates aren't very believable, IMO. And that's more than 10 years out of course, and probably not fully on line until 20 years out.

But of course, if you really want to change prices, cutting the demand side would be even more effective:

The US uses 20 million barrels per day (out of 83 million worldwide). 58% of that is in cars. That means, approximately 12 million barrels in cars. (I got these figures from top hits on Google, accuracy unconfirmed.)

Now, double the CAFE standards - that's a savings of 6 million barrels, double the best case estimate of the oil retrievable from offshore drilling. And available in about the same time frame - starting to really make impact in 10 years, and fully realized in 20. That the press doesn't discuss this as an alternate point is explainable - a Democratic congress just raised CAFE by a feeble amount, and they'd be embarrassed to start talking about it.

Think it's too hard to double CAFE standards? Tell it to the Chinese, who are working on close to that. The Europeans also have much more agressive standards as well.

Yeah, one day we'll surpass the Chinese in our environmental goals.

Jim D.:
I think if you add in trucks, rr's, boats, etc., transportation accounts for about 80% of use.
As far as CAFE standards are concerned, trade-offs are involved, there too. The two ways to increase mpg are technology and weight. I think we are getting closer to a point of diminshing returns on technology, so we are talking lighter weight vehicles. As the fleet size gets smaller, deaths and injuries (per 100,000,000 miles driven) will tend to rise. Hard to put a value on the convenience of larger cars as well (try getting four kinds into a micro-car).

Krugman has an interesting note on his blog about conservatives and their attack on oil speculators:

http://krugman.blogs.nytimes.com/2008/06/20/conservatives-and-evil-speculators/

Contrary to mdallasj's contention, Katrina did cause significant oil spillage.

http://thinkprogress.org/2008/06/19/mccain-oil-katrina/

May I respectfully suggest, h-bob, that you look at source documents rather than the screaming headlines of liberal blogs and press. The source document for your citation shows TOTAL OFFSHORE spillage from both hurricanes to be about 17,500 barrels. Not pretty, but considering the concentration of rigs and pipelines (many of which are old) and the magnitude of the storms, even the Secretary of the Interior remarked that "Hurricanes Katrina and Rita confirmed that our offshore oil and gas industry produces environmentally safe energy for America."
The 7-8 million gallons of spillage cited elswhere were ONSHORE from sources such as storage facilities.

"The two ways to increase mpg are technology and weight. I think we are getting closer to a point of diminshing returns on technology, so we are talking lighter weight vehicles."

No, we're nowhere near where we could be on getting better fuel technology.

For starters, and this is kind high tech, so follow me here, just make the darn engines smaller. Lower acceleration means higher mileage. And that means *less* people get killed, not more. And your "more deaths for smaller cars" argument assumes also that those smaller cars are competing with bigger cars on the road - take the big cars off the road, and the numbers aren't nearly as dramatic as you make them out to be.

"Liberal makes a very good point. Sometimes drilling in the U.S. is raised as a national security issue,...
As long as the oil is in the ground, we have the option of drilling it out at some future date, if we decide that we need it badly enough. However, once we have pulled the oil out, we no longer have this option."

Neither Baker nor Liberal are correct.

With integrated world markets and the necessity for the U.S. to import some percentage of oil for the next twenry years if not longer, there is no national security issue at all.

Liberals don't call conservatives on this often since they also like to use the empty slogan of national security to promote switching faster to renewables, but the logic doesn't on either side of the fence.

If there is a national security issue, then Baker, Liberal or someone please explain how the U.S. is any more nationally secure importing 20% instead of 50%.

Gladstone,

the point is that if there is a time where we are cut off from imported supplies, then as long as the oil is in the ground, we have the option to pump it out. If we have already pumped it out, and at some future point we are cut off, then we are out of luck.

Baker,

repeat what you wrote out loud:

"if there is a time where we are cut off from imported supplies..."

Didn't that sound a little silly?

The entire world, including Canada and Mexico, can block oil shipments to the US?

gladstone wrote, If there is a national security issue, then Baker, Liberal or someone please explain how the U.S. is any more nationally secure importing 20% instead of 50%.

Not all of domestic US is strategically important.

Duh.

ndallasj wrote, As the fleet size gets smaller, deaths and injuries (per 100,000,000 miles driven) will tend to rise.

Nope. SUVs are heavy, get terrible milage, and kill lots of people through (a) rollovers, (b) hitting people in other cars.

liberal,

oil is oil is oil.

This isn't difficult.