Thursday, June 19, 2008

DRILLING FOR OIL: WHAT BENEFIT?

DEAN BAKER, PROSPECT Let's see, John McCain wants to drill offshore to increase oil supply and lower gas prices. Barack Obama says he wants to protect the environment and maintain the ban on such drilling. What is a voter to do?

Well, one piece of information that might be relevant is how much we expect the potential oil production to lower prices. After all, we probably wouldn't destroy a nice city park for a 0.1 cent reduction in the price of a gallon of gas, while some folks would destroy Yellowstone, the Everglades and everything in between to cut gas prices by $1.00 a gallon, so what are we talking about here?. . .

According to the NYT, the Energy Information Agency estimates that the total amount of oil in the offshore zone in question is about 16 billion barrels. 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. If we assume a long-run demand elasticity of 0.3, this would imply a drop in world prices of approximately 3 percent. In today's prices, we would be looking at a drop in the price of a barrel of oil from around $135 to $131. If this were passed on one to one in gas prices (this is long-run story), we might expect to see a drop in the price of a gallon of gas from around $4.00 to around $3.92 a gallon. These are of course very crude numbers (someone has probably done a serious analysis), but they should get us somewhere in the ballpark.