The reason why the Americans, Europeans, Japanese and others who buy oil want the price of oil to go down is that their economies would benefit if it dropped. The Saudis, Mexicans, Norwegians, and others who produce oil would like the price of oil to rise, because their economies would benefit if it did. It is not so much about the price as whether you are buying or selling, and most importantly, how much.
Let’s suppose that the U.S. decided to drill in ANWR and in the offshore areas where it is currently prohibited, and that subsequently the price of oil did not change at all. Because the amount of oil in the new drilling areas is low compared to total world production, the price might not change much.1 If such were the case, the impact would be solely in the amount of money transferred out of the U.S. to the oil producers. In practical terms, that means the foreign trade deficit would be reduced. Would the reduction in the foreign trade deficit be significant?
ANWR is estimated to have about 10 billion barrels of oil.2 As with offshore drilling, we don’t really know how much oil is there because Congress has kept the area unexplored. The 10 billion barrel estimate is therefore a minimum, based upon the surveys that have been done. As of this writing, oil is about $115 per barrel. The current total value of the oil in ANWR is therefore $1.15 trillion. As we are often reminded, it will take time to get the oil out, perhaps seven years before it starts flowing. Most likely, it will be worth considerably more by then.
By comparison, the total foreign trade deficit with China since 1980 is about $1.5 trillion. That means that a trillion dollars is still a substantial sum, and the revenue from ANWR would have a significant impact on the foreign trade deficit.
Offshore drilling on the continental shelf is even less well explored than ANWR. Environmentalists block exploration. Perhaps environmentalists fear that if large reserves were found, the political pressure to recover it would be irresistible. In any case, the oil companies are not going to spend money exploring regions upon which they cannot recover their investment. A deep-water test well may cost $25 million dollars. No one is going to spend that much without a guarantee of being able to going into production to recoup the investment.
Drilling is permitted off the coasts of Louisiana and Texas, and has been for a long time. In 2002, Chevron discovered a new oil field 190 miles off Louisiana that appears to hold from 3 to 15 billion barrels of oil.3 The point is that even when exploration is permitted and there is economic reason to pursue it, it takes many years to know what is there. If 10 billion barrels will not significantly affect the world price, another 15 billion barrels would not do much either. However, if it pans out it would be another $1.5 trillion in foreign trade deficit saved. The late Senator Everett Dirksen famously said, “A billion here, a billion there, and pretty soon you are talking about real money.” It happens even faster with trillions.
Shouldn’t we subtract the cost of environmental damage from the revenue? Absolutely. In the case of ANWR, the area is both smaller and in a less environmentally sensitive area than Prudhoe Bay, and it would be exploited with more advanced technology. So what has the environmental damage been to Prudhoe Bay? I know of no claims of substantial environmental damage in the area. Drilling in the eastern Gulf of Mexico seems no more likely to cause damage than that in the western Gulf, and again I know of no proof of substantial damage in the western Gulf.
The rupture of the Exxon Valdez caused substantial environmental damage, amounting to $3 billion^4^. However, if we do not drill in the US, the amount of oil transported by tanker will increase, increasing the risk of environmental damage by tanker rupture, not decreasing it.
There is a traumatic component to oil spills as well as a dollar cost. The large sums involved means that strict environmental safeguards are affordable and ought to be imposed. It may not be so apparent, but there are traumatic costs to foreign trade deficits as well, in the form of lost jobs and the political instability of wealth transfer to foreign governments.
As far as I know, no one in any part of the political spectrum questions the importance of reducing foreign trade deficits. It makes alternative energy more competitive than they might otherwise appear to be. Perhaps $150 worth of solar power is equivalent to $100 worth of foreign oil when the trade deficit is taken into account. I don’t know what the true equivalence is, but it bears study.
The analysis in terms of foreign trade deficit is so simple, that I don’t know why it is often ignored in favor of arguing whether or not the price of oil will drop. The arguments in terms of tradeoffs depend on knowing how much oil is in each place, and we do not know how much there is, well only have some idea of the lower bound. It could be vastly more than currently supposed.
1. U.S. News and World Report, Arctic Drilling Wouldn’t Cool High Oil Prices, May 23, 2008
2. 1002 is where the oil is at, anwr.org
3. Chevron Could Avoid Huge Royalties on New Field /2006/09/12/business/12oil.html, The New York Times, September 12, 2006
4. Chicago Tribune, Court slices Exxon Valdez damage award, June 25, 2008