I voted no to offshore drilling (its lack of effect on prices) twice!

Take the poll at Dump it in the Pump:

Is Offshore Drilling A Realistic Solution To High Gas Prices?
	Yes
	No
	Undecided

Comments

[Bob Murphy]

I voted "yes' once... I may be an ideologue, but I don't cheat! :)

John, do you see that this website at least is making the basic mistake I was pointing out in the other thread? Look at their first two points:

# It will be 10 years before oil will start to be pumped into refinery pipelines, from the point the exploring begins.

# Oil will start being pumped out in 10 years, but maximum capacity isn’t expected to be reached until 2030.

So they are clearly implying that knowledge today about new future supplies, can't possibly affect prices today.

And then I loved this:

# As the oil is pumped from these new leases, it will just be auctioned off into the global market, and the highest bidder will buy the oil. It will not be set aside solely for Americans, unless we are planning to change the way we participate in free global markets.

So apparently even if we had extra production today, it wouldn't lower prices, because oil would just get sold to the highest bidder. If only global demand curves sloped downward! Curses!

[Sam]

Bob, I DO think that knowledge today about future supplies can effect gas prices today, but what future supply will there be from these reserves? Its estimated that at maximum capacity, the new offshore leases will produce 200,000 barrels a day, while the rest of the world will be producing 85 million barrels a day.

Can we really expect any impact on price from this predicted level of future supply?

[odograph]

Bob, if future drilling is lowering oil prices, then surely future plug-in hybrid electric cars, and future walkable communities, are also lowering gasoline prices ... how do you separate those effects?

... or even future carbon taxes?

Basically the "future drilling lowers oil prices now" is 1 part economics and 99 parts narrative fallacy.

[dWj]

If we ran down private stockpiles of oil over the next ten years, we could reduce the price of oil by a couple percent. If the owners of those stockpiles were very confident that a lot of new oil would come on-line ten years from now, that's what we could achieve. For actual figures, there should be, in principle, a small effect immediately. If you're trying to measure it, statistically consistent with zero.

The question, though, isn't "does it have any impact on prices, even a picayune one", it's "is it a realistic solution to high prices"? Insofar as high prices are a problem, drilling doesn't really solve it.

[odograph]

Our word for the day is picayune, now meaning something of very little value, and it's origin:

"A Spanish-American half-real piece formerly used in parts of the southern United States."

(the origin gnawed at me so I had to look it up)

[Bob Murphy]

Sam wrote:

Bob, I DO think that knowledge today about future supplies can effect gas prices today, but what future supply will there be from these reserves? Its estimated that at maximum capacity, the new offshore leases will produce 200,000 barrels a day, while the rest of the world will be producing 85 million barrels a day.

Can we really expect any impact on price from this predicted level of future supply?

OK, I don't expect you to endorse my answer, but it's that I think the 200,000 bbls/day estimate is crazy. For example:

* 200,000 barrels per day is roughly equal to the daily production rate of just one new offshore platform in the Gulf of Mexico. The Thunder Horse oil production facility, which will be on line this year, is designed to produce 250,000 barrels per day. The Atlantis oil platform currently producing in the Gulf of Mexico has a production capacity of 200,000 barrels per day.

Despite these facts, the EIA projects that lifting the bans that prevent production on 85 percent of the OCS acreage surrounding the lower 48 states will yield an amount equal to that which can be produced from just one of these platforms. Obviously, the projections are flawed.

That's from this IER analysis (for whom I am an economist, though I didn't write this particular piece).

But obviously if it comes down to government projections and a free market think tank that, yes, receives some of its funding from energy companies, I realize we might agree to disagree.

Even so, Sam, you still see that this website (and plenty of other commentators) are NOT making your particular point. They're rather saying, "Current prices aren't affected by stuff happening in 20 years. McCain doesn't have a time machine!"

[Bob Murphy]

Odograph wrote:

Bob, if future drilling is lowering oil prices, then surely future plug-in hybrid electric cars, and future walkable communities, are also lowering gasoline prices ... how do you separate those effects?

... or even future carbon taxes?

Basically the "future drilling lowers oil prices now" is 1 part economics and 99 parts narrative fallacy.

Quick quibble, expected future carbon taxes would raise oil prices, not lower them. (Raising taxes on cigarettes causes their price to go up, even if that very mechanism causes more people to quit smoking. That's how it gets people to quit smoking.)

But as for your larger point, yes, if they suddenly announced tomorrow that the government would spend $x billion per year, in order to provide every American with a new electric car by 2015, oil prices would drop like a stone (if people really believed the government would follow through with it).

But there wasn't some radical new announcement about electric cars or biofuels on July 14, the DAY that oil prices began falling. Since then, the spot price has fallen $29. Seriously, if you haven't already, look at this price history at EIA; July 14 was the day Bush lifted the executive side of the ban. It is striking. There might be other things involved, but I think it is undeniable that oil traders all of a sudden realized the political mood was shifting and the ban might seriously be lifted (since Congress has to follow suit in order for anything to happen).

I'm not saying removing the drilling ban is the only way to reduce oil prices, I am just saying it would indeed reduce oil prices, and by a lot. The website linked in this thread (and John himself) deny that claim.

[odograph]

"Quick quibble, expected future carbon taxes would raise oil prices, not lower them. (Raising taxes on cigarettes causes their price to go up, even if that very mechanism causes more people to quit smoking. That's how it gets people to quit smoking.)"

I said oil, not gasoline prices.

It would be akin to higher cigarette prices meaning lower tobacco prices for the farmer.

[odograph]

"I'm not saying removing the drilling ban is the only way to reduce oil prices, I am just saying it would indeed reduce oil prices, and by a lot. The website linked in this thread (and John himself) deny that claim."

I'm asking you assert that "and by a lot" bit?

It seems a Fooled By Randomness moment, with everyone trading their future-narratives, and swearing that they are the one to see to true future.

I don't think I've played that game. I have raised some of the other factors that cloud your fortune telling. I'm sure I could name a string more of them.

[Bob Murphy]

odograph said:

I said oil, not gasoline prices.

Right, I said oil prices too; go re-read my post. :)

The way a carbon tax would cause motorists to Drive Less! is by raising oil prices, which in turn raise gasoline prices.

If you're talking about the after-tax earnings per barrel that oil producers receive, yes that would go down, but so what? The reason high oil prices have people upset is that people have to pay a lot for the oil. It is that price that will go up with a carbon tax. It has to be, otherwise the carbon tax wouldn't be doing its job to discourage people from using oil as an input.

[Bob Murphy]

I don't think I've played that game. I have raised some of the other factors that cloud your fortune telling.

Well, I don't think you have. None of the things you've listed has changed since oil started dropping. It's as if you said, "Nah it's not the executive ban being lifted, it's the fact that there is gravity. After all, imagine how hard it would be to pump oil to market if there were no gravity! Costs would go through the roof! So for all we know, oil prices have fallen since July 14 because of gravity."

[odograph]

Go back to your tobacco example, Bob. X million tons grown, balanced with X million tons smoked (as cigarettes). A retail cigarette tax raises the price of cigarettes, yes. It reduces the demand of cigarettes, yes.

Did farmers still grow X million tons? How would their market price change?

(Certainly we might expect a future adjustment, as farmers move out of tobacco growing, to arugula, but can oil drillers do that?)

[odograph]

Well, I don't think you have. None of the things you've listed has changed since oil started dropping."

What exactly has "changed" on offshore drilling?

More absurdity in comments sections?

[Bob Murphy]

Odograph said:

Go back to your tobacco example, Bob. X million tons grown, balanced with X million tons smoked (as cigarettes). A retail cigarette tax raises the price of cigarettes, yes. It reduces the demand of cigarettes, yes.

OK I see why you're getting bogged down here. Originally, you said that maybe the reason oil prices are falling isn't (as I claim) that people expect future drilling, but rather that they expect a carbon tax.

So in response, I pointed out that a carbon tax--though designed to curb oil consumption--works by raising the price of oil. For an analogy, I said that a tax on cigarettes--though designed to curb smoking--works by raising the price of cigarettes.

You were thrown by the fact that cigarettes are a retail good while oil isn't. You're right, they're different in that respect. But they are similar in that if you lay a tax on oil, its price goes up, just like the price of cigarettes goes up if you tax them.

It's true that if the gov't tried to reduce GHG emissions by jacking up the gasoline tax, then your farmer analysis kicks in, and oil prices drop (because refiners' demand for oil drops when people drive less).

But you didn't bring up a gas tax, you brought up a general carbon tax.

[Bob Murphy]

Bob said:

"Well, I don't think you have. None of the things you've listed has changed since oil started dropping."

To which odograph replied:

What exactly has "changed" on offshore drilling?

More absurdity in comments sections?

Since we argue so much, can you do me a favor? I don't know whether (a) you really don't know my answer to the above, or (b) you know perfectly well what my position is, and you're just trying to show me how dumb it is. As I say, we argue a lot, and so to economize on my own answers, it helps if I know how to interpret your sarcastic remarks. E.g. I don't want to assume you know my position, if in reality you have no idea what is prompting me to spout my drivel.

In any case, I'll say it again: Before July 14, there was both an executive ban (put in place, ironically, by George HW Bush) on offshore drilling, as well as a congressional ban. Either one was enough to prevent oil companies from drilling in something like 85 percent of the federal acreage in the outer continental shelf around the lower 48 states.

Places like my think tank had been calling for offshore drilling for years, but nobody thought it had any political chance until gas prices really got outrageous (by American voter standards) last spring. Then McCain realized it was his only shot at catching Obama, and he got on the bandwagon.

Then, in what I think was a surprise to everyone, Bush rescinded the executive side of the moratorium on July 14. At that point, the ball was squarely in Pelosi's court. The Republicans could now say to the voters, "It is the Democrats who are keeping oil prices high because they won't let US companies hire US workers to reduce our dependence on Middle Eastern oil."

And indeed since that day, Pelosi has backed off her original position. She all of a sudden was in favor of more drilling, and started criticizing the oil companies for overlooking the "68 million acres." Obama got on board too once the Gang of Ten came out with (tepid) support for more offshore drilling.

Now maybe it's just a coincidence that oil fell so much the two days after Bush's move, and that it's drifted down almost constantly since then. But I don't think so. I can give you a theoretical explanation for why this makes perfect sense.

In contrast, you started talking about the possibility of hybrid cars and walkable communities. Those two things can't explain why oil has fallen so sharply since the day of July 14, whereas my theory can.

[odograph]

That doesn't really make sense Bob. To set a "carbon tax" on the producer you'd have to go set it in Saudi Arabia.

Any carbon tax in the US is thousands of miles from the world's swing producers. It would be set here, on consumers. That would reduce demand for the Saudi oil, and so on ...

[Steven Earl Salmony]

To behold such huge challenges to life as we know it and the integrity of Earth; and to see so many pathetic responses to them by politicians and government sinecurists, are abominable signs of a state of dangerous decay, one that is destroying the very heart and soul of political life.

[Bob Murphy]

...and to see so many pathetic responses to them by politicians and government sinecurists...

Are you talking about me? If so, I don't get it. I may be a sinecurist, but I'm hardly a government one; I am actively opposing government policies.

In contrast, a lot of the climate alarmists are getting taxpayer funding for their work, which in turn justifies carbon legislation that will bring in trillions in new revenues for the government.

[Bob Murphy]

Odograph wrote:

That doesn't really make sense Bob. To set a "carbon tax" on the producer you'd have to go set it in Saudi Arabia.

Any carbon tax in the US is thousands of miles from the world's swing producers. It would be set here, on consumers. That would reduce demand for the Saudi oil, and so on ...

OK, I think we're probably both right/wrong. The cap and trade legislation that is in the works is not going to (so far as I'm aware) hit actual consumers at the retail level. Rather, it will be levied on, say, coal-fired power plants, refiners, etc. I was thinking of US-based oil producers in my examples above, but you're right, I'm not sure what the treatment will be of imported oil.

My guess is, that oil will be taxed as it comes in, so that yes indeed the market price of oil will rise in the US. This might make the non-taxed world price of oil (for regions not subject to carbon legislation) drop. If that's what you meant, sorry for the confusion.

I was saying that individual households are not going to have the carbon tax / permits levied on them directly. Politically, that's the point; they'll just see higher prices passed on from businesses, and so won't realize they're paying for it.