Rick Perry in the Union Leader:
We can create hundreds of thousands of jobs and increase our oil output by 25 percent if we fully develop oil and gas shale formations in the Northeast, mountain West and Southwest. I also support drilling in Alaska’s Arctic National Wildlife Refuge coastal plain (ANWR), offshore expansion in the Beaufort and Chukchi Seas, and development of the National Petroleum Reserve in Alaska, all of which would maintain the Trans-Alaska Pipeline System. This will create more than 185,000 U.S. jobs. ...Additionally, our families, communities and employers will benefit from more affordable energy prices as we increase the domestic supply. American manufacturing will experience a tremendous boost if we control electricity prices and get a handle on the cost of fuel for transportation fleets.
Doing the back of the envelope (and not worrying about whether the 25% increase in oil output is realistic) with these data:
- daily world oil production = Q = 89,123,026 [barrels]
- 25% of daily U.S. oil production = dQ = 2,422,000
- oil price = P = $90
- demand elasticity = ed = -0.1
- supply elasticity = es = 0.2
- dp = ((P*dQ)/Q)/(-ed + es)
The world price of a barrel of oil would fall by $8.20 as a result of a 25% increase in U.S. production. If gas prices are about 70% due to the price of oil and gas costs $3.35 per gallon, then the oil price share of gas is about $2.35. Cross-multiplication tells me that the oil price share of the price of a gallon of gas would fall to $2.13 and we'd enjoy and $0.22 drop in the cost per gallon. Filling up a 20 gallon tank you'd save about $4. Doing this every week you'd save about $200/year.
Update at 8:42 a.m.: The price change formula above is for linear demand and supply curves which will lead to an upper bound on the price changes. After reviewing Hahn and Passell, I tried the formula for constant elasticity demand and supply curves and find a similar result. The price of a barrel of oil falls by $7.70.
Also, I used the short run demand elasticity for gasoline, not oil, and made a guess at the supply elasticity for oil. Using the long run elasticities in Hahn and Passell, ed = -0.48 and es = 0.36 and linear demand and supply, yields a price change of $2.60 per barrel, $0.07 per gallon and savings of about $75/year.
Drop your corrections in the comments section!
