| ANWR Drilling Would Provide Quick Relief Robert P. Murphy Daily Article 7/28/2008 In a previous article, I showed that the proposals to curb "excessive" speculation in oil futures markets were based on ignorance of how the market coordinates production and consumption over time. In the present article, I will explore the issue of opening up the Arctic National Wilderness Refuge (ANWR) to oil drilling. We'll see once again that even friends of the market often don't fully understand its power to fix problems. The Standard Argument Over ANWR With record oil prices, many on the Right (as defined with today's labels) have understandably called for the federal government to remove its restrictions on oil exploration and drilling in ANWR (located in Alaska) as well as other federal lands and offshore water areas.[1] They point out that these federal restrictions, in conjunction with local environmental activism, have resulted in the absurd situation where 94 percent of federal land, and 97 percent of federal offshore waters, are not being leased by energy companies. The US government itself estimates that its own prohibitions currently render 18 billion barrels in the outer continental shelf (OCS) and 19 billion barrels located under federal lands off limits. Note that these are very conservative estimates, because nobody has gone out and extensively explored the areas where it is illegal to extract oil! Of course, calls to open up domestic areas for drilling horrify environmentalists and others on the Left, who liken the move to giving a junkie one more fix rather than dealing with his addiction. One of their strongest arguments is that ANWR drilling isn't a real solution for today's crisis, since The Energy Information Administration (EIA) estimates that it will require 8 to 10 years after opening ANWR before oil is produced from any new leases. Furthermore, it would be 20 years after opening ANWR before oil production reached its peak of only 780,000 barrels per day. Faced with this response, the people on the Right have typically come back with a few zingers. First, they point out that the critics of drilling have provided alternative proposals (development of renewable energy, conservation measures such as raising CAFE standards, etc.) that would also take years to kick in. They also frequently mention that this ten-year lag would have been over by now, if President Clinton hadn't vetoed the attempt to open up ANWR back in 1995. More Oil in the Future Means More Oil Now Yet there is an even stronger argument for opening up ANWR: because of its impact on oil prices in the future, relaxing federal prohibitions would cause current oil producers to change their pumping decisions right now. Even though the additional barrels from ANWR wouldn't physically hit the market for years, current knowledge of this fact will alter current behavior, leading to rapid relief at the pump. Though compelling, this argument is subtle and has only recently gained attention. I myself didn't bat an eye when experts in the industry told me (last year at a briefing) that opening ANWR wasn't a near-term solution. It wasn't until a colleague passed along an unpublished paper by Coats and Pecquet that I considered the impact of future supply increases on current production decisions. Once I heard the argument, it was obvious and I couldn't believe I had missed it. I began using it wherever I could, and was very glad to see that the respected Martin Feldstein made the case in the Wall Street Journal. Hopefully, proponents of ANWR drilling will now feel confident to repeat the claim. In the remaining space, I'll spell out the argument as simply as possible, because, admittedly, at first it sounds too good to be true. Read More |
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