In the
New York Times today, Jad Mouawad argues that the United States “needs” more offshore drilling in the Gulf of Mexico.
I don’t think the numbers support his claim. Instead, any additional oil would mainly a) lead to increased consumption in other nations, and b) lead to decreased production in other nations, with little net effect on American consumers. This is because
oil is a fungible global commodity.
According to his article, Mouawad reports that Gulf of Mexico oil production amounts to 1.7 Million bbl/day. This is just 2% of the 85 million bbl/day produced globally. James Hamilton
has estimated that the long run demand elasticity of oil is about -0.2 to -0.3 (although there’s evidence of less elasticity recently). If crude oil accounts for half of the cost of gasoline, then even a 50% increase in Gulf production would lead to only about a 1.5% to 2.5% decrease in U.S. gas prices.
In addition, we must also consider supply elasticity, which further limits the effect of increased drilling on gasoline prices. Bringing more Gulf oil to market would reduce incentives for other nations to bring as much oil to market. Furthermore, it would decrease incentives for investments in alternative energy like wind, solar and nuclear. Thus every additional barrel we drain from our Gulf oil reserves would net
less than an additional barrel of oil or its equivalent coming on to the market.
Factoring in both demand and supply effects, it appears that a major increase in Gulf production would have barely a 1% effect on gasoline prices for American consumers. That's less than the average monthly change in prices.
On the other side of the ledger are the risks of more catastrophic oil spills like the BP rig, and the inevitability of negative externalities from increased oil consumption, such as pollution and congestion.
America does not “need” more offshore drilling. On the contrary, an energy strategy focusing on demand and speeding the development of alternatives is likely to be much more effective.
Update: The Official U.S. Energy Information Administration
appears to agree:
"Because oil prices are determined on the international market, however, any impact on average wellhead prices [from additional drilling on the Outer Continental Shelf] is expected to be insignificant."