Save the Environment: Drill, Baby, Drill
Wednesday, 17 September 2008

ROBERT HAHN and PETER PASSELL

THE audience's mantra at the Republican National Convention — "drill, baby, drill" — reflected deep frustration with Washington's decision to lock down tens of billions of barrels of oil under American territory in an era of $4-a-gallon gasoline. Whatever the merits of his argument, Barack Obama's response that "drilling is a stop-gap measure, not a long-term solution" won't make the sting go away as long as it costs $100 to fill the tank of a pickup truck.

The crux of the matter is how accelerated drilling would affect gas prices, now and in the long term. And the conclusions of our latest research aren't likely to please true believers on either side. We found that full-speed-ahead exploitation of the restricted oil reserves would lower prices at the pump by a few cents at most. Nonetheless, it's equally clear that the failure to develop these oil resources would cost the state and federal governments hundreds of billions of dollars in royalties and taxes. It would also, paradoxically, pass up an opportunity for a grand bipartisan bargain — going far beyond the deal to open up some coastal drilling that Congress is expected to vote on this week — that could preserve or restore huge swaths of wilderness that are a top priority of serious environmentalists.
 
Our projections are based on government estimates that some seven billion barrels of oil could be extracted from the Arctic National Wildlife Refuge and a whopping 11 billion barrels could be had from the restricted offshore sites. That translates into an extra million barrels a day in the year 2025 — one-sixth of the total projected domestic output.
 
A big deal, right? Not in the context of the current political debate. The markets in which oil prices are determined are global, not local, and the extra million barrels would represent less than 1 percent of total world consumption in 2025. Thus we estimate that the million daily barrels would lower the price of crude by just 1.3 percent, which few consumers would even detect against the background noise of the weekly ups and downs of fuel prices.
 
To many, that's the end of the story. Why open a fragile ecosystem to drilling if it wouldn't materially reduce Americans' fuel bills? A good answer requires a shift in perspective, from the current focus on gas prices to a more comprehensive economic framework for weighing the public and private benefits of drilling against the likely costs.
 
Assuming that crude will still be selling for $100 a barrel down the road, we estimate that the oil from two new sources would be worth close to $1.85 trillion. Add to that the extra benefit to consumers of paying slightly less for imported oil and economic gains from being less vulnerable to supply disruptions, and the total benefit exceeds $2.1 trillion.
 
On the other side of the ledger, the expected costs of developing all that oil, including cleaning up environmental damage, would amount to a bit less than $400 billion. So, at a first cut, the decision to drill seems an economic no-brainer.
 
Why, then, the controversy? Many environmentalists argue that this calculation leaves out the biggest cost of all: the loss of the intangible benefits Americans get from knowing that the Alaskan refuge and outer continental shelf have been left untouched. Indeed, economists spend a lot of time thinking about such "non-use values," if not much time agreeing on them. Still, our best attempt to get a fix on the non-use value of Arctic National Wildlife Refuge yields a figure of just $11 billion. In sum, this leaves about $1.7 trillion in tangible net benefits, so most people, one would guess, would still find the case for drilling to be compelling.
 
Some people, however, attach a much, much higher non-use value to the Arctic refuge, and their opinions count a lot because they are well represented in Congress. So here's a question for them: If a big chunk of that $1.7 trillion could be spent on preserving wilderness that didn't happen to sit astride vast quantities of oil, would you really choose to spend it on keeping human hands off the currently protected sites?
 
One could imagine a political bargain in which several hundred billion dollars went into a fund with a charter to preserve wilderness in the United States, or climate-stabilizing rainforests in Africa and Latin America. As little as $100 billion would go a long way: the projected cost of preserving the entire Everglades against the encroachments of the Florida economy is $11 billion, while a comprehensive restoration of 200,000 acres of Louisiana's coastal wetlands would run to $18 billion.
 
For better or worse, "drill, baby, drill" is now widely viewed as the cure for what ails. Giving the public what it wants wouldn't lower gas prices by any meaningful amount. But it would create an opportunity to move public opinion (and huge sums of cash) in the direction of good environmentalism and good economics.
 
Robert Hahn is the director of the Reg-Markets Center at the American Enterprise Institute. Peter Passell is a senior fellow at the Milken Institute.

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