Common Tragedies

Thoughts on Environmental Economics

The hedge value of domestic oil conservation (or, “I’m rich, B*tch!”)

Posted by Rich Sweeney on June 26, 2008

John McCain caught a lot of heat last week for proposing to open up offshore drilling. This is largely because he proposed doing so as a response to high gas prices. As people quickly pointed out, not only would it take 10 years before the first drop of oil came out of these offshore endeavors, but the entire operation would be so small relative to global production that it would have virtually no effect on the price of oil. In fact, as the WonkRoom noted, even McCain’s own advisers acknowledge that offshore drilling wouldn’t impact current prices. This prompted a predictably econo-idiotic restatement from the Maverick, where he tried to justify offshore drilling as impacting the psychological price of gas, not the actual price (maybe this is behavioral econ?).

However, talking to Daniel today about all of the the oil speculation nonsense today, we stumbled on a reasonable justification McCain could give to explain his offshore drilling flip flop: “I’m rich, Bitch!” As Wyatt Cenac brillantly explained on the Daily Show in response to Obama’s flip flop on accepting public financing, “we all say things we don’t mean just before we get rich….voters will forgive him once they take a ride in his brand new Hummer-copter.”

While, then as now, opening up off-shore drilling in the US won’t significantly reduce gas prices, what it will do is bring in a boatload of money to the US.* Back when oil was $20 a barrel, this revenue stream seemed far too small to sacrifice the serenity of of our oceans. But with analysts predicting $200 a barrel oil in the near future, it might be time for us to reconsider. When a democracy decides whether to conserve land or not, it values the costs and benefits of both options. I’m not saying we’re at a point now where we should drill, but it’s not entirely unreasonable to change one’s stance on an issue like this once the relative pros and cons have changed.

Which brings me to the point of this post. From a financial perspective, the decision to delay drilling in ANWR a decade ago is looking pretty prescient. Assuming that the resulting environmental damages and quantity of oil in the ground haven’t changed, it’d be much more beneficial to crack ANWR open now. As I see it, the public panic over recent run up in gas prices has less to do with the current level, and more to do with the fact that there’s no end in sight. If people believe that we won’t be able to wean ourselves off oil quick enough and that prices will continue to rise, then it should be somewhat comforting to know that if things really do get bad we can somewhat offset these negative effects by cashing in our untapped reserves. Otherwise, if people believe that the recent crunch is a brief abberation, that either oil prices will come down or we’ll simply learn to use a lot less of it, then it probably seems imprudent to permanently spoil the environment. Either way, a reasonable, informative public debate over the relative costs and benefits seems a lot more helpful than atemporal categorical rejections.

* In this example I’m assuming that the federal government would either auction off drilling sites, or extract royalties from companies who find oil offshore, and return a dividend of the proceeds to every American. In reality, most of the profits gained from offshore drilling would go to American oil companies. In the case of McCain’s plan, I think its pretty safe to assert that he’s thinking about placating Houston, not offsetting the increased transportation costs of American families.

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