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Shall We Drill?
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August 8, 2008

One could be forgiven for thinking lately that the only question facing the U.S. in the 2008 election is where to drill for more oil.

After a summer-long back-and-forth between Democrats and Republicans, in which both sides took turns blocking the other side's energy proposals, Democratic leadership effectively forestalled a Republican initiative to loosen restrictions on off-shore drilling by shutting down the Capitol for a traditional August break. In response, a few Republicans engineered a demonstration in the Capitol, gathering in the darkened chambers to demand that Congress reconvene and approve offshore drilling.

It's a colorful show, and the many journalists covering the event have doubtlessly had fun quoting some of the rhetoric. For instance, from the CHICAGO TRIBUNE:

Rep. Virginia Foxx (R-N.C.) compared Pelosi with Marie Antoinette, the French queen who, when told that French peasants had no bread, is mistakenly said to have suggested that the peasants eat cake instead. Foxx said Pelosi is thumbing her nose at Americans who can't afford the price of gas.

Pelosi, in turn, dismissed the GOP rhetoric and symbolic protest: "We have a debate every single day on this subject," said Pelosi, calling the GOP protest "the war dance of the handmaidens of the oil companies."

But obscured in all the parsing of whether it is a "protest" or a "stunt" is the substance of the issue: what are the pros and cons of off-shore drilling and will lifting the ban lower the price of fuel now? And if the answer isn't drilling, what is it?

Whither to Drill?
THE ECONOMIST gives a little background on the debate:
The Republicans argue that allowing oil firms more leeway to drill offshore will help to bring the price of petrol down. Twelve years after an infamous spill from a well off Santa Barbara in 1969, Congress barred the government from issuing new offshore leases anywhere but in the western Gulf of Mexico and Alaska. By the government's own reckoning, there are some 18 billion barrels of oil to be discovered in the restricted areas — enough to supply all America's needs for two-and-a-half years.
Offshore drilling, though more sophisticated than it was when the ban was leveled, remains a complicated engineering feat, and the Energy Department projects that the first substantial amounts of oil would not begin to flow for ten years.

Proponents of drilling argue that just knowing that increased supply is coming will persuade speculators to sell what they've hoarded, thus lowering the price of oil. Indeed, some of the Republicans demonstrating in Congress have claimed just talking about it has lowered the price of oil already. Phil Kerpen, of the NATIONAL REVIEW ONLINE explains:

And while it is true that energy companies need time to harvest this oil and gas, the mere perception of substantial new future production will break expectations of higher energy prices in the futures markets and bring down prices at the pump today. We had a preview of this effect last month when the president lifted the executive branch's moratorium on offshore drilling.

According to many economists, though, the truth is yet more complicated. Many experts who support lifting the ban on offshore drilling do not think the decision will have much, if any, bearing on current prices. From the ST. PETERSBURG TIMES:

It takes years to bring new oil wells online, said Mike Rodgers, a leading oil expert with PFC Energy in Washington. Companies need to drill exploratory wells, then discovery wells around the exploratory wells that show promise. Shipyards that build platforms, a two- to three-year endeavor, are already booked solid.

"It's foolish to sell it as a short-term solution to high gas prices," Rodgers said. "Opening offshore drilling would have no impact whatsoever on gas prices today."

Steve Mufson, an energy analyst for the WASHINGTON POST and NEWSWEEK explains the ins and outs of oil pricing for laypersons:

The current price of oil is based largely — some would say entirely — on the amount of oil available now and the amount people want to use now. To the extent that there is a psychological, speculative or political element in the price of oil, that dimension applies to factors that might have an effect on supplies or contracts in the near term. Think an attack on Iran before Bush leaves office, or a cut in Nigerian pipeines, or a cut in Federal Reserve rates that might boost the U.S. economy and stimulate more oil demand. Even the inflow of cash to oil markets over the past couple of years has gone largely to index funds that mostly buy oil contracts due two or three months from now.

Opening up a new offshore lease area would take years to affect supplies. The Energy Department's Energy Information Administration estimates it would take until 2017 before any new offshore lease produces oil and many more years before those leases reached peak production. That time horizon is far beyond anything on the minds of traders or investors now.

Look at it this way: If you wanted to gamble on rising oil prices that far in advance, you'd have to buy oil, pay for storage and lose the use of the money tied up during the next ten years. (It is tied up because you used it to buy the oil.) You would need a huge premium in ten years to make it worthwhile. The New York Mercantile Exchange doesn't even sell oil futures that far into the future. The last one listed on its Web site is December 2016 and the number of open positions for that month is quite small.

So does this mean the Democrats have a more workable plan to bring down the price of gas? Not according to THE ECONOMIST:

But the alternatives the Democrats are attempting to push through Congress are an incoherent mish-mash. One, dubbed "use-it-or-lose-it", would oblige oil firms to exploit their existing leases more quickly or see them revert to the government. The hitch is that federal leases already work along those lines, and few imagine that oil firms are deliberately ignoring vast pools of oil, given the current high price.

Another proposal involves revoking a tax break for oil firms, with the proceeds going to fund research into alternative energy. Mr. Obama, in a similar vein, wants to impose a "windfall tax" on oil firms' profits and use the proceeds to give all taxpayers a $1,000 "energy rebate". But any measure that reduces oil firms' margins in America is likely to have the effect of diverting at least some investment to other countries — and so exacerbate the shortage of fuel produced at home.

Other proposals target speculators and the OPEC cartel. Yet another idea, to release some oil from America's Strategic Petroleum Reserve, would doubtless help to bring prices down briefly. But it would not be sustainable: the government's entire stockpile would keep America going for no more than a few weeks, and is supposed to be used only in dire emergencies. Democrats in either the House or the Senate have approved all these measures in some form, but the two chambers have been unable to agree on any of them.

Many economists and energy experts aggree that drilling is likely to bring down the cost of oil in the future, and that finding new sources for oil is necessary to meet projected future consumption. Ultimately, many people believe the question of whether or not to drill is a long-term question. Do the long-term benefits outweigh the risk to the environment? Has new drilling technology mitigated the environmental dangers? Can the United States adopt policies that will make these reserves unnecessary in the future?

What do you think? We invite you to respond on the MOYERS BLOG

References and Reading:
"Bush lifts one ban on offshore drilling, but Congress' remains,"
By David Lightman and Renee Schoof for MCLATCHY, DC.

"Oil experts: they're as bad as economists,"
Paul Krugman finds oil experts on both sides of an oil debate.

"No Will to Drill"
Charles Krauthammer makes the case for drilling in the WASHINGTON POST.

"Gauging the furor over Obama's tire pressure remark,"
Dan Neil explains the politics - and practical matters - of tire pressure.

THINK PROGRESS
Progressive site THINK PROGRESS considers Newt Gingrich's evidence.

"No Will to Drill"
Charles Krauthammer makes the case for drilling in the WASHINGTON POST.

"No Reason We Can't Get Cheaper Oil--Just Drill!"
Newt Gingrich recommends four steps to cheaper oil.

Published August 8, 2008.

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