Cuts Both Ways

by Don Boudreaux on August 3, 2008

in Energy, Environment, Myths and Fallacies, Prices, Regulation

Here’s a letter that I sent today to the Baltimore Sun:

Brad Heavner says that “drilling off our coasts would have no significant impact on gasoline prices – not in the short term, not in the long term, not ever” (Letters, August 3).  If so, then Mr. Heavner is mistaken to worry that such drilling would “increase our dependence on oil and produce more global warming pollution,” for any such impact would also be insignificant.  An amount of oil that would affect prices only inconsequentially is an amount of oil that would affect global warming and Americans’ use of oil only inconsequentially.

And see Ross Kaminsky on this topic.

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{ 50 comments }

TJ August 3, 2008 at 10:35 am

Splendid, Don.

Adam August 3, 2008 at 10:48 am

I agree with your point on global warming …. However, with respect to dependence I think that you are not necessarily right. Special intersts always argue more vociferously than the average voter and so if you allow off shore drilling (and allow the operations to be owned by domestic firms) any attempt to make this less profitable in the future would be met with loud opposition. In this way off shore drilling may well have little affect on oil prices but a larger affect on American oil dependence.

I think environmentalists also feel that the more barriers to high production abolished, the easier the next ones will fall … Which is not wholly unrealistic but difficult to find evidence in the affirmative.

jpm August 3, 2008 at 10:49 am

actually, nto so much TJ. Don addresses an outrageous assertion by accepting another outrageous one, not rejecting it's premise as well. This is how the kook left advances their socialist anti-capitalist agenda

jpm August 3, 2008 at 10:56 am

here we see my point in action TJ. Adam now thinks both outrageous assertions have some merit and now seeks to debate them both

Don Boudreaux August 3, 2008 at 11:00 am

How can it be wrong to challenge the internal logic of an argument?

Martin Brock August 3, 2008 at 11:05 am

You miss Adam's point. Offshore oil is much more costly to recover than oil from Saudi Arabia for example. Possibly, offshore oil places relatively little downward pressure on the price of foreign oil not because it's so scarce but because it's so costly to discover and then recover and deliver to market. If so, regulatory changes, including tax subsidies, could encourage offshore oil recovery without lowering the price of oil.

Subsidies designed to make more costly offshore oil cost competitive with imported oil could increase our dependence on oil by discouraging adoption of alternatives. So if Saudi oil settles around $50/barrel (still very profitable for the Saudis) and U.S. offshore reserves cost $100/barrel to deliver to market, U.S. subsidizes lowering the price of U.S. offshore oil to $50/barrel discourage any alternative energy that could be sold for the equivalent of $75/barrel.

Sam Grove August 3, 2008 at 12:39 pm

Eh, were subsidies part of the argument?

gappy August 3, 2008 at 2:14 pm

I think Prof. Boudreaux argument makes perfect sense in this context. The impact on price of U.S.-produced off-shore oil will likely be small, and so its environmental impact. The tow are highly correlated. The benefits of offshore oil-drilling come from substituting an exported good with a local one, with obvious financial benefits, and an additional measure of protection in case of international supply shocks.

I also feel Martin Brock's argument is flawed in two respects. First, at current prices, offshore oil drilling will be profitable, even if extraction costs are higher than in other countries. No subsidies are necessary to make this oil more "competitive" with other sources. In commodity markets, prices are determined by supply and demand, and not by a "cost plus" criterion (this theory, for consumer durables, is advocated by neo-keynesians, and of course marxists). Second, increased supply of oil won't discourage innovation, first because no subsidies will be needed, and then because the market impact of these additional sources will be small. The incentives for innovators to discover more efficient technologies is still there.

Morerover, the concept that intentionally rationing a good promotes innovation in substitute products in counter-intuitive at best, and dead wrong at worst. I cannot think of an example, but have a terrible counter-example in mind: lisenkoism.

BoscoH August 3, 2008 at 3:15 pm

Martin,

Assuming your cost numbers for offshore oil are correct (and there are plenty of reasons to doubt them), what you miss is that having the capacity online or at the ready would act as a ballast against price spikes. The oil market discovered something very interesting this year in that it could exceed all the theoretical price ceilings imputed by oil shale and other expensive sources to recover because there are political barriers in place hindering use of those sources.

But the reason I doubt your numbers is that I can see oil rigs offshore at Huntington Beach, CA that have been there and been producing oil during the highs and lows of the oil market. Opponents of drilling have a much better argument about not liking the aesthetics or the risks of offshore drilling. The economics just isn't on your side. Perhaps the jump to bad economic arguments illustrates the lack of traction of the aesthetic and risk arguments.

Martin Brock August 3, 2008 at 3:42 pm

Gappy,

My argument is garbled toward the end, so I'll restate the last sentence.

If Saudi oil settles around $50/barrel (still very profitable for the Saudis) and if U.S. offshore reserves cost $100/barrel to deliver to market, a U.S. subsidy lowering the price of U.S. offshore oil to $50/barrel could discourage an alternative energy source that could be sold for the equivalent of $75/barrel.

The environmental impact of offshore drilling is not limited to "global warming". I'm not particularly concerned about CO2 myself. I worry more about the effect on sea life, but I don't oppose offshore drilling at all. I'm only reiterating Adam's reasonable point. Offshore oil may be profitable at current prices, but adding this oil to the competitive mix needn't lower the price, because the offshore oil costs more to deliver.

But suppose offshore oil is profitable only at current prices. Saudi oil is profitable at lower prices. Adding the offshore oil to the competitive mix could drive the price of oil down to a level at which the offshore production is marginally profitable. Then domestic producers cry "foul" and demand protectionist subsidies in the name of "decreasing dependence on foreign oil". That was Adam's point.

Price is not a matter of "cost plus", but profitability is. Oil producers will sell at any price generating a profit, and that's fine with me, but producers won't sell at a loss; however, they will take any subsidy Uncle Sam will give them.

Subsidized oil can discourage innovation. Your presumption that offshore oil will not be subsidized is wishful thinking. The rhetoric I routinely here is all about "dependence on foreign oil", and it's a "national security" concern. I can easily imagine protectionist measures in this arena.

Intentionally limiting the supply of a good, if supply could effectively be limited, could spur innovation. The problem typically is that supply can't effectively be limited.

Take moonshine for example. Its supply is artificially limited, and the legal alternatives are sufficiently attractive that little demand for moonshine exists. In this case, artificially limiting supply is effective.

Martin Brock August 3, 2008 at 3:55 pm

BoscoH,

I have no numbers for offshore oil. I picked numbers from the air only to illustrate the point.

The recent peak in oil price was speculative. Factors like a widened war involving Iran justify a high level of uncertainty regarding the future price of oil. Betting on the higher future price was completely reasonable. If the McCainiacs or some other political faction rattle their sabers loudly enough again, the price will rise again, just as it should.

I have no problem with this speculation at all, but I do have a problem with state subsidies, either direct or indirect, to encourage some artificial "buffer" against oil price increases. If unwarranted political barriers hinder offshore drilling for oil, I want the barriers lifted, but environmental concerns certainly are not irrelevant, and I have no interest in artificially stimulating this production while the offshore production is not competitive with imported oil. I have no idea what the economics of drilling at Huntington Beach might be.

I haven't jumped to any bad economics. I just picked some arbitrary numbers to illustrate a point.

gappy August 3, 2008 at 4:25 pm

Martin, I understand your line of reasoning a little better. To me this seems an argument against subsidies rather than drilling or increasing supply. But then, rather than worry about potential future subsidies for oil companies, why not criticize the near-term subsidies for ethanol, wind power, and solar promised by both candidates? And [I hate defending Big Corporations], why not worry about reverse subsidies, e.g. taxes against "excess profits" of the Oil Companies?

Regarding local effects of offshore drilling (e.g., loss of biodiversity) I don't know much at all. Information is welcome. However, this objection is now rarely mentioned when arguing against drilling. It seems that the issue is that it won't affect prices and won't have an immediate effect.

Regarding your other point: I also can see how subsidizing oil (or mostly anything) can stifle innovation. But rationing oil so that we are forced to find alternatives? If oil is abundant, why should we search for alternatives? If oil is naturally scarce, why should we ration it? It seems that rationing is just an excuse for planning.

I still don't get the argument that artificially limiting supply can increase innovation. I don't think banning moonshine accelerated R&D in alcoholic beverages. Regulating moonshine is more like rationing a non-scarce resource. I.e., no rationing at all. Either I don't understand the statement or I am missing some empirical study, if any exists.

By carrying the argument to the extreme, there should a strong correlation between countries with heavy controls on price and production, and endogenous technological innovation.

Martin Brock August 3, 2008 at 6:30 pm

But rationing oil so that we are forced to find alternatives? If oil is abundant, why should we search for alternatives?

I'm not recommending it, but I don't see why it couldn't spur innovation in theory. Suppose the statesmen just start shooting anyone using any petroleum product for any purpose. We'd find other energy sources, right? I'm not suggesting that statesmen could or should effectively ban oil use this way, but if they could and did, we'd find alternatives sooner than we otherwise would. How could this not be true?

Peak oil is no myth. Maybe we haven't reached the peak, but we are approaching it. We will start using fossil fuel alternatives eventually. Why would it matter that statesmen post armed guards at oil wells versus the wells running dry?

BoscoH August 3, 2008 at 6:59 pm

Martin,

As pointed out above, offshore, shale, and ANWR oil do not need to be cost-plus competitive with foreign oil to be part of the supply story. Their extraction cost needs to come in under the market price and they need to be available. A decade ago, oil people talked about shale being viable when a bbl was over $80 sustained. In retrospect, they underestimated the political resistance to bringing it online.

Shale is also the big argument against peak oil in our or our children's lifetimes. It's expensive to get out of the ground, but current estimates of what we have in the Rockies suggest a world supply of 50 to 100 years. World reserve estimates suggest a few centuries. Bring enough capacity online to bridge the gap between conventional production and world demand, and you'll have a long term price ceiling near the cost of extraction. Oil econ 101.

If we're going to have government energy policy, it ought to be directed at opening up sources of energy that have known viability at certain price points rather than taking crap shoots at trendy "alternative" fuels, as we've done with ethanol. Diversification for its own sake has unknown costs and nebulous benefits. Oil, on the other hand, has very predictable costs for a very long time.

John Dewey August 3, 2008 at 7:49 pm

Martin Brock: "I have no numbers for offshore oil. I picked numbers from the air only to illustrate the point."

The numbers you picked are so misleading that they illustrate nothing.

Martin, here's some real facts from the U.S. Energy Information Administration

"In 2006, average production costs (or “lifting” costs, the cost to bring a barrel of oil to the surface) ranged from about $4 per barrel (excluding taxes) in Africa to about $8.30 per barrel in Canada; the average for the U.S. was $6.83/barrel (an increase of 23% over the $5.56/barrel cost in 2005). Besides the direct costs associated with removing the oil from the ground, substantial costs are incurred to explore for and develop oil fields (called “finding” costs), and these also vary substantially by region. Averaged over 2004, 2005 and 2006, finding costs ranged from about $5.26/barrel in the Middle East1 to $63.71/barrel for U.S. offshore. "

It costs only about $10 a barrel to find and extract crude oil from Saudi Arabia. But that has nothing at all to do with the equilibrium price of crude oil. Oil companies have been developing far more expensive sources of crude for decades. Not for a few years but for decades, Martin.

The idea that the economic viability of petroleum deposits depends on the cost to produce Saudi oil is just not correct. The Saudis either cannot or choose not to supply all the world's crude oil requirements.

The equilibrium price of crude oil has much more to do with the marginal cost to produce crude oil – the cost of the most expensive barrel producers are willing to market – than it does with the Saudi's lowest production cost.

The cost quoted for current U.S. offshore exploration is for those very few locations where U.S. offshore exploration has been allowed. It includes only recent finding costs, and excludes the shallow and cheap fields which were long ago found and developed.

We do not yet know if oil fields off the coast of Florida and California and other states can be produced for less than $50 or less than $75 per barrel. We don't know because the U.S. Congress has not allowed oil companies to lease and explore in order to make that determination.

The argument that unfound oil will have no effect on the worldwide equilibrium price of crude oil is not based on any known facts.

Methinks August 3, 2008 at 9:13 pm

any attempt to make this less profitable in the future would be met with loud opposition.

Oil companies are price takers. No amount of subsidy has ever been able to protect oil companies from significant drops in demand. In the late 90's, for example, oil producers were bleeding as oil tanked – with "subsidies" (in the form of tax breaks). So, I don't much stock in that argument as I saw first hand oil producing companies limping along or going out of business.

It costs only about $10 a barrel to find and extract crude oil from Saudi Arabia.

That's quite a testament to the age of those oilfields. Ten years ago, it was $2.50/bbl. Are you sure about the $10 (I know that's not the main point of your post, I'm just wondering)?

Shale is also the big argument against peak oil in our or our children's lifetimes

There is more oil in the shale of the Rocky Mountains than there is in Saudi Arabia – provided the market price of oil remains above $40/bbl.

In fact, the "peak oil" lot has been screaming "peak oil" for time immemorial. The truth is that there is an almost infinite amount of oil. You could refine oil from the dirt in your back yard – it'll just cost you $1000/bbl. Reserves calculations are a function of market price and recovery costs. At $20/bbl you may have have x oil and at $150/bbl you may have 15x oil. So, at any given price there is a finite amount of oil (all else held constant). That is the only claim that can be made about the amount of oil we have.

Oil Shock August 3, 2008 at 10:32 pm

You could refine oil from the dirt in your back yard – it'll just cost you $1000/bbl.

That is a load of B.S. How much energy will it take to refine that oil. I will bet you it is like spending 10 barrels of oil to create 1 barrel. Extracting resources takes energy and energy is no exception

There is more oil in the shale of the Rocky Mountains than there is in Saudi Arabia – provided the market price of oil remains above $40/bbl.

Shale is a big net energy loser. It is another case of turning gold into lead. It is always possible that we will find more efficient ways of extracting oil from shale. So that $40/barrel is fiction.

Human beings have always found superior forms of energy to replace inferior ones. The only superior source of energy to Petroleum that we have discovered since the beginning of oil age is Nuclear.

Good news is world is not a closed system. It receives from the Sun, several billion times the energy we consume, on a daily basis. So it is just a matter of harnessing it. Even oil is stored solar energy.

Methinks August 4, 2008 at 8:42 am

So that $40/barrel is fiction.

I assume you're a reservoir engineer to be able to make that statement? I'm thinking you're just another moaner, so I'm just going to go with what trained professionals working in the oil field and putting their own money on the line are estimating.

How much energy will it take to refine that oil.

Uh…how do I put this? That's the point!

How much energy will it take to refine that oil.

Kumbaya. You don't know what a hydrocarbon is, do you? But you're sure that shale oil is B.S. Awesome. I'll give you nuclear (although, it's not as "flexible", thus not superior). As soon as you can get the U.S. to allow the building of a single nuclear power station, let alone figure out how to run cars on nuclear, I'll be partying in the streets. Until then, keep those dreams of soccer moms carting kids around in solar powered vans alive!

John Dewey August 4, 2008 at 9:49 am

methinks: "That's quite a testament to the age of those oilfields. Ten years ago, it was $2.50/bbl. Are you sure about the $10 (I know that's not the main point of your post, I'm just wondering)?"

$10 a barrel may be a little dated. The most recent information I've found has been the 2004-2006 production costs by region provided by the EIA in December, 2007. It shows a total production cost for the entire Middle East to be $14.31 a barrel. I've read that Saudi oil was even cheaper than the rest of the Middle East. My estimate of "about $10 a barrel" is not a misleading number, at least not with respect to the $50 a barrel that Martin used.

Are you sure that $2.50 a barrel was the total production cost ten years ago? or was it just the lifting cost?

jpm August 4, 2008 at 10:12 am

An amount of oil that would affect prices only inconsequentially is an amount of oil that would affect global warming

About 1/3rd of Don's post is the above sentence, yet Don doesn't even see mand made global warming as a debatable issue anymore, much less see it for what it is, an attack of capitalism.

This is how the left gets their socialist agenda advanced, jumping from oune outrageous unsupported assumption straight into another, and Don is there accepting them as the do it

Martin Brock August 4, 2008 at 10:20 am

The numbers you picked are so misleading that they illustrate nothing.

"Averaged over 2004, 2005 and 2006, finding costs ranged from about $5.26/barrel in the Middle East to $63.71/barrel for U.S. offshore."

Right. I picked $100/barrel for the price of "delivering U.S. offshore oil to market". Your source says $63.71/barrel to "find" plus $6.83/barrel to "lift" (although this figure doesn't refer to offshore oil specifically). Conservatively, your source says $70+/barrel to deliver, so my pick wasn't as wild as I imagined myself.

It costs only about $10 a barrel to find and extract crude oil from Saudi Arabia. But that has nothing at all to do with the equilibrium price of crude oil.

I never say that cost is equivalent to equilibrium price. It isn't, and I'm very explicit on this point above. Cost certainly does set a lower limit on price. Offshore oil producers will not produce oil at a loss, unless they're subsidized.

The equilibrium price of crude oil has much more to do with the marginal cost to produce crude oil – the cost of the most expensive barrel producers are willing to market – than it does with the Saudi's lowest production cost.

No. It has to do with the marginal cost and demand. If demand exists for oil at a price justifying the cost of producing offshore oil, offshore oil can be produced, but price is not simply the price of producing the most costly oil that could possibly be produced. Oil costing more than the market clearing price is not produced at all, unless it's subsidized.

And if I can supply an alternative energy source between the cost of Saudi oil ($10/barrel according to your source) and the cost of U.S. offshore oil ($70+/barrel according to your source), I can lower the market clearing price of oil below $70/barrel even if demand exists for every drop of Saudi oil at the cost of delivering offshore oil. That's called "competition".

We do not yet know if oil fields off the coast of Florida and California and other states can be produced for less than $50 or less than $75 per barrel.

Somehow, your own "real facts", quoted authoritatively just above this statement, give a price closer to $70. Apparently, we know "real facts" when they seem convenient to you but not otherwise.

Your own source says that U.S. offshore oil cannot be produced competitively for the market price only two years ago. Now, investors are supposed to dump billions into offshore oil exploration and recovery, that can't possibly yield a return for years, expecting the current price to last forever? That's your theory? And promised subsidies are not part of this theory?

Keith August 4, 2008 at 10:30 am

Quote from Adam: "In this way off shore drilling may well have little affect on oil prices but a larger affect on American oil dependence.

I think environmentalists also feel that the more barriers to high production abolished, the easier the next ones will fall …"

Aren't we already dependent on oil? Is there some other secret energy supply we don't know about (I mean other than the fabulous "alternative" energy that we are continuously told that we need to switch too, but doesn't actually exist)?

Why would anybody be in favor of barriers to high production? The only reason I can think of is to give power to the politicians and bureaucrats in government with which to control our lives and destroy our liberty. Perhaps you have another reason?

John Dewey August 4, 2008 at 10:54 am

Martin: "your own "real facts", quoted authoritatively just above this statement, give a price closer to $70. Apparently, we know "real facts" when they seem convenient to you but not otherwise."

Do you even bother to read what I write, Martin? or do you just ignore what conflicts with your opinion?

"The cost quoted for current U.S. offshore exploration is for those very few locations where U.S. offshore exploration has been allowed. It includes only recent finding costs, and excludes the shallow and cheap fields which were long ago found and developed."

Again, Martin, we do not know how much it will cost to produce oil from fields not yet discovered. The cost provided by the EIA is for the last remaining oil off the coasts of Louisiana and Texas. That's the very deep stuff. The oil off the coast of Florida and elsewhere is likely not that deep. But we don't know because it's been off-limits to exploration.

John Dewey August 4, 2008 at 10:59 am

Martin Brock: "Your own source says that U.S. offshore oil cannot be produced competitively for the market price only two years ago."

Where does the EIA say such a thing? Give me a link to that statement, Martin?

Oil companies continue to produce oil today from the Gulf of Mexico. They would produce oil from off Florida coasts if not for federal government restrictions.

Methinks August 4, 2008 at 12:35 pm

Are you sure that $2.50 a barrel was the total production cost ten years ago? or was it just the lifting cost?

I'm as sure as I can be. These numbers came from oil producers themselves. However, as the fields age, it makes sense that costs increase if technology has not been keeping pace. Also, they may be accessing fields that are more expensive to produce as demand continues to drive the oil price up. I don't think your numbers are misleading, I was just surprised to see such a large change in costs over the decade.

Methinks August 4, 2008 at 12:43 pm

The only reason I can think of is to give power to the politicians and bureaucrats in government with which to control our lives and destroy our liberty. Perhaps you have another reason?

Bingo.

Nothing comes close to the efficiency of hydrocarbon. People have been trying to find a viable substitute for decades. I'm one of those people who wishes for an alternative. It would go a long way to remove power from Putin, the Saudis (and the wahhabism they export), etc. I just can't see a justification for dictatorship and socialism in the West to fight dictatorship and socialism in the East. Forcing an alternative to hydrocarbon based fuel means we don't have an alternative.

Oil Shock August 4, 2008 at 1:35 pm

Methinks is a very inappropriate moniker for you. Your post contained hardly a thought at all. Is that the best you could come up with?

If you still "think" that you are capable of thought, do a search on EROEI on google.

Methinks August 4, 2008 at 1:57 pm

Well, Oil Shock, I think "Oil Idiot" is a better name for you, but we are all allowed to pick our own monikers on this site. I understand the lefty position is "think like us or you can't think", but that's really your problem, not mine.

So, until you can produce actual arguments for your positions instead of aggressive assertions like these:

Shale is a big net energy loser. It is another case of turning gold into lead.

That is a load of B.S. How much energy will it take to refine that oil. I will bet you it is like spending 10 barrels of oil to create 1 barrel. Extracting resources takes energy and energy is no exception

Even oil is stored solar energy.

I'll just keep rolling my eyes.

I'll give you a hint (not that it is likely to help you) – E&P costs already take into consideration the amount of energy it takes to find and extract. And incidentally, Shale was economic at $40/bbl when I was still covering the industry 10 years ago. Since then, it has become economic at around $8/bbl less. I use $40/bbl because I know it's a more conservative number.

Oil Shock August 4, 2008 at 3:13 pm

I'll just keep rolling my eyes.

It is not going to help. Problem is not in your eyes. But, right behind it.

Martin Brock August 4, 2008 at 4:06 pm

Do you even bother to read what I write, Martin? or do you just ignore what conflicts with your opinion?

Yes. No.

Your presumptions about future finding costs are your presumptions. Of course, any projection of future costs would not simply apply costs of the most easily discovered oil which, of course, has already been discovered.

Where does the EIA say such a thing? Give me a link to that statement, Martin?

I don't need to link it. You quote it above. Here it is again.

"Averaged over 2004, 2005 and 2006, finding costs ranged from about $5.26/barrel in the Middle East to $63.71/barrel for U.S. offshore."

Did I just paste "$63.71/barrel for U.S. offshore", or do my eyes deceive me?

Oil traded for $60/barrel only a few years ago, and that price was considered extraordinarily high then. Somehow, you imagine that cheap oil is just waiting to be discovered out there, because … well … because this version of events appeals to you. You don't present a shred of evidence for it. The only evidence you do present paints a very different picture.

Oil companies continue to produce oil today from the Gulf of Mexico. They would produce oil from off Florida coasts if not for federal government restrictions.

Even if oil off Florida can be found and delivered to market for less than $70/barrel (a point you don't substantiate at all and that your only source more nearly refutes), it's still far more costly than imported oil. That's the point you ignore.

Charlie August 4, 2008 at 4:08 pm

As Stephen Colbert might say, "This feels like its true." But Don hasn't given any reason for us to believe it is true. As is it is just a conjecture without any support (model please?).

For instance, if you take the Weitzman interpretation that the main reason to worry about global warming is the small chance of catastrophic damage, it is quite possible that a small amount of oil, causing a small amount of pollution, that creates a small increase in the probability of the worst case scenario, could have a large effect on a risk averse objective function, even if it has only a small effect on the expected cost of warming.

Maybe that is how the world works, maybe not. But if you are going to just conjecture that it doesn't work that way, shouldn't evidence be demanded from your readers?

Methinks August 4, 2008 at 4:12 pm

It is not going to help. Problem is not in your eyes. But, right behind it.

Thank you for that brilliant analysis. We'll just have to accept that this is all the leftards can muster.

John Dewey August 4, 2008 at 4:24 pm

martin brock: "I don't need to link it. You quote it above. Here it is again."

Are you just as stubborn as you're showing yourself to be, Martin?

The EIA figures for U.S. offshore finding costs for 2004-2006 are finding costs for extremely hard-to-find crude oil. This is the oil in regions of the Gulf of Mexico which were leftover long after the inexpensive oil in those regions was found and produced. These figures are not relevant at all to the finding and production cost of oil around Florida and off most other coasts. Do you not understand why they are irrelevant? Do you not understand the difference between deep Gulf of Mexico drilling and the drilling which will eventually be allowed 50 miles off the Florida coast?

John Dewey August 4, 2008 at 4:41 pm

Martin brock,

Here's a little information about the differences in deepwater and shallow water exploration and drilling costs. Asiked about the cost of drilling off the Florida coast, an exploration company executive responded:

"Your drill times and drill costs are … probably a third of what they'd be out in deepwater," said William Van Wie, vice president of exploration at Devon Energy Corp., an Oklahoma City-based producer that is one of the largest leaseholders in the deepwater Gulf of Mexico.

A large shallow-water project might cost $200 million, compared with $3 billion for a big deepwater field, Van Wie said. California, the most promising region for new oil finds, is almost certain not to lift restrictions, he said."

The project costs he refers to include not just the drill costs, but also acquisition of leases, mapping of the sea floor, seismological testing, drilling of test wells, and much more.

Are you aware, Martin, of the type exploration and drilling in the Gulf of Mexico recently? The EIA figures I provided earlier for the cost of offshore drilling are mostly the exploration and drilling costs for the deep and expensive wells far out in the Gulf of Mexico.

Oil Shock August 4, 2008 at 4:52 pm

Isn't leftard is the opposite of retard! LOL! I would rather like to be compared to Rothbard.

Martin Brock August 4, 2008 at 7:06 pm

Are you just as stubborn as you're showing yourself to be, Martin?

No, I'm just consistently quoting your own source. If you don't want it cited authoritatively, I don't know why you quoted it. I nowhere ever express any opposition to offshore drilling, on the contrary. The issue is whether offshore drilling will lower the price of gasoline or increase pressures for subsidies, as Adam suggested earlier, thereby increasing dependence on oil vs. increasingly attractive alternatives.

Oil Shock August 4, 2008 at 7:40 pm

It doesn't matter what a group of reactionary central planners at EIA say about anything. I would trust what the private companies say and do a lot more.

vidyohs August 4, 2008 at 9:09 pm

John Dewey – Methinks,

Martin is just taking you around the mulberry bush. The more you chase him the longer you go round and round and round.

Methinks August 4, 2008 at 10:11 pm

The issue is whether offshore drilling will lower the price of gasoline

It will, provided demand doesn't continue to grow faster than supply.

or increase pressures for subsidies, as Adam suggested earlier,

There are always pressure for subsidies (the only ones I've ever seen come in the form of tax breaks). The fact that oil is a boom and bust business is used to lobby for these subsidies. The pressure for subsidies increases when oil price drops sharply and the government wants to encourage drilling. Because shallow water drilling is prohibited in many areas, producers will not drill in more expensive deep water and on land without these tax breaks.

If you refuse to listen to John Dewey's excellent points, you should at least process the quote from Devon energy's van Wie. I'm very familiar with Devon. Management is knowledgeable, risk averse and distinctly lacking in B.S.

thereby increasing dependence on oil vs. increasingly attractive alternatives.

The search for alternatives has been around for decades. There are already alternatives – they just aren't good alternatives. By artificially increasing the scarcity of oil, we are forcing people to use inefficient alternatives. Then, we're subsidizing them and creating the exact problem you say you fear. The subsidy train has left the station, Martin. And it's much larger than the section 29 tax credits for Petroleum E&P companies.

Unless I'm completely mistaken (and John Dewey will correct me if I'm wrong), he's arguing that more land should be open to petroleum exploration and development. Why do you have a problem with that?

Martin Brock August 5, 2008 at 7:06 am

It will, provided demand doesn't continue to grow faster than supply.

Truisms are true. The price of gasoline will also fall if demand grows more slowly than supply without any increase in offshore oil. For example, if the Volt exceeds all expectations and many more nuclear power plants are built and many people start driving their cars on nuclear power, the demand for gasoline could rise more slowly than the supply from existing sources.

The question involves the cost of producing U.S. offshore oil vs. the cost of producing other alternatives to imported oil and the supply of both.

Why do you have a problem with that?

I nowhere ever express any problem with it. I'm addressing the issue that Don raises in this thread. Don cites Brad Heavner asserting that offshore oil will not lower the price of gasoline and then asserting that offshore drilling can increase dependence on fossil fuels compared with other energy sources. Don accuses Brad of an internal contradiction. Adam challenges this accusation, and his challenge is reasonable. Whether the challenge is strictly correct depends on facts like the cost of producing offshore oil, the cost of producing alternatives to gasoline, the pressure to subsidize alternatives to imported oil generally and the pressure to subsidize offshore oil vs. other alternatives specifically.

Dewey responds by disputing my hypothetical cost of delivering offshore oil ($100) to market while simultaneously quoting a source he calls "real facts" citing nearly this price. He then claims that less costly offshore oil exists without citing any similar figures from any other "real facts".

It's entirely possible for Adam's challenge to be correct and for offshore oil to be a plentiful at some price at the same time. I suffer the capacity to grasp this point and not to focus obsessively on the fashionable debate over offshore oil to the exclusion of every other alternative.

I have no idea how people will propel their cars generations from now, but I don't expect U.S. offshore oil to contribute much to the propulsion; however, as I say very specifically above, I have no fundamental problem with offshore drilling. You then respond by asking, again, without any justification, "Why do you have a problem with that?" I can only repeat the same answer to this question that I've given consistently. When did you stop beating your husband?

Methinks August 5, 2008 at 10:22 am

Martin,

Don cites Brad Heavner asserting that offshore oil will not lower the price of gasoline and then asserting that offshore drilling can increase dependence on fossil fuels compared with other energy sources. Don accuses Brad of an internal contradiction. Adam challenges this accusation, and his challenge is reasonable.

Adam's challenge is based on the assumption that alternative fuel can be viewed independently of petroleum. It cannot. Like it or not, with the exception of Nuclear energy, no alternative to petroleum is as efficient. Thus, all other alternatives depend on extremely high oil prices to even hope to be somewhat competitive.

The pressure for subsidies comes when oil prices collapses (petroleum tends to be a boom and bust industry). Petroleum companies cut back on operations, people get fired, local economies flag and local politicians seek to "stimulate" them back into action by seeking tax breaks for E&P. Since alternative fuels only begin to become marginally "competitive" (but only with subsidies – a contradiction, really) during tremendous oil price spikes, there will be even more pressure for subsidies from that industry when oil price declines because they will be even less competitive. Like it or not, alternative energy is itself dependent on oil price by virtue of being a substitute. The minute you shift demand from oil to alternatives, the oil price drops and alternatives become even less attractive, requiring more subsidy. So, a high oil price is a prerequisite to petroleum E&P in more expensive areas and for alternatives at all times. The only way to make alternatives more attractive is by creating artificial scarcity in oil to drive up price – which is partially what's happening. But, that's effectively another subsidy for alternative energy. So, if you're against subsidies, this is a problem. In the long run, creating artificial scarcity in the U.S. won't work to make inefficient alternative more prevalent because the climbing price of oil will drive other producers to seek more and more risky fields to explore and develop and more countries will turn to nuclear energy, driving down the price of oil. See a pattern there? Unlike natural gas, oil is a global commodity. Like I said, it's boom and bust.

The only exception (and the only energy source that petroleum companies see as a real challenge to petroleum) is nuclear energy. But, we've closed the door to that energy source as well. If you want to decrease dependence on oil, nuclear energy is the only real alternative. IMO, we are spending too much energy trying to stop drilling and subsidizing poor energy substitutes and not enough trying to remove the ban on nuclear energy.

Martin Brock August 5, 2008 at 1:15 pm

Adam's challenge is based on the assumption that alternative fuel can be viewed independently of petroleum.

I don't agree. His challenge is based on the assumption that alternatives interact with petroleum to influence the price of gasoline.

Like it or not, with the exception of Nuclear energy, no alternative to petroleum is as efficient.

Many alternatives are not competitive, but "no alternative is as efficient" is short sighted. Boone Pickens claims that we can replace a substantial portion of the electricity generated from natural gas with windmills and then use the natural gas to run automobiles. I don't know that he's right, but he makes the case.

It's not simply a matter of replacing petroleum with something else, one for one. Substitutions can be more complex. A replaces B, and B replaces C, and C replaces D. That's equivalent to A replacing D. And "A" in this case needn't be an energy source at all. It could be a more fuel efficient automobile or a more practical battery, like a higher capacity supercapacitor.

Thus, all other alternatives depend on extremely high oil prices to even hope to be somewhat competitive.

Well, the $70+/barrel cost of offshore oil is extremely high compared with the $10/barrel cost of Saudi oil. Those are the "real facts" according to John, and no other credible numbers appear in this thread, only wishful thinking and hand waving. I can just as easily prefer Pickens' hand waving. He's no environmentalist Cassandra.

The pressure for subsidies comes when oil prices collapses (petroleum tends to be a boom and bust industry).

Right.

Petroleum companies cut back on operations, people get fired, local economies flag and local politicians seek to "stimulate" them back into action by seeking tax breaks for E&P.

Imports increase, and politicians call for more domestic supply in the name of "national security". Petroleum companies accept subsidies as happily as agribusiness or anyone else.

Since alternative fuels only begin to become marginally "competitive" (but only with subsidies – a contradiction, really) during tremendous oil price spikes …

I don't know that alternatives become competitive only during oil price "spikes". At some point, global oil production peaks (as it did decades ago in the U.S.). the oil price might then rise and subsequently decline as alternatives replace oil as an energy source, but the price decline then doesn't drive out the alternatives, because there isn't enough oil to replace the alternatives.

Even if we lift all restrictions on oil exploration in the U.S., in Alaska, off the cost of Florida and everywhere else, we'll never remotely approach the peak of U.S. production decades ago, and we'll never come close to meeting our own current demand. This point is not controversial.

Like it or not, alternative energy is itself dependent on oil price by virtue of being a substitute.

I like it just fine. Oil is also a substitute for the alternatives. Alternatives to gasoline will appear in the next few decades, because oil production is near a peak.

The minute you shift demand from oil to alternatives, the oil price drops and alternatives become even less attractive, requiring more subsidy.

No subsidy is required to substitute alternatives for oil. I don't advocate any subsidies.

The only way to make alternatives more attractive is by creating artificial scarcity in oil to drive up price – which is partially what's happening.

No artificial scarcity is necessary. Oil is self-limiting, but demand for energy is not. If the Chinese and the Indians remotely approach U.S. energy consumption per capita, oil is already very scarce, and production is already near a peak. It just doesn't take that long for a developing nation on the right economic course to reach U.S. levels of demand. We did it in less than a century, and we were leading the way. Later adopters of our habits can develop in this direction more rapidly.

So, if you're against subsidies, this is a problem.

I'm against subsidies. The substitution of other energy sources for petroleum is inevitable. It's a matter of when, not if. Global oil production shows every sign of following the pattern that Hubbert first predicted half a century ago and then observed two decades later. Even Ron Bailey at Reason magazine accepts the conventional wisdom that global production peaks in the next few decades, if it isn't peaking now. The oil price then rises, and alternatives become more competitive as demand continues to rise. The oil price doesn't rise indefinitely, but we probably don't see $10/barrel again, regardless of the cost of delivering oil from Saudi Arabia, although we could see much cheaper energy again, if one or more of the alternatives scales unexpectedly well.

The only exception (and the only energy source that petroleum companies see as a real challenge to petroleum) is nuclear energy.

I don't think you know enough to reach this conclusion definitively; however, I'm also a booster of nuclear power.

Methinks August 5, 2008 at 2:07 pm

I don't think you know enough to reach this conclusion definitively;

Yeah? How do you know?

That is hilarious. It will take me a whole week to run an energy tutorial to unwind your misconceptions. I don't have time for that. Plus, you tend to plug your ears and dig in when anyone challenges your ignorance – as John Dewey did. So, there's not much point. The funniest part of your post is when you assert that I don't know enough about nuclear energy to make the statement I make. This after a long diatribe rooted in complete ignorance. Thanks for the laugh, Martin.

Point taken, Vidyohs.

Martin Brock August 5, 2008 at 3:57 pm

Yeah? How do you know?

I don't think anyone knows that nuclear energy is the only alternative to petroleum as an automotive fuel. Again, according to Boone Pickens, who has some right to an opinion, a combination of wind generated electricity and natural gas propelled cars is a competitive alternative to gasoline from petroleum at this time, and Pickens puts quite a bit of his own money where his mouth is. Why should I believe that you know better?

Plus, you tend to plug your ears and dig in when anyone challenges your ignorance – as John Dewey did.

Incredible. Above, I write, "If unwarranted political barriers hinder offshore drilling for oil, I want the barriers lifted …" Later, I write, "I nowhere ever express any opposition to offshore drilling, on the contrary."

Two posts later, you respond with "[John]'s arguing that more land should be open to petroleum exploration and development. Why do you have a problem with that?" Well, I don't have a problem with it, as I said. The point involves effects on the price of gasoline and pressure for oil subsidies vs. other subsidies.

Arguing that increased exploration for offshore oil need not lower the price of gasoline is not an argument against exploring for offshore oil, anymore than arguing that more nuclear power plants needn't lower the price of gasoline is an argument against more nuclear power plants. I never make the point that you attribute to me here at all.

But you accuse me of "plugging my ears" and hearing only what I want to hear. The record is very clear. Your accusation is a denial reflex. You describe yourself.

Methinks August 5, 2008 at 4:59 pm

The record is clear.

Let the record stand.

the record!

Martin, I'll tell you something about Boone Pickens (for I too listen to his commercial all day long). It is far less risky to seek government subsidies for wind farms in this political environment than to take the risks necessary to find petroleum. Just something to consider when you talk about good ole' Boone. He is rent seeking.

Like, I said, I don't have time to go into Huberts Peak and why most of your assertions are naive. Just get an energy primer with comparisons of different energy sources and spend some time on the subject.

As for nuclear, my understanding is that it would be an alternative to hydrocarbon based fuels for production of electricity – which is a large chunk of demand and why petroleum companies see it as a viable threat. I don't know how much it will do for transportation.

Methinks August 5, 2008 at 5:34 pm

The record is very clear. Your accusation is a denial reflex. You describe yourself.

You forgot to ask me when I stopped beating my husband!

vidyohs August 5, 2008 at 8:06 pm

Why Methinks

"As for nuclear, my understanding is that it would be an alternative to hydrocarbon based fuels for production of electricity – which is a large chunk of demand and why petroleum companies see it as a viable threat. I don't know how much it will do for transportation.
Posted by: Methinks | Aug 5, 2008 4:59:31 PM"

My goodness lady, a small nuke explosion in the rear of your SUV ought to propel you for a long way, that may be threat enough.

vidyohs August 5, 2008 at 8:16 pm

BTW on this related subject of filling the needs for domestic production of oil, may I point out again that (in accordance with my rant (IAWMR)) one person elected to the house of representatives is blocking any discussion, debate, or vote on the house floor of proposals to open off-shore fields and ANWR to drilling.

One person.

Makes a real farce out of that equal representation thing doesn't it?

It doesn't matter that she is doing it out of playing policitcs for future advantage (after election); what matters is that one representative (Nancy Pelosi) has the power under the Constitution Art 1. Sec 5, Para 2. which allowed our congresscritters to create this traversty of representation. She could be the head of a committee instead of Spealer of the House and she still would have the power to block it…..of course she wouldn't have the power to order the lights turned off, the microphones, turned off, and the cameras of C-span shut down if she were the simple head of a committee in opposition to the Speaker, but what matters again is the simple fact that our government can be held hostage to one person. And proof of that is slapping you across your chops right now…..once again.

One person, Ladies and Gents, and most likely it ain't your person. Kinda sucks doesn't it?

vidyohs August 5, 2008 at 8:18 pm

More BTW,
I posted this on the Freedom of Expression post as well.

"Am I the only one tht began having trouble accessing the Cafe Hayek website last week.

I went two or three days with being told that it could not be opened, then it was fixed and now this morning I am back to the not available screen again."

Any clue as to what is going on?

Martin Brock August 5, 2008 at 10:10 pm

Martin, I'll tell you something about Boone Pickens …

You don't tell me anything really, except your preference for some other prophecy. Why imagine that offshore oil drillers covet subsidies any less than anyone else?

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