Friday, September 5, 2008

The Economics of Drill Here, Drill Now

Most folks who visit our little corner of the WWW have seen the estimates of the price-at-the-pump impact of new (American) production coming into the market (not much). Tyler Cowen brings up a factor that I haven't seen mentioned elsewhere, the value of the taxes imposed on extraction and profits. I am agnostic on the virtues/vices (which is how the debate has come to be framed) of drilling. From an economic point of view I see value in leaving the stuff in the ground as an appreciating asset and an argument can be made from a security angle that burning the Mideast's petroleum first is advantageous.
On the other hand you could go with the soundbite argument, "Just as the best time to plant a tree was ten years ago, the same is true of drilling an oil well".
Whatev, here's Marginal Revolution:

Matthew Kotchen and Nicholas Burger have done a real study of the economics of drilling in ANWR (ungated, published version here). Ben Muse reports some of their results:

What are the benefits? Kotchen and Burger estimated that the oil had a value of $374 billion (writing in July 2007, they assumed a long-term price of $53/barrel), but that it would cost $123 billion to extract and market. The net return of $254 billion is divided consists of industry rents of $90 billion, Alaska tax revenues of $37 billion, and Federal tax revenues of $124 billion.

Under the authors' understanding of incidence, consumers wouldn't benefit much at all because oil prices would not fall noticeably. Still, drilling makes economic sense if the loss of environmental amenities is valued at less than $1,141 a person (per American, not per Alaskan) and that was with a price of oil roughly half of today's price....

HT: to Mr. Cowen himself- "Silly me"
(I had missed the post yesterday)