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What New Offshore Drilling Will Yield

Author: Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change
March 31, 2010

What New Offshore Drilling Will Yield - what-new-offshore-drilling-will-yield

Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change

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President Barack Obama's decision (NYT) to allow new oil and gas exploration along the Atlantic Coast, in the eastern Gulf of Mexico, and off the north shore of Alaska is notable more for its political significance than for its substantive impact.

The potential impact on oil prices and volumes of opening more of the Outer Continental Shelf (OCS) has been exhaustively (and exhaustingly) studied. Last year, the U.S. Energy Information Administration (EIA) estimated that reversing President George W. Bush's decision to open up much of the OCS to exploration and production would increase oil prices by 11 cents per barrel in 2020 and $1.33 per barrel in 2030, which would raise gasoline prices by less than a tenth of a penny per gallon in 2020 and by only three cents per gallon after a decade more. (Though details are still thin, Obama's announcement appears to be largely tantamount to a decision not to permanently reverse the Bush policy.) Consumers aren't going to notice any impact from this step.

The broader economic impacts are potentially more significant. One 2008 study put the potential revenues from opening up all off-limits OCS at $1.1 trillion and the direct costs at around $200 billion, for a net direct benefit of about $900 billion. (This overstates the likely economic benefits of the Obama move, since it does not open up all off-limits OCS.) That revenue would be split between oil companies (including their shareholders) and the federal and state governments; depending on the details, that could be a significant benefit for Americans. That said, the bulk of the revenues would likely go to the companies (and shareholders), and the sums would be spread over several decades, lessening the public benefit of the move.

The direct climate change downsides of the move are harder to quantify. If the United States expands oil production and OPEC cuts production to stabilize prices, the net impact on emissions would be roughly zero. (The benefit to U.S. consumers in this case, of course, would be much diminished too.) If OPEC keeps its production constant and allows prices to fall, some fraction of the increased U.S. production will translate directly into increased emissions. If, for example, the move resulted in a net five billion barrel increase in global oil production, and carbon was priced at $50 per ton, the climate damages resulting from the move would be about $100 billion--a serious sum but one that would likely be much less than the value of the oil produced.

The biggest impact of the move, though, will likely be on the politics of energy policy--or at least that's what the president seems to hope. Obama probably still believes what he said during the 2008 campaign: that offshore drilling won't have much of an impact on the U.S. economy or on U.S. security. He appears to be betting that this move will build confidence among moderates and industry as Congress gears up for a fight over comprehensive energy and climate legislation. His speech (NYT) this morning focused almost entirely on clean energy--indeed it barely mentioned the OCS decision. But confidence-building is very tough slogging in Washington these days.

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