Wolfram: U.S. should up oil output
With oil prices declining, it would appear at first glance that the need for additional oil and natural gas production in the United States is a thing of the past. This belief would be a case of what Sherlock Holmes said is seeing but not observing. While we have seen a recent sharp decline in the price of oil and as a result, the price of gasoline, we should observe that policies that restrict our ability to make use of our oil and natural gas reserves are harmful to the economy in the long term.
The decline in the price of oil has to do with a number of factors, one of which is the use of the technology of horizontal drilling (fracking has been used in Michigan for over 60 years). This reduction in the cost of finding and extracting oil and natural gas has led to the United States fast overcoming Saudi Arabia as the world’s largest producer of oil.
There is also a short run dampening of demand because of the cyclical slowdown of the economies of China and Europe. Russia has not been able to reduce its supply because of the need to generate revenue for the government under the stress of sanctions.
One advantage of the new horizontal drilling techniques is it allows producers to quickly adjust to changing market conditions. Should OPEC decide to change its policies and limit supply, as it did in the 1970s, and drive up the price of oil, U.S. producers would expand production and dampen any increase in the price of oil.
Unfortunately, current policy is to limit that ability of U.S. producers to respond to changes in the price of oil and refined gasoline. President Barack Obama has said he will veto the bill recently passed by the Congress that approves the Keystone Pipeline.
Vetoing the bill is akin to increasing gasoline prices and reducing the amount of oil that will be produced in the U.S.
The Obama administration is attempting to close off one of the largest sources of oil to production, by setting aside more than 12 million acres in the Artic Natural Wildlife Refuge that would not be available for oil exploration or drilling. The administration is also putting part of the Arctic Ocean off-limits to oil production.
While there are certainly environmental risks to oil exploration in the Arctic, Alaska, or anywhere else, any production of energy entails risk. It is useful to recall what the environmental cost of transportation by horse and buggy was in the cities of the 19th century. Look at the environmental havoc caused by burning wood as a source of heat and energy.
Rather than a blanket limitation on the ability to explore for, produce, and transport oil, the government’s role should be to ensure that if there is environmental damage from an incident, there will be recompense.
The approach of the Obama administration will result in lower oil production in the U.S., higher oil and natural gas prices, and resulting higher prices of gasoline and other goods, such as plastics, that are made from oil. This, in turn, will result in higher prices of consumer goods and services. Those who are most harmed by this will be those least well-off in our society.
Gary Wolfram is William Simon professor of economics and public policy at Hillsdale College.