is critical to the operation of our economy and the maintenance and
improvement of our standard of living. Restricting access to energy
hurts the economy, drives income down, and, of course, drives up prices
of other goods. Opening access to our own petroleum reserves can help
our economy as it helps restrain rising energy costs.
Petroleum Prices Hurt Economy
past several years have seen a dramatic increase in the price of
petroleum and petroleum products. The price of petroleum doubled in the
past year, though it has eased in the past two months. The resulting
increases in gasoline, diesel fuel, and heating oil prices directly
impact household budgets while reducing jobs and income.
example, the EPA estimates that a typical light vehicle travels 12,000
miles per year and averages about 20 miles per gallon.
Doing the math indicates that the typical vehicle uses about 600
gallons per year. Further, the Department of Transportation data show
that the average household owns nearly two cars.
Therefore, the cost to the average household of a $1 per gallon price
increase is about $1,100 per year. But the damage to the economy does
not stop there.
Higher petroleum prices squeeze the production
side of the economy from both the demand and the cost directions.
Consumers’ demand for output drops as they divert expenditures from
other items to gasoline and heating oil. In addition, petroleum
products are used to produce and distribute many goods and services.
with these higher costs, producers try to raise their prices. But the
lower demand prevents the prices from rising enough to completely
offset cost increases. This leads to production cuts and, therefore,
lower employment. In turn, these conditions put downward pressure on
wages and salaries.
The effect of high petroleum prices in the
U.S. is a weaker economy; the cause of the high petroleum prices is a
change in supply and demand. In the past decade, worldwide demand for
petroleum has grown faster than supply and has virtually erased spare
capacity. With over 5 million barrels per day as recently as 2002,
spare capacity has dropped below 2 million barrels per day in the past
couple of years. When supply is pushed up against its capacity
constraints, as it is now, additional demand in one part of the world
can be met only with demand reductions elsewhere.
When there was
spare capacity on the order of 3–5 million barrels per day, the demand
of a new car owner in the developing world could be met with additional
pumping from existing wells. With no spare capacity, fuel for a new
driver can be provided only when the price rises high enough to force
drivers elsewhere out of their cars. In this situation, slight changes
in supply can also lead to large changes in price.
What If Petroleum Output Rose?
domestic production of petroleum will affect the economy two ways:
First, it will reduce the amount we spend on imported oil. Second, it
will lower the price of petroleum. The two effects work together to
reduce energy expenditures, reduce the trade deficit, and expand
The impact of increased production on world
petroleum prices depends on the market conditions into which the
additional oil is supplied. In a letter to Representative Jack Kingston
(R–GA) dated July 2, 2008, Guy Caruso, administrator of the Energy
Information Administration, estimated each additional million barrels
of oil would lower world price by $20 per barrel. This price impact is
consistent with other recent research.
consumption of gasoline, heating oil, and other petroleum products is
difficult for consumers to do in the short run. As a consequence, a 1
percent increase in price reduces consumption by only 0.05 percent. So
a 1 percent change in supply requires a 20 percent change in price to
bring markets back into balance. It is understood that the price impact
would be smaller over time once the world economy fully adjusts to the
It seems probable that world petroleum
markets, which are not currently in long-run equilibrium, will continue
to see strong demand growth, especially over the long-run.
Nevertheless, if the world petroleum market eases significantly by the
time this increased production comes on line, the price and economic
impacts will be less pronounced. But this reduced impact would occur in
a world that already had significantly lower petroleum prices.
domestic production by 1 million barrels per day would reduce imported
petroleum costs by $123 billion, generate an additional $7.7 billion in
economic activity, and cost $25.6 billion in additional oil production
costs. The net gain to the economy would be $105 billion. The impact on
employment would be an increase of 128,000 jobs.
same analysis to a 2 million barrel per day increase in domestic
petroleum production yields net economic gains to the economy of
270,000 jobs and $164 billion.
Artic National Wildlife Refuge (ANWR) and the off-limits part of the
Outer Continental Shelf (OCS) are estimated to contain 28 billion
barrels of petroleum. The 10 billion barrels estimated to be in ANWR
are enough to fuel all the vehicles for 7.4 million households for 50
years. In addition, the Mineral Management Service conservatively
estimates there are nearly 18 billion barrels of petroleum in the
restricted areas of the outer continental shelf alone.
bringing an additional 1–2 million barrels per day of petroleum out of
these resources is not a trivial enterprise, it could be done in less
time than the decades often mentioned. A single platform in the Gulf of
Mexico is slated produce one-quarter of a million barrels per day
within the next year. Estimates claiming less than this amount from the
whole OCS are not believable.
A bit of petroleum history is also
worth reviewing. The Alaska Oil Pipeline took two years, two months,
and four days from the first shovel of dirt until completion. This
engineering marvel covers 800 miles, crosses three mountain ranges, and
traverses 800 rivers and streams.
Within 24 months of completion, the pipeline throughput reached 1.5
million barrels per day. ANWR is about 75 level miles from the head of
this pipeline, which has over 1 million barrels of unused capacity
In addition, billions of barrels of petroleum are
located close by under the waters off the southern California
coast—much of which can be tapped with existing oil infrastructure and
horizontal drilling from onshore.
Drilling Will Not Hurt
cannot drill our way out of all energy problems, but we can certainly
lower petroleum prices if we commit to developing our own resources
instead of blocking access to them. Modern technology allows for safe
and clean extraction of petroleum. There is no need to become ever more
dependent on unfriendly and unreliable foreign producers when we have
billions of barrels of petroleum in our own back yard.
See Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling,
"Evidence of a Shift in the Short-Run Price Elasticity of Gasoline
Demand," NBER Working Paper No. 12530, September 2006.
In its most recent Mid-Term Oil Market Report, the International Energy
Agency projects a return to spare capacities of less than 2 million
barrels per day after a slight easing over the next two years. See
International Energy Agency, "Medium-Term Oil Market Report," July
2007, at http://omrpublic.iea.org/currentissues/mtomr2007.pdf (October 1, 2008).