Echo

Why not drill on the Outer Continental Shelf?

Friday, September 12, 2008

Recently, President Bush withdrew a large portion of currently untapped and prohibited drilling for oil and natural gas on the Outer Continental Shelf (OCS, or areas off the Pacific, Atlantic, and Florida costs). The present Administration felt that by tapping the domestic supply, energy price surges would subside; this has been a point of contentious debate.

According to the Energy Information Administration, increasing the availability of the OCS for drilling will raise total production by 18 billion barrels to 59 billion barrels. Production would not start before 2017, and by 2030, oil production is expected to increase by 200,000 barrels per day (about 1.7% of what we import). This is not a considerable amount; Democrats argue that this cannot outweigh the social costs of associated pollution and health effects.

In its raw form, OCS leasing is only prohibited in certain areas in the Eastern and Central Gulf of Mexico, which doesn’t expire until 2022. However, the prohibited areas are subject to the withdrawal of lands by the President. President H.W. Bush made large portions of the OCS off limits to OCS leasing, and President Bill Clinton renewed those terms until 2012. Recently, President George W. Bush reduced the OCS limitations to include only areas designated as National Marine Sanctuaries. Under these terms, leasing activities in 2009 will resume in all areas not covered by the new Presidential withdrawal, unless the new President repeals Bush’s decree.

Drilling in the OCS affects not only the supply of oil and natural gas, but also government tax receipts. Recently, Congress requested that the Congressional Budget Office produce an estimate of the budgetary impact of the new OCS restrictions. According to the CBO, OCS receipts will increase by roughly $2 billion over the 2009-2018 period as a result of Bush’s actions (In 2007, total OCS receipts were about $6.8 billion). And during this time period, the receipts would be mostly in the form of bonus bid payments, and royalty payments will remain essentially unchanged.

Admittedly, the OCS receipts could be “significantly more or less than $2 billion depending on the resource value of acreage offered by MMS through 2018.” Further, the government would not accrue the receipts until about five years from now, so there is no estimate of the potential tax receipts coming from production that will not commence until 2017 (according to the EIA). Essentially the U.S. government will accrue a $2 billion bonus in tax receipts just by allowing private firms to set up drilling infrastructure in the OCS, and that before production even starts, which would certainly produce hefty royalty receipts.

The next President has two choices. First is to keep the restriction and prevent private oil companies from leasing the lands. The argument here is that the impact on supply would be minimal, and the impact on prices would be negligible. So, by default, the environmental costs would outweigh the supply benefits. However, there are many tax receipts available to the Democratic government that can be shared with the States for various education, health, or environmental programs.

Second would be to renew Bush’s amendment of the Presidential withdrawal and allow private oil companies to lease the OCS waters. The untapped reserves would be in use, and faced with a growing World shortage of oil supplies, there would be no alternative except to put resources into alternative technologies. If extent to which domestic reserves can be tapped is already on the table, then movements toward alternative fuels will happen more quickly than if the reserves were not tapped and still regulated by the government. Further, there are an unknown amount (but likely plentiful) of tax receipts that the U.S. and State governments will accrue, where if they choose to (they will not), can be redirected toward their environmental policies of choice. I just don’t see the downside.

Please leave comments. Best, Rebecca Wilder

3 comments:

Janie September 12, 2008 at 9:48 AM  

No downside! But, who in the beltway thinks rationally these days. It will be interesting to see what happens with Ike and the drill rigs in its path. Any destruction and spills will be fodder for the "anti" groups. Maybe, if Palin is VP, something realistic with oil drilling will happen.

Anonymous September 13, 2008 at 1:39 AM  

Maybe because it is a bad investment?

With US drivers reducing their driving by 4.5% in the last year we won't need to drill offshore. Also, the Bush Administration even says that offshore drilling won't bring enough to change the prices until 2030 or so.

Rebecca Wilder September 13, 2008 at 9:28 AM  

Building infrastructure is not a bad investment. Price changes won't go into affect until well later, but that is because the new drilling will not even start until at least 2018.

Jobs will open up, new technologies for drilling will arise, and the country will put itself on a fast-track to developing non-fossil fuel energy sources, and as I mentioned, the U.S. government will gain a hefty sum.

I have a very difficult time believing that with lower gas prices, US drivers are going to continue to drive less.

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