Gas prices are high. At certain political rallies this election season an angry mob has been heard chanting, "Drill, baby, drill! Drill, baby, drill!" Politicians and lobbyists are telling us that we need to ramp up domestic drilling in order to reduce gas prices and lessen our dependence on foreign oil. Still many remain skeptical that increased domestic oil production will have any substantial impact on prices at the pump. The economics of the energy sector are complex and at times counter intuitive. Fortunately Tim Kailing's elliptical research has come to the rescue. In an essay entitled Why "Drill, Baby, Drill!" is Not a National Energy Policy, Kailing explores the relationship between oil drilling and production.
Spoiler alert: more domestic drilling will make a lot of money for oil companies, but won't impact the price at the pump.
Kailing's key points:
- There is little correlation between the amount of drilling and total domestic oil production
- More drilling activity leads to less oil production per rig
- There is a time delay between increasing in drilling and increased oil production, about 4-6 years
- As oil scarcity increases, so does its price; there is still a large profit motive for oil companies despite diminishing supplies
The last section of the essay really sums things up well:
In other words, they want to drink our milkshake. They want to drink it up! But we are long overdue for a major diet overhaul.
The data show that the sentiments behind "Drill, Baby, Drill!" do not translate into a rational or effective national energy policy. In fact, aggressively developing our nation's late stage oil reserves is arguably precisely against our long-term national interest. The data are clear: ramping up domestic drilling will at best only slightly slow the rate of decrease of our domestic oil production, but it will rapidly exhaust our remaining precious domestic oil reserves. And the faster we use up the little oil we have left, the quicker OPEC will be the only one at the table with any chips left. Strategically, this is a loser's strategy.
Image Credit: Tim Kailing