Why Drill, Baby, Drill Wont Work

U.S. domestic oil production peaked in 1970 and even with the new Alaskan North Slope oil, technological improvements, and a host of other finds, it has marched downwards ever since. This decline did not reverse itself during the huge price run-up in recent years that had everyone with a drilling rig looking for every barrel he could find. Since 1999, the number of drilling rigs has more than tripled without stopping the steady slide of domestic oil production.

Meanwhile, even assuming we wished to drill in Alaska’s Arctic National Wildlife Refuge (ANWR), the estimated size of these resources, (10 billion or so barrels with an extraction rate of less than 900,000 barrels per day of crude oil) are modest given the extensive needs of the American economy, which consumes almost 21 million barrels of oil per day. The U.S. Energy Information Administration has projected ANWR exploration would reduce the cost of a barrel of oil by just twenty-five cents. America imports 62% of its oil and that number is only likely to increase in the face of growing oil demand, demand that has only softened modestly even during an era of extremely high prices in the worst U.S economic environment since the Great Depression. While new fields in the Gulf of Mexico may finally stem this decline over the next few years, the long-term trend is unmistakably downward.

None of this is to suggest that America shouldn’t be expanding domestic drilling for oil. It would be unsurprising that conservatives could have legitimately differing views on the wisdom of drilling for more oil domestically offshore or in ANWR, balancing environmental stewardship concerns with economic and strategic imperatives. But no honest analyst in the industry would ever suggest that domestic oil drilling in ANWR or elsewhere in the U.S. is going to form a core of future U.S. energy policy. At best, it is a moderately-useful supplement. Furthermore, a good deal of the price rise in areas such as gasoline has been to a shortage of U.S. refining capacity rather than crude oil. Conservatives need to recognize this and understand that while domestic drilling for oil and gas may be a political winner, it is not the serious basis for an energy policy.

Instead of focusing most of our resources on the drilling dead-end, conservatives could champion reduced prices for gasoline by demanding greater accountability transparency in oil and gas futures markets, which cost Americans billions of dollars through uncontrolled, opaque, and highly leveraged speculation. Many industry analysts believe that span>this speculative bubble was a major contributor to the oil price explosion< (and subsequent collapse as cash-starved hedge funds unwound their positions). While derivatives markets in oil and gas play an important role in balancing the market, and can serve an entirely useful role in helping companies mitigate price risks, unless conservatives can introduce some regulatory sanity, and acknowledge that a great deal of market gaming has been going on, the use of these markets as a tool can be put at risk. During the bubble, Wall Street speculators played with massive amounts of other people’s money to exploit arbitrage opportunities. Now taxpayers, having given many of these firms billions in profits when their speculative trades worked, are bailing them out for their losses. This is hardly a “conservative” or “free market” victory. Conservative engagement on enforcing proper regulation for these markets is vital to their success.