Saturday, June 28, 2008
A couple of days ago a local U.S. Representative (who, because I don't want this to be a political post, shall remain anonymous) sent me an e-mail exposing what he called energy "myths." One of his purported myths was that increased U.S. oil and gas production would lower energy prices. His argument went as follows: there is more oil drilling in the U.S. now than when oil prices started ramping-up; thus, we see that opening more areas to oil production can not lead to lower prices.
BZZZZ, Congressman. It's time for you to attend some remedial study-sessions for my Principles of Economics class. As the above diagram shows, if supply technology for oil production remains the same (the Supply curve) but demand for oil sustains a shift in underlying demand conditions (from D to D+) the result will be both higher market prices and and more production. Such a demand shift is undoubtedly consistent with rapid industrialization of countries such as China and India. If, on the other hand, the conditions and technology of supply change so as to shift the supply curve to the right, then there will be downward pressure on price together with increased production. What would cause such a supply shift to the right? An obvious example would be discrete changes in regulatory policy that open new areas to exploration and development (that is, more areas open to drilling). Florida politicians may want to continue to argue that, unlike residents of Texas, Louisiana, California, Scotland, Norway, and so forth that our citizens are specially entitled to consume energy resources without having to look at oil platforms on the horizons, but you can't make that argument on a misunderstanding about the difference between movement along a supply curve and a shift in the supply curve. You can argue about how large the price response from increased areas for U.S. oil exploration and production would be, but that's a different question, and one that is difficult to answer in advance: MYTHBUSTED - BUSTED.
Furthermore, to pursue the broader purpose of this blog, I wonder whether we can find in Christian theology any rationale for Florida's "special" status not only in avoiding offshore drilling but also in not having a great deal of energy infrastructure such as refineries and pipelines. I recall that several local Christian pastors argued that if residents of Tallahassee weren't willing to allow coal fired power plants in our backyard, we shouldn't be proposing to build them elsewhere and then import the electricity. I think that there's something to that argument. Residents of Tallahassee arguably pay a premium in our electric bills from our "anti-coal" requirements, and I think that there is a Christian case to be made that we shouldn't try to avoid that cost by exporting that externality to other people. There is likewise a serious thought-experiment as to whether residents of Florida's coastal areas should be willing to pay a differential tax to help other people who could benefit from lower energy prices from off-shore Florida drilling.
By the way, before the Congressman's staff figures out whose e-mail I'm talking about and rushes to send me a comment that a supply/demand model is inapplicable because of OPEC, it's pretty obvious that OPEC does not have the power to "fix" the price of crude oil in the sense that it can eradicate the upward slope of the effective world supply curve.