Why off-shore drilling isn’t worth it
The oil slick off the Louisiana cost is still expanding and is now approaching coastal marshes. The Coast Guard is now going to try to set fire to the slick in the hopes of dissipating the oil. Some commentators have (jokingly?) suggested that the US should simply nuke the slick and move on, like the Russians did several times during the Soviet era.
All of this craziness makes me wonder: what’s the point of all of this? Why even bother with domestic off-shore drilling at all? It’s often been said by level-headed observers that tapping off-shore capacity wouldn’t do anything to lower prices here in the US.
And what do you know — we can use our handy-dandy gasoline demand model to figure out how much of an effect on prices this oil would have. Instead of explaining gasoline consumption (making consumption the dependent or Y variable), we now explain gasoline prices (by making prices the Y variable.)
According to Energy Information Administration, U.S. off-shore capacity would max out at around 200,000 barrels per day. In gallon terms, this is about 8.4 million gallons per day, or .03 gallons (110 ml) per U.S. resident per day.
If we re-estimate the equation from several posts back, we get the following inverse demand function:
Here, we see that price goes down by 17 cents for every extra gallon consumed per person per day. δ is monthly variation; ε is error; Q is quantity per person per day; U is unemployment; and P is price, in cents.
Plugging in .03 gallons per person per day, the yield from U.S. off-shore drilling, we find that U.S. gas prices would be about .467 cents lower than before.
Long story short: off-shore drilling isn’t worth it. A .467 cent decrease in gas prices while running the risk of destroying our ecosystem in the same way the Louisiana coast is now being destroyed?
Not worth it.
