Drill, drill, drill?: the economics of drilling

Matthew Kotchen and Nicholas Burger have done a real study of the economics of drilling in ANWR (ungated, published version here).  Ben Muse reports some of their results:

What are the benefits?  Kotchen and Burger estimated that the oil had a
value of $374 billion (writing in July 2007, they assumed a long-term
price of $53/barrel), but that it would cost $123 billion to extract
and market.  The net return of $254 billion is divided consists of
industry rents of $90 billion, Alaska tax revenues of $37 billion, and
Federal tax revenues of $124 billion.

Under the authors’ understanding of incidence, consumers wouldn’t benefit much at all because oil prices would not fall noticeably.  Still, drilling makes economic sense if the loss of environmental amenities is valued at less than $1,141 a person (per American, not per Alaskan) and that was with a price of oil roughly half of today’s price. 

At today’s price of oil, a rough estimate of the benefit — not counting environmental costs — is over $600 billion.  So the whole issue seems much more important than I had thought just one hour ago.  Some approximation of taxes and transfers and auctions are available, so these gains can be redistributed to some extent if you wish.

That’s a lot of wealth.


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