The Economics of Allowing More Domestic Oil Drilling

Abstract

The recent sharp increase in the price of oil has generated renewed interest in U.S. oil exploration and development. This paper examines the likely impact of developing new energy resources on oil and gasoline prices. In addition, we use a benefit-cost framework to analyze the impact of allowing oil drilling in the Arctic National Wildlife Refuge and the portions of the Outer Continental Shelf that are currently closed to development. We find that development of ANWR and off-limits OCS is likely to have only a modest impact on future world (and thus domestic) oil prices, on the order of one percent. Therefore, we believe that the impact of opening the new resource areas on current prices would be modest as well. Our benefit-cost analysis of developing off-limits OCS suggests that the benefits are very likely to exceed the costs. We are less confident in the case of ANWR, but still believe that the expected benefits of development are likely to exceed the costs. We suggest an alternative way of framing the issue of resource development that may give both policy makers and the public a better sense of the tradeoffs involved.