Logic And Economics

SEARCH BLOG: OIL and ENERGY POLICY

This was part of a post at Econbrowser:

Anon admonishes me to read Barry Nalebuff's book Thinking Strategically (actually it's Dixit and Nalebuff); I confess I have not yet done so. But having endured some amount of game theory over the years, I'm going to wade ahead nonetheless.

First, consider this exchange from April 2004, where Nalebuff suggests investing $5 billion to enable Iraq's oil industry to export a million extra barrels of oil a day, thereby negating OPEC's monopoly power. One interesting aspect of Nalebuff's argument is that he doesn't propose something like exploiting US offshore reserves. I think the reason is quite simple, and is rooted in game theory -- Iraq in principle can be a low cost producer (after security is established). Supply from offshore sources in the US would be (and is known to be) a relatively high cost (per unit production) venture relative to, say, Saudi oil production. Hence, it's not clear increasing US production can have the strategic effect often suggested. (Example, see: [2])

I do agree with Anon that a lot of world production is undertaken by state owned enterprises, which lack proper incentives for responding to price signals. But I'm unconvinced that foreign state owned enterprises would be privatized simply because the US removed its moratorium on OCS exploitation.

So, opening up production in the currently inaccessible areas of the OCS might have substantial effects (perhaps on trade balance, or oil company profitability, Federal leasing revenue), but in my view is unlikely to have a substantial impact on oil prices (just as in the case of opening up ANWR).

My comment was this:

Actually, the issue is beyond offshore drilling. Congress has refused to clear the way for regulations related to shale oil production which has a vastly greater potential to impact oil supply.

The argument that a course of action has no value because it has no immediate results is specious and deceptive. Using that simplistic thinking... AIDS research is of little value because it may be 25 years before there is a cure and all we are doing is driving up medical costs for society [driving up environmental risks for society].

Either increased supply reduces prices by meeting demand or increased supply reduces the level of price increases by partially meeting demand. If you don't believe in the dynamics of supply, demand, and prices, you should be reading RealClimate instead of Econbrowser... or writing there.

Just for reference:

• The lifetime cost of treating [not curing] AIDS
• Holding up development of shale oil resources... here also
  

Just so we all have this straight:

• Anything that does not produce immediate results is not worth pursuing.
• Increasing the supply of oil will not reduce prices as long as we are successful at preventing an increase in the supply.

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