Drilling Our Way to the Future

September 24, 2008

With the fallout from Wall Street firmly positioned at the top of the congressional agenda this week, it may be convenient to forget that the fate of bipartisan energy legislation also hangs in the balance.

Last week, the House considered a measure to partially lift offshore drilling bans in exchange for increases in the financial incentives for renewable energy. The final vote in favor — by a margin of 236-189 — effectively handed the legislative baton over to the Senate.

Even if the House-passed bill ultimately fails to garner a vote in the other chamber as this final, tightly constrained session draws to a close, the Senate may still be forced to confront this complex set of issues in another form. Senate leaders will almost certainly face strong pressure to let drilling bans expire in the so-called continuing resolution — the critical piece of budget legislation that maintains federal spending beyond the end of the fiscal year. They have also been considering financial incentives separately as part of a larger tax package.

This odd state of affairs begs an obvious question: Is drilling worth yet another fight and yet more gridlock around energy?

New drilling is contentious for a variety of reasons, but the most obvious argument against it is that neither the size nor anticipated rate of new domestic production will be sufficient to alter the price of oil on the global market by more than a few cents.

For all of the negatives, however, drilling does come with one obvious benefit: It shifts a greater share of oil revenue from international to domestic suppliers, meaning that a greater fraction of oil expenditures would accrue to U.S. firms rather than to regimes with interests openly hostile to ours.

In fact, in one recent study, Robert Hahn of the American Enterprise Institute and Peter Passell of the Milken Institute project that even the relatively small contribution from currently restricted areas could add up to more than $1.85 trillion in new domestic revenue, whereas the environmental costs would amount to perhaps $400 million. The seemingly simple conclusion is that new drilling makes economic sense, even if the net benefits go undetected by most.

The problem with stopping there, of course, is that drilling, on its own, achieves none of the real objectives of a comprehensive energy policy. Most notably, it fails to address the problem that motivates such policies in the first place — high energy costs — because, for reasons already mentioned, the impact of our supply contribution is simply too small to significantly change the global price of oil.

A drilling-only policy falls short on several other grounds as well: It would not insulate consumers from price shocks, since the share of oil used in our economy would not decrease; it would not significantly lessen the global transfer of wealth to exporting nations, since our decreased contribution to this transfer would be relatively small on a global scale; and it would not mitigate the threat of global climate change, because carbon dioxide emissions would not decrease.

Despite the obvious barriers, the only plausible solution to this larger and more difficult set of issues is to gradually displace the oil used in transportation, and the only way to do this is to make investments in technology alternatives more attractive. Given the diverse set of policies needed to bring about such transformation — from providing incentives for plug-in hybrids to reforming the grid in ways that would accommodate the push toward electrification — the disproportionate emphasis on a drilling policy whose impacts would scarcely be noticeable at all is merely a distraction.

But, for better or worse, the resolution to the House debate suggests that the now-fashionable do-it-all approach may be the political compromise through which some of these more important objectives can ultimately be achieved, at least in the waning hours of this Congress. That’s not really such a bad deal, if one believes that exchanging something that doesn’t matter for something that does is a decent bargain.

So, as strange as it sounds, perhaps it is possible to start drilling our way to a clean energy future.