The following is a guest essay from Michael A. Livermore, Executive Director of the Institute for the Study of Regulation at New York University School of Law and author, with Dean Richard Revesz, of Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health.


What is the cost of cheap gas?

High gas prices are squeezing working families and it’s understandable that Americans are looking for a quick fix. The RNC — and the feverish support showed there for the “drill, baby, drill” position — should be a wake-up call to anyone interested in smart policy-making. Hopefully, before we turn into an angry mob and seize on the first idea that comes our way, our decision-makers are given a chance to think through this question a little more carefully.

On September 12, Congress will vote on a new energy package that addresses the offshore drilling moratorium among other issues. Given the large divisions among and between the parties, it’s unlikely a final solution will be enacted. That might not be a bad thing. A breather before the new Congress would give us some time to really flesh out the pros and cons of this decision. Questions, heated opinions and conflicting information have been bandied about for months. With so much confusion, we need to do a better job of figuring out the costs and benefits of this major choice.

Questions worth answering

The obvious questions:

One: How much oil is there to be had by opening the reserves?

There have been many estimated tossed around; some as high as 45 billion barrels, others as low as zero.

Two: What are the probably effects on domestic gasoline prices over time?

Some have predicted that opening up more offshore drilling will immediate reduce prices; others have predicted that it will take ten or twenty years.

Three: What is the risk of increased pollution or — worse case scenario — environmental catastrophe brought on by increased drilling?

Advocates of expanded drilling tend to accentuate the safety of offshore rigs and our long track record of drilling in the ocean. Opponents point to the Exxon Valdez oil spill as an example of how bad it can be when things go wrong.

Four: What value do Americans place on pristine, largely untouched expanses of ocean?

The tempers on offshore drilling are not only raised in folks that want cheaper gas. The idea of drilling in the ocean clearly bothers many people — a preference that deserves recognition in the calculus.

Five: Are there underutilized leases? How many, covering how much?

Environmental groups have advocated for a “use-it-or-lose-it” approach to mineral leases (including oil and gas) to ensure that land already available for exploitation is not simply laying fallow in the hands of speculators. It is worth know how much is available now with no change in policy.

Six: What will the effects on tourism be?

Tourism is big, big business. While the price of gasoline is important for the economy, it is not worth trading large losses in some sectors for smaller gains in others. We need to know the likely effects from drilling on coastal tourism.

Seven: What are the environmental effects of reduced gasoline prices?

It is largely assumed that lowering gasoline prices is an unadulterated good thing. Of course, we know — and OMB even under the Bush administration has acknowledged — that there are negative effects from low gas prices. Burning more gasoline means greenhouse gas pollution, increased health risks from dirtier air, smog, and many other health and environmental threats. When these are all tallied up, cheap gas doesn’t sound as exciting.

Eight: What about option value?

The oil and gas under the oceans is the property of the people of the United States. No investment manager would recommend selling property when the price is positioned to go through the roof. Both the value of the resource now, and its potential value need to be weighed — it is possible that the option to drill in the future is more valuable than immediate drilling.

The big picture

Perhaps most importantly, we need to look at the effects of more drilling on the shape of our economy for decades to come. On the one hand, we are on the cusp of creating a post-carbon economy. There is a new and continually rising awareness of the need to address greenhouse gases. There will be a new administration; and whoever wins will come into office after having promised strong action on climate change. While news from Iraq doesn’t take up headlines the way it used to, it would also be a mistake to underestimate how sick voters are of the country’s addiction to foreign oil.

On the other hand, as gas prices increase, people get frustrated, and politicians start to sweat. For the average voter, spikes in oil prices are very real and tangible evidence of failure in Washington.

Whatever is done on oil drilling will have resonance for far longer than a single election cycle. Investors are looking for a signal from our political leaders. Investors in green-tech do not want to see that support for alternatives to the oil economy is broad but shallow — easily evaporating in the heat of summer oil price spikes. Sometimes, the investment community acts like a herd — and spooking the heard on rocky terrain is a recipe for trouble. If we scare off an investment boom in alternatives, all that expanded drilling will have done is leave us a little closer to the bottom of the barrel and a little further from a better solution.

Perhaps after a balanced cost benefit analysis is done we will see that some amount of drilling in the short term can help us ease into a larger plan to reduce our dependence on oil. Or it may show that “drill, baby, drill” is a rational policy choice — or that we should scale back leases that are currently available. We just can’t know unless our decision-makers are given a chance (and take it) to find reasoned, rational, and balanced economic answers to questions with very serious economic consequences.