Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

"A strong conviction that something must be done is the parent of many bad measures."
  -- Daniel Webster

Wednesday, July 26, 2006 :::

Some economics on drilling ANWR. I'm not looking at the paper he cites, but his own calculations suffer, among other things, from assuming that the cost of extraction (which is energy intensive) is not itself correlated with the price of oil, and from looking for a constant price of oil from now to 65 years from now, not even allowing for inflation. (Unless he means 10% as a real discount rate. Perhaps he does.) That capital expenditure precedes production by a few years is also worth noting. The first and last point will tend to increase the price required for it to be worth drilling, and the middle point will tend to decrease the (current) price required.

(I also think it strange that he cites a willingness to pay per household. Per capita or per adult or something would seem more natural to me.)

I'm somewhat interested in rearranging the equation to back out how much the government would have to charge in royalties to make it profitable to drill when the price of oil exceeds, say, $60 per barrel, but not when it doesn't. Not interested enough to do the calculation, though.

Cap-and-trade has been discussed here (and elsewhere) before; so have Pigovian taxes, but I'm not going to look that up. The former constitutes a fixed supply of pollution rights, and the latter a fixed price, and I imagine the proper thing to do is present to the market a God-fearing supply curve that says we can pollute more if it turns out to be really, really valuable, but not by so much that the marginal cost is the same as if we didn't have a good reason to be doing it. A similar way to create a fixed quantity of carbon dioxide release, to the extent that oil use is a good proxy for that, is to keep a fixed quantity of oil production. (We specialize in the obvious here.) From that standpoint, keeping new sources of oil off-line can make sense for carbon dioxide reasons, even if not for protect-the-frozen-tundra reasons; if transaction costs are the same, though, doing a cap-and-trade rights auction and charging royalties based only on the frozen-tundra concerns is probably the easier way to keep things from tripping over each other.

::: posted by dWj at 9:12 PM

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Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

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