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  • Already Known to Economists … but Not to the Democratic Policy Committee

    We’re willing to bet that no member of Congress is a regular reader of The Energy Journal, though perhaps some of them should be. It’s an academic journal on energy economics. But maybe leaders on Capitol Hill should start with something The Energy Journal decided not to publish: a paper finding that current prices for oil are influenced by expectations of future production.

    That’s actually a topic Congress is debating right now. In response to $4 per gallon gasoline, many Republicans want to allow more exploration and drilling for oil on public lands. Democrats are opposed because opening up the oil spigot runs counter to their idea that the national economy needs to be shoehorned into a clean energy paradigm. In service to that position, Democrat leaders in Congress have made use of the argument that opening up public lands will have no impact on current prices for oil—and thus the retail price of gasoline—for at least 10 years. It takes that long, they say, for a new source to be developed into a producing well.

    To believe that argument, you would have to believe that oil producers do not try to anticipate future market conditions (i.e., that they don’t speculate!). The contrary theory holds that if oil producers do expect oil production to increase in the future, and thus prices to decline in the future, then producers become more willing to sell oil from existing sources at today’s higher prices. They respond by increasing production from wells already in operation. Thus, opening up ANWR today, would have some price impact today, even though oil from ANWR may not reach the market for another decade.

    So along comes a paper by R. Morris Coats and Gary Pecquet, titled “The Effect of Opening up ANWR to Drilling on the Current Price of Oil” finding that, indeed, expectations of higher production in the future does reduce prices today. The Energy Journal rejected the paper. Why? The editors wrote the authors:

    Basically, your main result (the present impact of an anticipated future supply change) is already known to economists (although perhaps not to the Democratic Policy Committee). … It is our policy to publish only original research that adds significantly to the body of received knowledge regarding energy markets and policy.

    If congressional leaders want the price gas to remain high, then they should say that is their goal rather than employ silly arguments. Only on Capitol Hill is it controversial to suppose that people attempt to anticipate the future.

    Hat tip: Newt Gingrich’s American Solutions newsletter.

    Posted in Energy [slideshow_deploy]

    5 Responses to Already Known to Economists … but Not to the Democratic Policy Committee

    1. Morris Coats, Thibod says:

      The Heritage Foundation should not be too harsh about the Democrats missing this point of economic theory that was first put forward by Harold Hotelling in the Journal of Political Economy in 1931. In this same "Energy and the Environment" section from Heritage, Ben Lieberman of the Heritage Foundation similarly claims that it would be years before a price effect would be felt from new drilling:

      "With oil currently at $55 per barrel—an inflation-adjusted level not seen since the early 1980s—public support for opening ANWR is also stronger than in the past. Supporters should remember, though, that ANWR drilling is a long-term project, not a short-term solution. It will take at least seven years of work before the first barrel becomes available, and so ANWR will not affect current oil and gasoline prices. On the other hand, had President Clinton not vetoed an ANWR proposal in 1995, we would have that oil today."

      http://www.heritage.org/Research/EnergyandEnviron

      R. Morris Coats (one of the authors of the rejected paper)

    2. Pingback: Already Known to Economists … but Not to the Democratic Policy Committee

    3. Pingback: Already Known to Economists … but Not to the Democratic Policy Committee

    4. Pingback: The Conservative Reader » Blog Archive » Why Do Oil Prices Continue To Drop?

    5. scott m,kauai says:

      Hurricanes approaching oil rigs in the Gulf of Mexico and the possible disruption in supply that they may bring,in the future, cause spikes in the price of oil. Development of new oil fields,producing oil in the future, should cause a drop in price.

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