by Roger Pielke, Jr.
cross-posted from Prometheus

The debate over new oil drilling in the United States usually breaks down into a debate over the effects of any new supplies on the price of oil. Some say that the effects are marginal, and thus pretty much irrelevant to the longer-term challenge of transitioning away from fossil fuels, while others say that the the effects are positive and work toward getting the U.S. off of foreign sources. In this debate, there are valid arguments on both sides, but the "drill or not to drill" debate itself misses what seems to be the elephant in the living room, which has been discussed in today's Wall Street Journal:

...liberating publicly owned resources could net the Treasury as much as $2.6 trillion in lease payments, royalties and corporate taxes, according to one estimate currently knocking around Capitol Hill. The returns wouldn't roll in overnight, but that's almost a full year of spending even for this spendthrift Congress.

Already, with the ban in place, offshore development is one of the federal government's greatest sources of nontax revenue, amounting to $7 billion and change in 2007. Energy companies bid competitively to acquire leases upfront, then pay rents. The feds are also entitled to a royalty on the market value of oil and gas when sold. Corporate income taxes on producer profits add to the bank.

All told, studies (some industry-funded, some independent) estimate that the total government take from leases in the Gulf of Mexico ranges from 37% to 51%, depending on the location of the lease. The take is somewhat higher is Alaska.

If the ban were lifted, how much Congress might rake in depends on how much oil and gas is recovered, as well as energy prices, royalty rates and taxes at any given time. A 2007 study by University of California economists Matthew Kotchen and Nicholas Burger concludes that opening up a small portion of the coastal plain of the Arctic National Wildlife Refuge would generate $251 billion in government and state revenue, with oil at its 2005 price of $53 per barrel. Prices are now double that.

And that's just for a patch in Alaska. The $2.6 trillion estimate, prepared by John Peterson (R., Pa.) and Neil Abercrombie (D., Hi.), is a back-of-the-envelope calculation from exploiting the 86 billion barrels of oil and 420 trillion cubic feet of natural gas that the Department of the Interior determines are undiscovered but "recoverable" on the Outer Continental Shelf. And these volumes are almost certainly too conservative.

The Kotchen and Burger study of ANWR is available here in PDF.

The inescapable reality is that further exploitation of U.S. fossil fuel resources will increase the government's revenue, and thus the spending available to policy makers (without even raising taxes), and by a really enormous amount. And whether it is $2.6 trillion, or more or less, won't change the fact that it is a very, very large number, regardless of the impacts of any new supplies on the global market.

So as this debate matures, you should expect the focus to shift from drill or not to drill, to how the government should spend the money raised from drilling. It is hard to imagine policy makers -- of any political party or perspective -- leaving much if any of hundreds or thousands of billions of dollars out of their reach. If this analysis is anywhere close to correct, then a likely scenario is that the debate over drilling will morph into a debate over revenue from drilling. Policy makers will promise to spend new money in ways that benefit constituencies whose support is necessary politically to guarantee enough votes to drill. With promises that might include tax cuts, new spending on alternative energies, environmental protection, and whatever else, it is difficult to imagine any other outcome.