Dunkelberg: Drill Baby Drill Does Work

William Dunkelberg|Economics Professor, Temple University
Friday, 9 Mar 2012 | 2:52 PM ET

With gas prices on the rise, the President, after blocking the oil pipeline from Canada to Gulf refineries, brought back his anti-drilling mantra, telling us that more oil will not lower gas prices (for ten years anyway).

Apparently the President was not required to take a course in economics and learn about supply and demand.

Given a level of demand, increases in supply will always reduce prices to dispose of inventory. If demand grows, then increasing supply at least as fast as demand grows will stabilize prices. If supply grows faster, prices fall. This is just common sense.

But if logic isn’t sufficient, one need look no further than the natural gas boom to see that “drill baby drill” does reduce prices.Natural gas priceshave declined by 2/3rds since the shale gas started coming on line. Supply has expanded much faster than demand (with an extra help from a warm winter). Consumers have benefited from lower utility bills.

But, the President persists with his focus on wind and solar (the electricity he needs for his hybrid cars will be much cheaper as gas replaces coal for generation). Golden eagles are being wiped out by wind mills, but no concern from a government which goes out of its way to block development to save the “snail darter.”

The flaw in his strategy is that he is trying to pick “retail” energy businesses, departing from the long successful policies of investing in basic research (like how to make solar cells more efficient at converting sun light to electricity) and leaving the commercialization to the private sector. In the meantime, paying less to foreign suppliers of oil would be nice. If we are going to learn to live without oil, better that we use ours than theirs in the transition.

There is no doubt that we will continue to migrate our economy to more energy efficient technologies. Our consumption of oil per dollar of GDP is low compared to most countries, we just have a lot of GDP (luckily). But government largess might be more constructively used to support basic research than to subsidize projects that don’t make sense either technologically or economically.

William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.