Economics Professors Defend McCain’s Energy Policy

With Sen. Barack Obama set to meet today with an all-star team of economic advisers — including billionaire investor Warren Buffett, former Federal Reserve Chairman Paul Volcker, and former Treasury Secretary Robert Rubin, as well as former Bush administration officials Paul O’Neill and William Donaldson — Sen. John McCain unleashed a couple of economic heavyweights of his own. Martin Feldstein, professor of economics at Harvard University and president of the National Bureau of Economic Research, and John Taylor, economics professor at Stanford and a senior fellow at the conservative Hoover Institution, took part in a McCain campaign conference call with reporters to promote the presumptive GOP nominee’s economic plan. Feldstein lent credence to McCain’s controversial claim that lifting the federal moratorium on off-shore drilling would lower gas prices in the short-term:

"Policies that affect long-term supply, like the McCain strategies for increasing exploration and production, or strategies that reduce demand in the long-term — incentives for a new technology, for example — have an immediate impact on today’s prices. Something that’s going to change the supply and demand — five years, 10 years, 20 years from now — will have an impact on today’s prices. The reason for that is that if an increase in long-term supply, or reduction in long-term demand, is perceived by investors and the oil industry and others, as changing the future price of oil, that changes their incentives today, in terms of the inventory the accumulate and the prices they charge."

With all due respect to Professor Feldstein, this view is not shared by many prominent economists, including some of those employed by the U.S. government to forecast future energy prices. As we’ve noted before, the Energy Information Agency — the federal agency that provides official energy statistics — recently concluded that increased offshore drilling would not affect oil and natural gas prices until 2030, and even then the effect would be negligible. From the EIA:

The projections in the [Outer-Continental Shelf] access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017. Total domestic production of crude oil from 2012 through 2030 in the OCS access case is projected to be 1.6 percent higher than in the reference case, and 3 percent higher in 2030 alone, at 5.6 million barrels per day. For the lower 48 OCS, annual crude oil production in 2030 is projected to be 7 percent higher—2.4 million barrels per day in the OCS access case compared with 2.2 million barrels per day in the reference case. Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant.

Feldstein continued:

"If the price is going to be lower in the future because of more supply and less demand..that gives producers and others an incentive to sell more today, rather than hoarding it, inventorying it or failing to bring it out of the ground. That’s an incentive that affects not just American firms, but also Middle East oil providers, who look ahead and see policies coming into place, which are going to affect the demand and supply over the long term. We’ve already seen it in recent days, as the price of oil has come down substantially."

It is true that in recent days, the average gas price has dipped a little. Still, I would ask Professor Feldstein the following questions: Is $4 per gallon gasoline — or $125 per barrel oil — not incentive enough for oil producers to pump as much oil as they possibly can and sell it on the market? Is there any evidence of oil producers "hoarding" or "inventorying" oil, or "failing to bring it out of the ground?"