May 28, 2011

Oil, Democracy and 'Drill, Baby, Drill' (Guest Post)

By Dr. Mark J. Perry

The chart below is from a Bloomberg article and shows that "Most of the world's oil is produced in states that are undemocratic. The U.S., Canada and Norway are the exceptions."


The article refers to this 2009 research paper "Oil and Democracy Revisited" by UCLA professor Michael Ross whose findings include:

a) "Oil wealth strongly inhibits democratic transitions in authoritarian states, and b) Oil’s anti-democratic effects seem to vary over time and across regions: they have grown stronger over time, but do not hold in Latin America.

The mechanism that seems to account for the oil-autocracy link is the ‘rentier effect’ – the combination of low taxes and high government spending that seems to dampen support for democratic transitions."
The oil-autocracy link is one of the indirect costs of our "dependence on foreign oil" because we provide support to authoritarian states and inhibit the growth of democracy in those countries. This is one more reason to drill, drill, drill domestically, in places like the Eagle Ford Field in Texas, which is featured in NY Times:

"The Texas field, known as the Eagle Ford, is just one of about 20 new onshore oil fields that advocates say could collectively increase the nation’s oil output by 25 percent within a decade — without the dangers of drilling in the deep waters of the Gulf of Mexico or the delicate coastal areas off Alaska. More than a dozen companies plan to drill up to 3,000 wells there in the next 12 months."
It's all made possible by the technological "miracle" of "fracking," which is not without its critics and controversy, here's more from the NY Times:
"There is only one catch: the oil from the Eagle Ford and similar fields of tightly packed rock can be extracted only by using hydraulic fracturing, a method that uses a high-pressure mix of water, sand and hazardous chemicals to blast through the rocks to release the oil inside.

The technique, also called fracking, has been widely used in the last decade to unlock vast new fields of natural gas, but drillers only recently figured out how to release large quantities of oil, which flows less easily through rock than gas. As evidence mounts that fracking poses risks to water supplies, the federal government and regulators in various states are considering tighter regulations on it."
The oil industry says any environmental concerns are far outweighed by the economic benefits of pumping previously inaccessible oil from fields that could collectively hold two or three times as much oil as Prudhoe Bay, the Alaskan field that was the last great onshore discovery. The companies estimate that the boom will create more than two million new jobs, directly or indirectly, and bring tens of billions of dollars to the states where the fields are located, which include traditional oil sites like Texas and Oklahoma, industrial stalwarts like Ohio and Michigan and even farm states like Kansas."

“It’s the one thing we have seen in our adult lives that could take us away from imported oil,” said Aubrey McClendon, chief executive of Chesapeake Energy, one of the most aggressive drillers. “What if we have found three of the world’s biggest oil fields in the last three years right here in the U.S.? How transformative could that be for the U.S. economy?”

“This is very big and it’s coming on very fast,” said Daniel Yergin, the chairman of IHS CERA. “This is like adding another Venezuela or Kuwait by 2020, except these tight oil fields are in the United States.”
Thanks to Thomas Keene and Dan Greller for the pointers.

Further Reading
$300 Oil by 2020: Scary but Unlikely
$80 Oil By September: When Fundamentals Smack Big Banks in the Face

About The Author - Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the University of Michigan, and he blogs at Carpe Diem.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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