OIL AND THE ENVIRONMENT – CALIFORNIA CASE STUDY

Abstract

USA environmentalists have tended to oppose all new energy developments. Their efforts may be counterproductive because opposition to, say, offshore oil directly leads to the continued use of other energy sources that may have a higher social cost. Rather than attempting to eliminate all pollution from energy production, which would be prohibitively expensive, one should minimize the social cost of energy production for the given demand.

Linear programming is used to rank various oils (California State and Outer Continental Shelf (OCS), Gulf of Alaska, Prudhoe Bay, Athabasca tar sands, oil shale and certain foreign crudes) in terms of their social desirability. The objective is to minimize the cost of supplying the California market, subject to resource, sulphur and oil spill constraints.

Social desirability is indicated by the inclusion of the oil in the optimal solution and the size of the associated shadow price. The larger the shadow price, the greater the benefits of increased production. The more negative, the greater the cost associated with forcing consumption of that fuel. The environmental shadow prices indicate the size of the trade-off between a particular environmental standard and minimum cost. The trade-offs can be surprisingly large. Any reasonable spill standard can be achieved by changing the development pattern. Generally, the further offshore, the smaller is the environmental degradation, but the more expensive is the oil. Foreign oils can be economically and environmentally inferior to domestic oils. Crude from the California OCS, San Joaquin Valley and Prudhoe Bay appears a valuable resource, while the Gulf of Alaska, synthetic and foreign crudes appear marginal to submarginal.

The methodology could be readily adapted to the Australian scene.