Monday, December 11, 2017

Do We Really Need to Drill for Oil at the Arctic National Wildlife Refuge (ANWR)?

The dichotomous argument between economy and environment has found itself in many places, but I was not exactly expecting to find it in the Senate's tax bill. The Senate's version of the tax bill has many provisions in it, including one to start drilling in the Arctic National Wildlife Refuge (ANWR). There are many reasons the Republicans could have snuck this provision, but one is presumedly to get Senator Lisa Murkowski (R-AK) to support the tax bill. The debate about ANWR is nothing new. It has been ongoing for 40 years. You can read a 1993 assessment from the Government Accountability Office (GAO) here to get a sense of how long ANWR has been a political controversy. What is new is that this is the best chance to date that drilling will take place in ANWR. So here is what I would like to ask: should Congress go ahead with approving drilling in ANWR?

The back and forth on the topic goes something like this. Proponents of drilling opine that we only need a small portion of the land in ANWR to drill. Since the environmental impact would be minimal and the economic benefits substantial, there isn't much reason to be concerned. Opponents opine that there would still be considerable environmental damage, and that it's not worth taking the risk to ruin a pristine place of nature. Let's ask ourselves a few questions to help frame the debate:

  • How much retrievable oil is in ANWR? In 1998, the Department of Interior estimated that there is anywhere between 5.7 billion and 16 billion barrels of oil in ANWR. In 2013, the U.S. Geological Society updated their estimates to 10.4 billion barrels. The Bureau of Ocean Management made an estimation in 2014 that it would be about 7 billion barrels. To put this figure into perspective, the U.S. imported 2.9 billion barrels of crude oil in 2016. This should give us serious reservations about the myth of how ANWR is going to solve energy dependency woes.
  • How much economic benefit would be derived? According to an economic study from two Yale economists (Kotchen and Burger, 2007), the oil was estimated at a value of $354 billion at $53 a barrel, which is not too far from today's barrel prices (see below). A December 2015 study from the Institute for Energy Research (IER) puts the economic benefit at $39 billion a year (p. 9) while ultimately adding 77,300 jobs to the economy (p. 10).
Source: NASDAQ
  • How much government revenue would leasing ANWR earn? According to a 2012 Congressional Budget Office (CBO) report, about $10 billion over a decade for the federal government. This does not count the government's gross receipts from royalties, which could vary from $2.5 billion to $25 billion. Alaska is also expected to gain up to $8 billion in annual state tax revenues (IER, p. 13).
  • How many people visit ANWR every year? I ask this because I want to know how many people appreciate the pristine nature of ANWR. According to the U.S. Fish and Wildlife Service, there are about 1,200 to 1,500 visitors each year. To put this number in perspective, over 4 million visited Yellowstone in 2016 and over 500,000 visited Redwood National Forest. 
  • What is the potential environmental impact? I'm not here to say that oil drilling is without risk. The BP oil spill acts as a reminder of that notion. There has definitely been environmental concern expressed over Congress' recent decision (also see here). Also, the U.S. Fish and Wildlife Service stated that the ecological diversity in ANWR is unparalleled, which presents additional challenges. That being said, we should always measure risk against reward. Technological developments in seismic computational capabilities make it easier to limit the impact and acreage used to drill in ANWR. 
  • How will this impact the caribou? One of the larger environmental concerns is the impact that drilling in ANWR would have on caribou. What can give us some insight is how the caribou population has been affected since drilling took place in Prudhoe Bay. In 1975, there were just 5,000 caribou. The population peaked to 70,000 in 2010, and then declined to 50,000 since 2013 primarily due to reasons unrelated to drilling. If the past is an indication of anything, it means that although the porcupine caribou are largely located in the proposed land for ANWR drilling, it should not have major effects on the caribou population. 
  • Should we still drill in ANWR? The short answer to this question is "no." This is not because I think the environmental costs outweigh the economic benefits. It is because we don't really need to drill. Ever since the United States used hydraulic fracturing (fracking), we have had such a fossil fuel supply glut that the United States went from being a net importer to a net exporter of oil (see DOE chart below). It is not just an issue of net exports, but also prices. As the Congressional Research Service (CRS) brought up in its 2015 report on ANWR (CRS, p. 11), lower oil prices make oil exploration and drilling less economically feasible. Oil prices have not increased greatly since (see NASDAQ chart above), which means there is not much economic incentive for oil companies to drill in ANWR. This is something to consider given that the average cost of drilling in Alaska is 31 times higher than it is in the other 48 continental states (CRS, p. 15).




Bottom Line: If you would have asked me a decade ago if we should drill in ANWR, I would have said "yes." Now, I don't see the urgency since we have more than plenty of oil. As we run out of retrievable reserves, I would revisit the issue. But as it stands, I don't think our response should be "Drill, baby drill!"

2 comments:

  1. Thank you for the straightforward and informative perspective; really helped me better understand the issue as someone who is getting into economics and values environmental conservation.

    ReplyDelete
  2. Thank you for the straightforward and informative perspective; really helped me better understand the issue as someone who is getting into economics and values environmental conservation.

    ReplyDelete