To drill or not to drill? That is the question once again in Alaska's Arctic National Wildlife Refuge. With oil and gas prices hitting record highs in an election year, politicians on both sides of the aisle support measures to increase our domestic production of oil. But conflict remains about whether to allow drilling in the federal portion of ANWR.
While ANWR is thought to contain vast quantities of oil, the region also supports natural environments that are unparalleled in North America. Thus, the ANWR question is typically cast in symbolic terms – “big oil” looking to cash in on big profits against environmentalists who care more about caribou than people.
| But let's consider a simple thought experiment to help cut through the symbolism. Imagine that ANWR – both the region and oil rights – were given to a collection of environmental organizations. What, then, would environmentalists choose to do? I consider myself an environmentalist, and thinking through this question has changed the way I think about ANWR.
Even environmentalists would be curious about how much oil lies beneath ANWR. According to the U.S. Geological Survey, the best answer, given recent prices, is 7.69 billion barrels – a quantity roughly equal to U.S. consumption in 2007. But that oil would not be available immediately and would take several decades to extract. Forecasts predict peak production after 2025, and ANWR would never account for more than three percent of U.S. annual oil consumption. |
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 Matthew J. Kotchen |
With this information, we can confidently dismiss two benefits that proponents of drilling most frequently advance. Because ANWR would increase the world's proved reserves by only 0.6 percent and oil prices are determined in a world market, any effect on oil prices would be negligible. And with ANWR supplying such a small fraction of domestic consumption, even at its peak, U.S. imports of foreign oil would remain significant even if ANWR were tapped.
But if environmentalists owned ANWR, they would begin to think about how much that oil is worth. Consider that 7.69 billion barrels at recent prices of $140 per barrel generate revenue of $1.08 trillion. Subtracting the estimated costs of finding, developing, producing and transporting this oil, the financial net benefit of ANWR's oil is substantial – $921 billion.
With all that money on the table, environmentalists might begin to think about what they could do with $921 billion. Perhaps some would choose to leave things as they are, forgoing the money in order to prevent drilling in ANWR. Others might think about the transformative effect that $921 billion could have on addressing climate change and other environmental problems.
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For example, the president's 2008 budget for all climate-change activities amounts to only $7.37 billion, which generously accounts for all expenditures related to science, technology, international assistance and energy tax provisions. Clearly, the scope and achievement of these programs would change dramatically if even a modest portion of ANWR's $921 billion were directed their way.
In reality, however, environmentalists do not own ANWR, and little is known about how the benefits would actually be distributed. In a recent study, co-authored with Nicholas Burger, we calculate the breakdown for different price scenarios under current policies. Extending our work to consider $140 per barrel, the net benefits of ANWR's oil would amount to $427 billion in industry profit, $102 billion in Alaskan state tax revenue and $392 billion in federal tax revenue. |
These numbers obviously shape the political economy of ANWR today. It is not surprising why oil companies and the state of Alaska favor drilling. And beyond environmental concerns, the public is not likely to support policies that further increase the profitability of oil companies, which continue to earn record profits while people pay record prices.
But perhaps the simple thought experiment of what environmentalists would do can help recast the debate. We should all acknowledge that drilling in ANWR would negligibly satisfy our addiction to oil. Nevertheless, it could provide a massive source of revenue to fund scientific innovation, renewable energy, energy efficiency and climate-change policy. The revenue could be earmarked specifically out of ANWR's tax revenue or, even better, be taken out of revenues that would otherwise be industry profit.
We are in serious need of new ideas for simultaneously satisfying our demand for energy and meeting the challenge of global climate change. In a speech in Washington, D.C., former Vice President Al Gore just challenged the nation to switch to 100 percent renewable energy generation for electricity within the next decade. With revenue from ANWR, perhaps we would have a shot at meeting such challenges.
Counterintuitive as it may seem, linking climate policy with the prospect of drilling in ANWR may present an opportunity. Even environmentalists might be willing to consider the trade-off of uncertain impacts of drilling in a remote area in exchange for real efforts to address climate change.
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Matthew J. Kotchen is an assistant professor of economics at the University of California Santa Barbara, a visiting scholar at Resources for the Future in Washington and a research fellow at the National Bureau of Economic Research.
