Matthew Kotchen and Nicholas Burger ask, "Should We Drill in the Arctic National Wildlife Refuge? An Economic Perspective." (NBER Working Paper 13211, July 2007). Back in 2007, when they could assume a price of $53/barrel for oil, they found that you should not have drilled if the value of the lost environmental amenities was more than $1,141 a person (that threshold would be much higher today because of the higher price of oil; here and elsewhere all values are for their central case).
The coastal plain where the drilling would take place is shown in green on this map from the Alaska Department of Natural Resources (click on the map to see a bigger version):
What are the benefits? Kotchen and Burger estimated that the oil had a value of $374 billion (writing in July 2007, they assumed a long-term price of $53/barrel), but that it would cost $123 billion to extract and market. The net return of $254 billion is divided consists of industry rents of $90 billion, Alaska tax revenues of $37 billion, and Federal tax revenues of $124 billion. [errata: $254 should read $251 - Ben, 9-4-08]
Welfare benefits to U.S. oil consumers? There aren't any, except in their role of taxpayers. That's because development would have little impact on oil prices (or energy independence):
Domestic oil prices are determined in a world market and would be unaffected by the relatively small annual flows from ANWR. Moreover, the quantity of oil in ANWR, 7.06 BBO, is merely 0.55 percent of the proven reserves worldwide... Analysts also recognize that even if ANWR's supplies were large enough to affect world prices, the Organization of Petroleum Exporting Countries (OPEC) would countermand the increase in production and thereby negate any price effects... It is also clear, with ANWR accounting for a maximum of 3.2 percent of domestic consumption in 2025, that something other than drilling in the Refuge will be necessary to substantially reduce out dependence on foreign oil.
Job creation? Some in Alaska, but with full employment there would be no net job creation; jobs created on the North Slope would be taken from other industries and places.
There would also be costs. The costs of actually exploiting and bringing the oil to market have been accounted for above - those benefits are net of production costs. However, there would also be significant environmental costs. There could be direct adverse impacts on animal populations, such as the Porcupine caribou herd. Oil spills may also hurt animal populations and wreck ecosystems. Greenhouse gas emissions are probably not an issue; if the oil doesn't come from ANWR, it would come from somewhere else, and greenhouse emissions would be unchanged. Not many people can be expected to go ANWR for recreation, so foregone use values of this sort are probably pretty limited. However, many people across the nation place a value on knowing that an environment remains undamaged.
There is no good information available on the amounts people would have to be paid to accept a risk of these costs. Kotchen and Berger do estimate that, given the potential benefits of development (and considering a range of possible development scenarios), "If the average WTA [willingness to accept compensation for development - Ben] for a one-time payment to permit drilling and development in ANWR is $1,141 [per person - Ben] (or $38 per year for 30 years), then the social costs will exactly equal the estimated benefits." If the WTA is less, its efficient to develop; if the WTA is more, then its efficient not to.
As I said above, the authors, writing in 2007, based their analysis on an oil price of $53/barrel. The price is much higher now (~$120) suggesting that the WTA to balance benefits and costs is much higher and that it is more likely that development would be efficient now.
June 18: see also the earlier Arctic Economics post: ANWR's Impact on Oil Prices (May 27)
September 21, 2008: Tyler Cowen at Marginal Revolution posted on this topic and linked to my post on September 4: Drill, drill, drill: the economics of drilling. Cowen's post had 72 comments as of this morning. He pulled one especially interesting comment out for special treatment in another post on September 5: Hail Giacomo Ponzetto!
Ponzetto argues that the present value analysis used by Kotchen and Burger did not take account of the interaction between the difficulty of reversing investment decisions and returning to the status quo ante, the uncertainty about investment outcomes at the time decisions are made, and the value of deferring irreversible action to gather more information. He argues that the drill-no drill problem is best considered in terms of the alternative real options approach to investment decisions. Here's an introduction to this: The New Option View of Investment.
Having been on both sides of the "ANWR issue" my observation is that I think there has been a lot of misleading rhetoric on costs/benefits of developing ANWR. Clearly, those who espouse not developing the 10 02 area invoke data on how little the oil will affect our consumption bottom line, how damaging the development process will be to caribou, and on and on. I think it would serve society and the general dialogue on this issue to assemble unbiased facts, which are difficult to find, in my opinion. I've seen data that indicate ANWR oil and gas would add a great deal to the Nation's energy supplies. And I do assert from my environmental studies in Alaska's coastal Arctic that the 10 02 area can be developed without all this harm people assert. Caribou will not all die - spills will not necessarily happen - the earth will not heat up more - fish will continue to migrate and thrive in the region, as will shorebirds, waterfowl, caribou, etc. I believe the REAL issue here is the emotional reaction. ANWR has been painted as the last wilderness, and unspoiled area, a unique habitat, etc. and people just don't like the idea of human activities, development, roads and drilling pads, gravel transport, drilling noise, and pipeline operations occurring in this area. All of that can be done responsibly - but many in society don't like the idea of developing this area. So this is an issue of perception, feelings, and mores - not factual destruction.
Posted by: Bill Wilson | June 03, 2008 at 05:35 PM