Thursday, September 27, 2007

Arctic National Park and OIL: An Economic Perspective

We have all seen pictures of cuddly polar bears getting thinner and we are used to stories of evil oil companies destroying the environment.

In this recent NBER paper a couple of economists tackle the question of drilling in the Arctic National Wildlife Refuge.

The conclusion - there is a lot of oil under all that snow and ice. The value of the oil is a lot higher than the extraction costs BUT when we take into account the environmental costs it comes out, conveniently, at break even.

There is of course the standard problems with using "willingness to pay" or "willingness to accept compensation" estimates.


"Should We Drill in the Arctic National Wildlife Refuge? An Economic Perspective"
NBER Working Paper No. W13211

University of California, Santa Barbara

Affiliation Unknown

Full Text:

ABSTRACT: This paper provides model-based estimates of the value of oil in Alaska's Arctic National Wildlife Refuge (ANWR). The best estimate of economically recoverable oil in the federal portion of ANWR is 7.06 billion barrels of oil, a quantity roughly equal to US consumption in 2005. The oil is worth $374 billion ($2005), but would cost $123 billion to extract and bring to market. The difference, $251 billion, would generate social benefits through industry rents of $90 billion as well as state and federal tax revenues of $37 billion and $124 billion, respectively. A contribution of the paper is the decomposition of the benefits between industry rents and tax revenue for a range of price and quantity scenarios. But drilling and development in ANWR would also bring about environmental costs. These costs would consist largely of lost nonuse values for the protected status of ANWR's natural environment. Rather than estimate these costs and conduct a benefit-cost analysis, we calculate the costs that would generate a breakeven result. We find that the average breakeven willingness to accept compensation to allow drilling in ANWR ranges from $582 to $1,782 per person, with a mean estimate of $1,141.


1 comment:

Anonymous said...

It is break-even only by construction. Their thought experiment is to see "how big" WTA estimates have to be to justify saving ANWR. Thus they find that if people are willing to accept an average of $1,141 per person to allow drilling that is the amount at which society breaks even. The question then becomes "is WTA that high or higher?" If so, we shouldn't drill. If not, we should.