Common Tragedies

Thoughts on Environmental Economics

Alaska and the illusion of energy independence

Posted by Evan Herrnstadt on December 4, 2007

An article in today’s New York Times highlights the tension inherent in Alaskan oil exploration. As Royal Dutch Shell has attempted to explore offshore oil resources off the coast, it has run into some stiff resistance:

It tried to make headway this summer, only to be stopped by an unusual alliance of Inupiat whalers and environmental groups who filed a suit in federal court. They argue that noisy drilling off the Alaska coast could disrupt migration routes for the bowhead whales, making it impossible for the Inupiat to capture their allotted share of about 60 animals per year. A court hearing is scheduled for today to consider whether the company can move forward, though a ruling is not expected for months.

There are generally two arguments for expanded Alaska oil production. One is local economic development:

Richard Glenn, vice president of the Arctic Slope Regional Corporation, the biggest Eskimo-run business, says the oil industry is vital to indigenous communities. The corporation runs a series of energy and construction businesses, and redistributes more than $200 million a year in profits to the Eskimos. “To say that the oil and gas industry succeeds does not mean that our culture fails,” Mr. Glenn said.

However, the mayor of at least one relevant community (the North Shore Borough) is opposed to the exploration, though he recognizes the tradeoffs involved. This is a decision that locals must make themselves. There is non-use value to preservation of indigenous cultures; however, I generally think that one’s choice of lifestyle should be left up to the individual.

However, these indigenous communities often are stuck with undesirable options. One direction is to give up an ancestral culture and accept some payout. Not bad, right? At least they’re compensated, and this very choice indicates that it is the best available scenario, assuming optimizing behavior. However, the flip side of the coin is not generally maintaining the status quo; rather, it is an attempt to live in the past, uncompensated, as the modern world and enormous fees from the inevitable protracted legal battle makes this a decreasingly plausible option. It is analogous to the use of market power to force an agent into optimizing in a second-best world.

Moving forward, the second argument for exploration here (and in ANWR, incidentally) is energy independence:

The oil resources off Alaska’s coast amount to some 27 billion barrels, according to government estimates, about the same as the original reserves of the giant Prudhoe Bay field discovered in 1968. That would be enough to satisfy America’s total oil consumption for three years if every last drop could be pumped, which is unlikely.

The production figure is stated in a somewhat disingenuous way. Let’s be generous and say that all 27 billion barrels make it out of the ground (highly unlikely). Unfortunately, this oil does not come up all at once. For illustrative purposes, the Prudhoe Bay field hit its peak production of 1 million barrels/day in the late 1980s. If this new field is indeed similar, this means that instead of providing “enough to satisfy America’s total oil consumption for three years,” it will provide (at peak) 4% of America’s oil consumption. Basically, this is like saying that if I received a 4% raise, assuming I work the same job for 25 more years, I just got about 3 years of extra pay (without discounting, for you sticklers out there). In the lifetime income sense, I suppose I did, but I’d never describe an extra hundred dollars per month in that manner.

On a broader scale, attempting to achieve energy independence in this manner is preposterous. In an RFF Issue Brief, Senior Fellow Joel Darmstadter in part discusses why supply-side efforts are doomed to failure. In a global market, any additional oil produced in the United States affects the price of oil (essentially) the same as if it came from the North Sea or the Middle East. Due to the fungible nature of crude oil, a price spike anywhere means a price spike everywhere. Short of a coordinated stockdraw from strategic reserves, “spare producing capacity around the world—whether of crude oil or refined products—that could offset significant shortages is often severely limited.” Even such a stockdraw is often politically tricky and occurs too late to have a real impact in the case of a geopolitical crisis in a petro-sensitive area (see Gulf War I).

In conclusion, we probably shouldn’t really tell a local group how to use (or not use) their endowed resources, especially as we push them further and further from their more sustainable lifestyle. However, using the possibility of a geopolitical oil crisis to justify producing such a small additional amount of crude is ridiculous when a persistent 4% reduction in our consumption (preferably achieved through a carbon price) would easily cover the same amount.

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