Common Tragedies

Thoughts on Environmental Economics

$1141 divided by $53 times…

Posted by Daniel Hall on June 26, 2008

Just to put some numbers on the point Rich made about ANWR this morning, here’s the abstract of a paper [ungated version here] from one of my former professors:

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 $1782 per person, with a mean estimate of $1141.

And from the section of the paper on the benefits of drilling:

As stated previously, two benefits of drilling in ANWR that are often put forth are a decrease in the price of oil and reduced reliance on foreign imports. The numbers above suggest, however, that neither of these benefits is likely to be consequential. 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% of the proven reserves worldwide (EIA, 2006b). 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 (EIA, 2004; Gelb, 2005). It is also clear, with ANWR accounting for a maximum of 3.2% of domestic consumption in 2025, that something other than drilling in the Refuge will be necessary to substantially reduce our dependence on foreign oil.

The benefits that would be real and substantial are the economic rents and tax revenues that would arise from drilling in ANWR. From a social perspective—the one used in benefit–cost analysis—it is important to recognize that the oil is not worth the total revenue that it generates. There are opportunity costs associated with finding, developing, producing, and transporting the oil, along with the required rate of return on capital. The only portion of total revenue that would generate a benefit to society is the net return, which would consist of economic rent to the oil industry and state and federal tax revenues.

We extend the USGS model (Attanasi, 2005b) to estimate the economic rents and tax revenues that would arise from ANWR oil. The first step of deriving an estimate of total revenue is straightforward. For any given price, we multiply the price times the quantity of oil indicated by the long-run marginal cost curve in Fig. 1. Using our best-estimate scenario of $53 per barrel and 7.06 BBO, total revenue is $374.2 billion. Considering the 95% and 5% certainty scenarios, the estimate of total revenue ranges from $203.0 billion to $565.3 billion. Table 1 reports the estimates of total revenue for the full range of prices evaluated under the three different scenarios. [emphasis added]

Their alternative scenarios vary the amount of recoverable oil but not the price. They don’t consider prices above $59 per barrel. I’ll outsource the commentary to John Whitehead:

It is hard to imagine nonuse values over $1000 for ANWR (even if these are for households and not individuals). The nonuse values that I played around with 2 years ago are all less than $50.

Addendum: The values are for individuals age 18 or over.

One Response to “$1141 divided by $53 times…”

  1. […] Why? Because the best reason to be open to these proposals is not that they will influence oil prices but that they won’t. This, my friends, is a positive. It’s positive because it means that deployment of these bargaining chips won’t lead to huge increases in driving and emissions. And it’s positive because it means that taking these steps can be a big revenue generator. […]

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