Sitting on an Ocean of Alaskan Oil
By David Henderson
Co-blogger Bryan wrote an excellent post yesterday, “Sitting on an Ocean of Talent,” in which he compared people’s actual opposition to major increases in immigration to their supposed lack of opposition to producing a hypothetical precious resource named Leonium. As Bryan and regular readers to this site know, I am basically with him on open borders.
But I don’t think people’s opposition to more immigration is that different from how they would react to those who would prevent them from getting at precious resources. Exhibit A is oil in the Arctic National Wildlife Region (ANWR.) For years, the federal government has locked up that resource, not allowing it to be drilled. Assuming that it is locked up forever, the foregone gains are about 30% of Bryan’s hypothetical trillion dollars.
The best study I know of on the economics of ANWR is an NBER study by Matthew J. Kotchen and Nicholas E. Burger, “Should We Drill in the Arctic National Wildlife Refuge? An Economic Perspective,” NBER Working Paper No. 13211, July 2007.
Here’s the 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.
They did their estimates based on a 2005 price of oil of $53 per barrel. Inflation-adjusted, that’s a price of about $63 today. The world oil price is between $93 (West Texas Intermediate) and $107 (Brent Crude). Futures prices of WTI up to 2021 are in the 70s. So that means the authors underestimated (I don’t blame them, by the way) the value substantially.
Kotchen and Burger’s best estimate of value was $374 billion. Since the future prices look to be higher than the $63 price (remember: inflation adjustment makes it $63 rather than $53) by about 15%, this value would be about $430 billion. That doesn’t get us to Bryan’s trillion but it gets us almost halfway there. Of course, we still have to subtract costs of production. So let’s inflation-adjust the $123 billion and we get $147 billion. Net gain: $283 billion, or about 30% of the magic trillion.
And that’s just the ANWR. It doesn’t include the natural gas that’s locked up in New York state. It’s not hard to see how we could easily get to a net gain of half a trillion dollars or even a trillion dollars by allowing more oil and natural gas production.
When I teach Kotchen and Burger’s article in my cost/benefit class and in my energy economics class, I cover their “average breakeven willingness to accept compensation to allow drilling” point, but I also raise another issue similar to the one Bryan raised about Leonium under the Empire State building or unused talent starving in India and Africa: With such large values at stake, how creative could you get at both getting the oil and preserving the wildlife threatened by oil production?
But the point is: that’s not what people are doing. People are treating that locked-up pool of oil much the same way they’re treating that locked-out ocean of talent. They’re passively accepting the government’s limits and, in both cases, many people favor them.
And I’ve covered just one type of resource that the feds are preventing us from getting. I haven’t covered another item that’s even more analogous to Bryan’s hypothetical Leonium that reverses aging: pharmaceutical drugs that reverse, prevent, or at least slow the worst parts of aging–disease. The Food and Drug Administration, as Bryan’s colleagues Alex Tabarrok and Daniel Klein have pointed out, does just that.