Thursday, September 18, 2008

Save the Environment: Drill, Baby, Drill

Our projections are based on government estimates that some seven billion barrels of oil could be extracted from the Arctic National Wildlife Refuge and a whopping 11 billion barrels could be had from the restricted offshore sites. That translates into an extra million barrels a day in the year 2025 — one-sixth of the total projected domestic output.

A big deal, right? Not in the context of the current political debate. The markets in which oil prices are determined are global, not local, and the extra million barrels would represent less than 1 percent of total world consumption in 2025. Thus we estimate that the million daily barrels would lower the price of crude by just 1.3 percent, which few consumers would even detect against the background noise of the weekly ups and downs of fuel prices.

Assuming that crude will still be selling for $100 a barrel down the road, we estimate that the oil from two new sources would be worth close to $1.85 trillion. Add to that the extra benefit to consumers of paying slightly less for imported oil and economic gains from being less vulnerable to supply disruptions, and the total benefit exceeds $2.1 trillion.

On the other side of the ledger, the expected costs of developing all that oil, including cleaning up environmental damage, would amount to a bit less than $400 billion. So, at a first cut, the decision to drill seems an economic no-brainer.
I think that is a pretty good summary of the economics of drilling. Compared to domestic production, increased drilling would increase by 1/6, which is sizable. But, compared to the 80 million barrels a day consumed world wide, it isn't much, and therefore unlikely to reduce prices much. On the other hand, the individual projects themselves will be profitable and would give state and federal governments hundreds of billions of dollars in royalties and taxes so it seems like they should should go forth.

I thought this next part was in intriguing new idea:
Many environmentalists argue that this calculation leaves out the biggest cost of all: the loss of the intangible benefits Americans get from knowing that the Alaskan refuge and outer continental shelf have been left untouched. Indeed, economists spend a lot of time thinking about such “non-use values,” if not much time agreeing on them. Still, our best attempt to get a fix on the non-use value of Arctic National Wildlife Refuge yields a figure of just $11 billion. In sum, this leaves about $1.7 trillion in tangible net benefits, so most people, one would guess, would still find the case for drilling to be compelling.

Some people, however, attach a much, much higher non-use value to the Arctic refuge, and their opinions count a lot because they are well represented in Congress. So here’s a question for them: If a big chunk of that $1.7 trillion could be spent on preserving wilderness that didn’t happen to sit astride vast quantities of oil, would you really choose to spend it on keeping human hands off the currently protected sites?

One could imagine a political bargain in which several hundred billion dollars went into a fund with a charter to preserve wilderness in the United States, or climate-stabilizing rainforests in Africa and Latin America. As little as $100 billion would go a long way: the projected cost of preserving the entire Everglades against the encroachments of the Florida economy is $11 billion, while a comprehensive restoration of 200,000 acres of Louisiana’s coastal wetlands would run to $18 billion.
I would rather see all those areas protected before ANWR. If the money from additional drilling could be used to help stop the clearcutting of the rainforests and restore the Everglades and Lousiana'a coastal wetland, I would sign up for that.

via NY Times

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