A new study on ANWR oil potential had some conservative blogs steaming in anticipation. Using current oil prices, total oil reserves amount to astonishing $600bi. Drilling our way out of foreign oil dependency sounds like a no-brainer, right?

Not so fast.

The annual output would actually be small in world comparisons, a main aspect concerning international oil prices. That means ANWR oil will not affect international oil prices, and consequentially price at the pump::

“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.”

Despite what Sara Palin believes, the relatively small flow also has little or no consequence on American dependency on foreign oil. Even at maximum output, ANWR oil would be around projected 3.2% of US oil demand:

“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.”

Oil extraction would create relatively few, low-level, localized jobs. Job benefits are so small relative to the overall net benefits they weren’t even considered in the study.

But what about the $600 bi waiting to be cashed in? First and foremost, Alaska would retain around 15% of it, or $86bi, and the industry would keep another 35%, or $210bi. Federal tax revenues, including royalties, would account for around 50%, or $300bi.

However, those numbers are calculated for the entire reserve, which would be spent over a few decades. In fact, it would take 15-18 years just to reach maximum output of 0.9 million barrels per day. Even assuming full-blown outflow right from Day One, the entire reserve is estimated to be economically viable for 21.5 years, optimistically giving federal revenue of around $14bi per year.

To put on much needed perspective, federal revenue on customs duties is twice that much. Or 7 weeks of Iraq war, according to the Congressional Research Service.

* * *

In national levels, with current federal revenues of $2.7 trillion and consumption of 20.7 million barrels per day, $14bi is simply nothing. We could save that much oil with a 5% increase in gas mileage, or save that much money with a 10% decrease in Iraq spending.

* * *

Matthew Kotchen, assistant professor of economics at the University of California Santa Barbara, acknowledges the small effect of ANWR oil in our day-to-day reality, but brings up another good point: this revenue could be ear-marked to fund alternative energy research:

We should all acknowledge that drilling in ANWR would negligibly satisfy our addiction to oil. Nevertheless, it could provide a massive source of revenue to fund scientific innovation, renewable energy, energy efficiency and climate-change policy. The revenue could be earmarked specifically out of ANWR’s tax revenue

Sadly, his following remark destroys the reputation of the Economics Department in UCSB:

“[…] or, even better, be taken out of revenues that would otherwise be industry profit.”

Given that all these estimates are based on assumption of profitability and marginal cost calculations, any profit cut would likely reduce the overall revenue, investment and production. Talk about killing the Goose

Advertisements