The ANWR Trust Fund

( – promoted by undercovercalico)

   What are the benefits?  Kotchen and Burger estimated that the oil had a value of $374 billion (writing in July 2007, they assumed a long-term price of $53/barrel), but that it would cost $123 billion to extract and market.  The net return of $254 billion is divided consists of industry rents of $90 billion, Alaska tax revenues of $37 billion, and Federal tax revenues of $124 billion.

Under the authors’ understanding of incidence, consumers wouldn’t benefit much at all because oil prices would not fall noticeably.  Still, drilling makes economic sense if the loss of environmental amenities is valued at less than $1,141 a person (per American, not per Alaskan) and that was with a price of oil roughly half of today’s price.

At today’s price of oil, a rough estimate of the benefit — not counting environmental costs — is over $600 billion.  So the whole issue seems much more important than I had thought just one hour ago.  Some approximation of taxes and transfers and auctions are available, so these gains can be redistributed to some extent if you wish.

That’s economics professor Tyler Cowen at his blog, Marginal Revolution.

The point that Cowen brings up is a profound one.  The common argument against expanding oil drilling both off-shore and in ANWR has been twofold: the amount of oil is not significant enough to alter the world price (which will always be true), and the value of the oil does not significantly outpace the amount of environmental damage that would be caused.

But when the price of oil changes, the value of the oil does as well.  Indeed, if the price of oil continues to rise in the long term, the value of the oil will be significantly more than the value of the environmental damage (to the extent that any value can be placed on that – but, it is easily imaginable that at future oil price X, the profits will be significant enough that huge sums from it could be used to finance environmental cleanup in many places).

Therefore, I predict that at some point, the value of the oil in ANWR will be large enough that it is politically irrational not to exploit it.  The oil in ANWR will become a sort of national trust fund, where at a certain expected value, the government is certain to exploit it.  I see no way of avoiding this, or by which this is not the rational course of action.

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    • Jay Elias on September 6, 2008 at 7:22 am
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    …this post is one where I am seeking contradiction by the community.  I know a good amount of economics, and see no way around the reality as Prof. Cowen presents it.  But I know very little about the environment.  Perhaps someone can estimate the environmental costs for me.  Or argue that non-carbon emitting energy will be attainable in short enough order that the oil in ANWR will not rise significantly in expected value.

    In other words, can someone here prove me wrong?

  1. thoughts again. I differ in that you see it as a rational choice but in reality it will be used as a political choice to show how R’s deal with energy problems.

  2. it becomes more and more “rational” for corporate participants in a competitive scheme based on capital accumulation, i.e. capitalism, to exploit dwindling resources at an increasing rate in order to cash in on rising prices.

    By the same token, we can imagine the collapse of marine ecologies caused by overfishing, ocean pollution, and abrupt climate change will make the remaining fish in the ocean that much more valuable, and thus more tempting to exploit.  Or that the destruction of the Amazon rainforests will make the remaining hardwoods in said forest all the more valuable to extract.

    Meanwhile, as abrupt climate change increases the chances of massive crop failure across the US, we can imagine food producers to cash in on famine by bidding up the price of food.  Party party party!

  3. I see the recognition that the current benefit is rising to a point, but a curious blindness to the fact that it will keep on rising. So long as the future price is expected to be higher than the present price, consuming now involves a foregone capital gain.

    Obviously the User Cost is higher the lower the implicit discount rate.

    And, further, the argument assumes gross substitutability … that once we value ecosystem services at $X, then if we can generate $X in revenues, we can use that to substitute for those ecosystem services. However, gross substitutability does not apply to distinct functions of the same complex system. More plasma television sets are not a generic substitute for less potable water … more cruises of the Caribbean are not a generic substitute for less non-poisoned food or breathable air.

    Remove the assumption of gross substitutability, and then rather than simply assuming that enough market value justifies a given degree of environmental destruction, it becomes necessary to establish specifically how that market value will be used in order to create ecosystem services equal to the ecosystem services being destroyed.

    Not to put too fine a point on it, that puts the shoe on the other foot. Now rather than just monetary values, it becomes necessary to set forward the plan for how an arctic reserve as effective as ANWR will be provided for as a result of the monetary income.

  4. “if the price of oil continues to rise in the long term, the value of oil will be significantly more than the value of the environmental damage” fails to recognize that just as we continue to deplete our natural resources and thus to put the entire web of life (recognizing the interconnectedness of all ecological subsystems – just listen to biologist EO WIlson talk about the importance of all species and their ecosystems) in jeopardy, those natural ecosystems also become more valuable – and the costs of destruction of those systems thus much higher; ie they become irreplacable so that it is not just a matter of figuring the cost of “environmental cleanup”.  I think there is an argument that the natural resources of the Arctic Refuge are unique enough that their value (home to herds of wandering caribou, at least at the end of their seasonal journey?, etc.) cannot be assigned monetarily.  Certainly, it’s difficult to assign a cost of drilling to the native Gwenich (sp?) peoples who argue against drilling in ANWAR because they say their way of life would be destroyed. So again it’s rational to whom to drill?

  5. That’s the driller’s way.

    Still, drilling makes economic sense if the loss of environmental amenities is valued at less than $1,141 a person (per American, not per Alaskan) and that was with a price of oil roughly half of today’s price.

    At today’s price of oil, a rough estimate of the benefit — not counting environmental costs — is over $600 billion.

    The expenses associated with Global Warming are not imaginary. Indeed, the problem has become so bad that the Intergovernmental Panel on Climate Change (IPCC) is already recommending a $100 per ton tax on C02 emissions.

    ANWRs approximately 10 billion+ barrels of carbon flood the atmosphere at a rate of 1 ton C02 for every 3 barrels – a rate which means a 100 per ton tax all by itself cuts ANWRs $600 billion ‘benefit’ just about in half.

    What’s more, personal damages of a mere $1100 per American is ridiculously low.  The big re-insurers are all getting out of disaster business because Global Warming has made the payouts too damn expensive, yet somehow when it comes to oil drilling business, the total public cost of ANWR’s released carbon to each person is merely one year’s car insurance deductible?

    Also, why does the author only think US residents will be the ones who suffer damages?  As the name implies, Global Warming does not require a passport.

    Bottom line, our climate is not ‘amenity’. Until drilling advocates own up to the true environmental costs of continuing carbon extraction, any so-called cost benefit analysis as worthless as an Enron P&L statement.

  6. that only measure profit for corporations do not include the real cost for humanity or the world which sustains all life. Eco systems are not just about saving individual critters say the caribou but about livability. It seems so divorced from reality to natter on about measuring good in US dollars in the bank of the rich while hurricanes bear down, pictures of China’s cities look like visions of hell from pollution and our essential resources food water and energy all are just considered fodder for future profit for who? Delusional arguments for Drill Baby Drill. Crisis capitalism in action. The price of clinging to a system of economics that holds no connection to the changing real world is like pouring gasoline on our burning house.

    http://www.huffingtonpost.com/

    http://www.dailymail.co.uk/new…        

    • BruceMcF on September 8, 2008 at 12:00 am

    … its the above up to “saving ecosystems”, and that’s the foundation value, with viability of human populations secondary)

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