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.