David R. Henderson  

Sitting on an Ocean of Alaskan Oil

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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.

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COMMENTS (16 to date)
Krishnan writes:

The analogy between immigration and oil is OK - upto a point - I would say it is quite easy to convince people of the actual potential (or threats) in (from) ANWR (for example) - because it is something people understand ... With immigration, many people just do not see it (even with lots of examples of how immigrants have contributed to the economy) ... all they see is the COST and so on

It is difficult for people to imagine what the US would look like if the US had decided (for e.g.) NOT TO ALLOW any foreign student to US higher ed campuses and earn their degrees and stay on ... the benefits are indeed distributed so widely, we imagine it has always been like this ... When it come to immigration they see the costs as FAR LARGER than with oil or anything else ... they cannot "see" the impact made by the "ultimate resource"

Philip writes:

There are a few major differences between ANWR oil and human talent of would-be immigrants. Most importantly, limiting immigration directly impacts the liberties of those would-be immigrants while oil reserves don't warrant the same type of human rights (I acknowledge that preventing people from using these resources has other "indirect" impacts to liberty that are similar in nature for each resource).

Second, 1 year, 10 years, and 100 years from now, oil that remains unextracted from ANWR will still be there (and potentially more valuable that it is now) while extraction technology will likely be more advanced enabling safer, more cost-effective resource use. For each year that immigration is restricted, the human talents that are not used are lost due to the limited life span of people. That is, the US retains the option to develop ANWR (and Yellowstone National Park, for that matter) while there is no retained option value of restricted immigration.

Mark Bahner writes:
Second, 1 year, 10 years, and 100 years from now, oil that remains unextracted from ANWR will still be there (and potentially more valuable that it is now)...

My prediction is that oil three decades from now will be worth less than half of what it's currently worth (adjusted for inflation)...and in 100 years it will be worthless.

Bottom line: drill quickly, if you're going to drill at all.

Jason Scheppers writes:

This is one subject where I am not so sure the delayed extraction is a huge cost.

The one big assumption that you made was the it was trapped away forever. I suggest that the forces of supply and demand will unlock this resource as its value increases. I don't dispute the less than optimal use of the current resource, but I say give it time and demand pressure and the energy will be provided and the loss efficiency will be an order of magnitude lower than the estimates you developed above.

I point to the fact that this is like an option and we may be under estimating the value of the future option, even though the option is controlled by breaking through the red tape.

Arthur_500 writes:

I disagree with you on your value estimates because if we were to have all that oil available it would affect the price (Supply vs Demand). Exactly how much will never be concluded until the future actually happens.

So how about all that locked up talent? What is the effect?

Certainly we would have higher prices as our current illegal immigrants could no longer work for below market value prices. After all they would be legal!

In the real world I think the value of immigration limits would be based on not exceeding the needs of the labor market or the State benefits. In other words, let 13 million come in from South of the Border (only one example) because we do not have the population (willingness) capacity to accomplish that work without them. That labor benefits all.
Conversely, if we have high unemployment and people actually want to work (limit unemployment benefits) then maybe we can only accept 11 million guest workers. We would have to send home two million guest workers to keep our economy in balance.

On the other hand, we could let the invisible hand sort it all out. Get out of the forever unemployment insurance market and allow the guest workers. Make everyone pay the appropriate wages and taxes. Many guest workers would find this unacceptable and return home, especially if there were not a host of free State benefits to support them.

In other words, the ocean of talent would have a rising tide where it was necessary.

Handle writes:

What about reversibility?

If you don't drill, your descendants - perhaps learning new information, or in different circumstances, or with cheaper / cleaner extraction technologies - can always decide to drill later. You know whether you can handle a small increase in scarcity in prices today, but it's harder to predict for tomorrow.

If you do drill, you risk oil becoming unexpectedly more valuable in the future, or more cheaply or cleanly extractable. You also arrogate the choice to yourself, leaving your descendants without any room for maneuver (except, perhaps, the additional wealth they will have inherited derived from present extraction).

So not drilling is reversible, but drilling is irreversible.

Now, how about immigration?

Let's be honest, genuinely open borders would mean many millions of people flooding into developed countries very rapidly.

Let's say after a few years, the original citizenry realizes they they made their decision in a fit of absence of mind and deem the experiment a huge failure and want to go back to the way things were?

Easily and feasibly reversible? I would argue no. Are we not told regularly how difficult, costly, and inhumane it is to deport?

On the other hand, if we have slow, controlled immigration, our posterity could always decide whether to try the experiment themselves (faced with the same concerns for their own future successors). So, as a policy, it's easily reversible.

Martin writes:

I do wonder how answers would change if the government proposed to go 300 billion or so into debt to restore some nature somewhere, perhaps even outside the USA. Do those individuals care about nature or just nature in the USA or do they just care about the status quo?

Likewise with immigration, what about if the government would go into debt to pay a large number of individuals to leave the country and renounce their citizenship. Would they consider that to be a good idea?

Andrew_FL writes:

Uh, barrels of oil can't vote.

Hunter writes:

Wake me when we can make use of the resources of the black gold known as the talents of our African-American citizens which have been sqaundered for generations.

James writes:

Andrew_FL: Some opponents of freer immigration create a false dichotomy where the only options to consider are either something much like the status quo, or a world where there are open borders and immigrants enter developed nations, vote for bad policies, live at the expense of natives, etc. Your comment above might be read as an attempt at promoting the same misunderstanding. But of course you know that people could be allowed into a country without being allowed to do any of those things, right?

Hunter: Wake up. Hiring blacks is legal and, according to many, a great bargain vs hiring whites with similar talents.

Mark Bahner writes:
For years, the federal government has locked up that resource, not allowing it to be drilled.

It's unfortunate that most people know nothing about the Constitution. The Constitution does not authorize the federal government to own land within the states, other than for "forts" and a piece of land "not exceeding 10 miles square" for the national capital. There is no authority in the Constitution for ANWR.

If ANWR were owned by the State of Alaska or private citizens, there almost certainly would already be drilling there.

Richard Besserer writes:

The difference is that otherwise sensible people don't accuse barrels of oil of wanting to take over the world or steal their daughters. Said otherwise sensible people are much more likely to be persuadable on ANWR.

I must confess I find the mental image of oil barrels cruising American cities wolf-whistling at trash cans more amusing than I ought to, though. I need more coffee.

Michael W writes:

I'll say it again, why is there no room in the economic model for the value to which many (including myself) assign value to an undisturbed environment free of oil rigs, the associated pollution, and disturbance to a relatively undisturbed environment rich in wildlife? Parts of ANWR have been described as America's Serengeti. Is there no room in the model for that?

I hear the chorus now "But there will be drilling somewhere else." Yes, that's likely true and in an area that I (and presumably others) value less because it is not in an environmentally sensitive area or has fewer consequences in transport or other effects.

There's nothing in these ideas that is distinctly anti-libertarian. I assign a value to Alaska's north slope that you do not. Put another way, I have little regard for the yard around Mr. Henderson's home (presuming he has a yard) and assign it little value as I neither desire it, wish to look upon it, or believe its condition has any effect upon me. I'm sure his neighbors and family feel otherwise.

The value I assign to the few wild (publicly owned) places we have left may be higher than the value assigned to them by some others.

As for the comparison to immigration, I too favor more open borders but, just as in the above example, I think Mr. Henderson is discounting the differing values assigned by others to the effects of these open borders.

It is not a purely numbers game but finding a way to assign numerical values to these effects and the variations across society might create a more reasoned debate.

Andrew_FL writes:

@James- I agree it is possible in some fantasy world for people to be allowed to come into this country and be denied the franchise.

Of course, this is reality, and in reality if you think that's going to happen that way, I have a bridge to sell you in Brooklyn.

In reality, what would happen if you denied the franchise to large numbers of now legal residents, is that you would be deemed a bigoted racist and there would be a strong-and I can guarantee you successful-push to grant such people the franchise.

I fail to see how recognition of reality is either creating a false dichotomy or promoting a misunderstanding.

Andrew_FL writes:

@Michael W-With regard to the value you place on an undisturbed ANWR, in an ideal world the solution to that would be simple. You could just buy the land and leave it undisturbed.

The real problem here is that the land is public rather than private property. Since it is public, you get this wrangling over how different people value it being disturbed versus undisturbed. They all have an equal claim to the property so they all demand a say.

Mark Bahner writes:
There's nothing in these ideas that is distinctly anti-libertarian.

Actually, the view that the federal government should own land *is* distinctly anti-libertarian. There's nothing in libertarianism that advocates governments at any level owning land.

The libertarian view of government is that, at most, government should be limited to violence and fraud.

And it's particularly un-libertarian to advocate the *federal government* owning land within the various states, because the Constitution expressly limits federal government ownership of land within states to "forts" (and the "10 miles square for the District of Columbia). So federal ownership of ANWR involves the government usurping powers that the 10th
Amendments gives to the States and the People.

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