Market Argues Against Arctic Ocean Oil Development

Market Argues Against Arctic Ocean Oil Development
Dirk Notz via AP

Conservatives normally respect market forces, so it is curious that some Republicans are pushing to develop natural resources that the market does not need. Their zeal for oil drilling in the high Arctic’s Beaufort and Chukchi seas provides a perfect case in point.

This political push to drill in the Arctic comes after experienced oil companies like Royal Dutch Shell and ConocoPhillips—after spending billions of dollars chasing prospects there—pulled out of the area and relinquished more than 2 million acres of previously purchased drilling rights.

These companies understand that to earn an acceptable return on the huge investment required to develop potential Arctic reserves, the price of oil would need to be much higher than at present; according to some analysts, about $100/barrel. In real terms, crude oil prices in 2016 were at their lowest since 2004. Oil prices are being held down largely because oil from the shale boom has flooded the market.

Over the last two decades this revolution in unconventional oil and gas production – three-dimensional seismic surveys, directional drilling, and hydraulic stimulation – has completely rewritten the global supply situation. The shale bonanza has helped drive the global reference price as low as $30 a barrel. Prices have rebounded some, but it will likely be decades before they begin to approach the level needed to make offshore Arctic oil a financial winner—and even then, reactivating dormant shale wells will be more cost effective than Arctic drilling.

Demand for oil products, while projected to grow, will be moderated by improvements in motor vehicle efficiency, electrification, and other technology trends. U.S. demand growth would be further dampened if the price of oil products reflected generous tax subsidies, greenhouse gas emissions, and other external costs of oil production, transport, and consumption. 

In addition, oil prices do not adequately reflect risks associated with spills. Oil company liability is capped by law at a small fraction of the potential liability incurred by a major spill and the Oil Spill Liability Trust Fund is grossly underfunded.

The industry’s liability exposure from spills in high Arctic seas is especially high. Just as the costs and risks associated with finding and producing Arctic oil are exceptional, the risks—and consequences—of an ecologically disastrous oil spill are even greater. If oil companies were required to shoulder a liability burden that reflected realistic risk and damage levels, developing offshore Arctic oil would be off the table. 

As staggering as the known economic and environmental costs of the 2010 Deepwater Horizon spill in the Gulf of Mexico are, much is still not understood about its long-term costs and environmental impacts. Seven years and $62 billion in BP expenditures later, oil continues to be churned up by Gulf currents and storms. The Gulf ecosystem and livelihoods that depend on it remain seriously damaged.

That disaster happened just 50 miles from the mouth of the Mississippi River in a temperate zone close to extensive industry and Coast Guard spill response assets. Contrast that with Arctic seas, which are ice-covered and dark much of the year, subject to extreme weather anytime, and more than a thousand miles away from even minimal spill response resources.

Despite all of the factors that make Arctic oil production risky and uneconomic, some argue for developing it anyway to promote energy independence. But this is not the 1970s. Today, only 8% of US oil consumption originated in the Persian Gulf, and overall US imports are projected to decline without developing offshore Arctic oil.

It is also worth noting that since oil prices are set by a global market, OPEC can—as it did recently—use its production capacity to drive down prices and make oil with high development cost uneconomic. Moreover, developing Arctic oil would not necessarily reduce foreign dependence because Congress relaxed longstanding restrictions on exporting U.S. oil. 

By keeping the Beaufort and Chukchi seas off-limits for now, the Trump Administration (which prides itself on running government like a business) would demonstrate that it understands market realities. Some oil companies want the Administration to open Arctic leasing so they can show their shareholders that they have access to these reserves, at least on paper. The Trump Administration needs to stand up to them and conserve the Arctic, both its oil reserves and fragile ecosystems, for all Americans.

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