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Drilling Arctic Refuge oil won't boost US energy security

Drilling Arctic Refuge oil won't boost US energy security
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There are two main arguments used to rationalize the destruction of the Arctic National Wildlife Refuge for oil production. The first is that it will strengthen our national security, presumably by decreasing reliance on foreign countries for oil, most notably OPEC.

The second is that the revenue gained from leasing the refuge could reduce the deficit. Yet even a superficial understanding of basic energy data and geopolitics illuminates how faulty these arguments actually are.

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One of the most important measures of national oil security is proved reserves — that is the yet-to-be-produced oil available at current market prices — and drilling in the Arctic Refuge will only increase U.S. proved reserves from 2.8 percent to 3.2 percent globally. OPEC, on the other hand, has 70 percent. So, for the foreseeable future, OPEC will be a dominant force in U.S. oil geopolitics.

 

Oil production from the Arctic Refuge will have no impact on prices — another “national security” argument used to justify drilling — because all oil must be sold into a global market, and according to the Energy Information Administration in 2008 OPEC “could neutralize any potential price impact of [Arctic Refuge] coastal plain production by reducing its exports by an equal amount.”

The other argument — that leasing the refuge will raise enough revenue to reduce the deficit —is fraught with uncertainty. The Senate budget calls for $1 billion in revenue from the Arctic Refuge — which means that leasing would need to raise $2 billion to account for a 50 percent share with Alaska. If the revenue received is less, then the shortfall would add to the deficit.

Shell Oil’s bid in Lease Sale 193 in February 2008, was the only time in the past two decades when lease bids reached the $2 billion level, and there are good reasons to doubt that bids in the Arctic Refuge would reach that level.

For starters, Shell was the only company to bid nearly that much money. Conoco Phillips, for example, bid roughly $500 million. Second, Shell spent about another $5 billion on its exploration program before abandoning the project entirely. All told, roughly $7 billion spent and zero barrels produced. The experience was, by all accounts, a disaster — the memories of which could easily reduce bids for acres in the Arctic Refuge.

The 193 Lease Sale was also an outlier. The average bids across all other onshore acreage in the North Slope from 2000 through 2016 was only $34 per acre (in constant 2010 dollars). To reach the $2 billion level in the Arctic Refuge, the bids must be $1,300 per acre, almost 40 times higher than the average.

Even more alarming, the $1,300 per acre bid level assumes that all the acres would be leased which is often not the case. Lease 193, for example, was only 10 percent of the available acreage. If only 10 percent of the Arctic Refuge is leased, the per acre bid level would need to be $13,000 per acre, roughly 380 times higher than the $34 average.

The Arctic Refuge may represent a relatively higher value area in comparison to other onshore acreage in the North Slope, but whether it is 40 times, or 380 times for that matter, better is highly uncertain.

Perhaps the strongest evidence that bid levels will not reach the $2 billion level is that tight-oil is now cheaper to produce than Arctic oil. Tight-oil companies can break-even with oil prices below $40 per barrel, while production in the Arctic requires between $60 and $90 per barrel. A shift to the Arctic is a shift towards higher cost oil — a move not many companies would prefer to make.

What’s perhaps most unnerving is the fact that the 2017-2025 CAFE standards would save more than six times the oil that is projected to be within the Arctic Refuge. Simply leaving in place existing legislation would have a larger positive impact on U.S. energy security than opening up the Arctic Refuge.

The energy industry has changed dramatically over the past 10 years, from the tight oil boom to advances in electric vehicles. Destroying the Arctic Refuge for oil production will not increase our energy security and represents a large step backwards at this point, locking-in the United States to more years of unnecessary environmental carnage justified falsely, in the words of President Trump, as “American energy dominance.”

Dave Murphy is an assistant professor of Environmental Studies at St. Lawrence University.