The Trump administration and Alaska officials are moving quickly to open up exploration for oil and natural gas on the coastal plain of the Arctic National Wildlife Refuge.
New seismic testing on ANWR’s coastal plain is being planned for this coming winter, with an environmental impact statement, or EIS, being completed as soon as the spring of 2019 and federal lease sales planned for 2020.
The accelerated review process has revived much of the negative messaging campaigns by national environmental groups. But companies invest to make money and as long as there is interest in ANWR’s vast resources, Alaskans should be wary of inaccurate and negative economic arguments regarding the workings of global oil markets or their influence on drilling the coastal plain.
Opponents of opening the small portion of ANWR set aside for its rich oil potential claim there is “much uncertainty” surrounding the size and value of the region’s resources. They also argue that the “shale gale” that is breaking production records in the Lower 48 spells trouble for investment in ANWR. Neither assertion is true.
There are two benchmarks that determine the global price for the kind of high-quality light sweet crude oil that Alaska has in abundance. The first is the U.S.-based West Texas Intermediate, or WTI, in Cushing, Okla., which determines the price of the majority of the oil being produced in the western United States. The other is Europe’s benchmark price known as Brent.
All of the crude oil coming out of the Middle East is priced to Brent, which carries with it a “risk-premium” due to the underlying threat of wars and regional conflicts destroying oil fields and export infrastructure.
Oil traveling through Alaska’s Trans-Alaska Pipeline System is also priced to the “rest-of-the-world,” meaning Alaska oil carries the Middle East risk premium even though it’s on the opposite side of the world.
The price “spread” between Brent and WTI is large, making Alaska oil delivered to California often worth $5 and sometimes nearly $10 more than Lower 48 crude prices. This price dynamic didn’t always exist, but after Congress lifted the domestic oil export ban in late 2015 and started sending cheap barrels through the Gulf of Mexico, the Brent-WTI spread became a semi-permanent fixture in the market.
This means that as long as the Middle East is in turmoil, Alaska crude will earn a higher price than Lower 48 crude oil of similar quality benchmarked to WTI. The existence of this price differential is one of the main attractions to drillers currently working on the North Slope.
Another criticism that is often made is that the amount of recoverable oil expected to be contained in ANWR – roughly 10 billion barrels, according to the federal government’s estimates – represents only a tiny percentage of America’s daily consumption and wouldn’t come online for a decade or more.
But even small amounts of new oil can make a big difference in oil prices when the supply market is tight. In 1995, then-President Bill Clinton vetoed legislation approved by Congress to open ANWR. One of the arguments during that period of low oil prices was that because North Slope oil would take more than a decade to reach the market that it was somehow unneeded.
Fast forward a decade to July 2008 and the price of oil spiked to more than $140 a barrel. Famed Oklahoma oilman T. Boone Pickens said that the world was short about 1 million barrels a day of crude oil. That is exactly the amount of oil that would have been produced from ANWR if President Clinton had done what President Trump did 22 years later and signed ANWR language.
Alas, record-high oil prices played a major role in initiating the 2008 financial crisis, the effects of which are still lingering today.
It’s true that any production from ANWR is probably at least a decade off and perhaps longer, but current under-investment is the chief risk of future price spikes, according to the World Bank and OPEC.
Economists see oil markets as roughly 25-year investment cycles that involve price spikes at the beginning of a cycle followed by heavy investment, a price equilibrium in the middle, and then a general price decline until under-investment eliminates spare capacity and a new price spike occurs.
If the median estimates made by the U.S. Geological Service are true, ANWR’s 10 billion barrels of producible could create peak output somewhere around 1 million to 1.2 million per day by the mid-2030s. That production estimate is based on today’s oil prices; even more of ANWR’s oil would be economically viable at higher prices.
It’s very possible that if the last price spike occurred in 2004-2008 timeframe, the next price spike could occur in the early 2030s, just in time for ANWR.
A lot can transpire in a decade. We shouldn’t base our decisions regarding ANWR on the oil price we have today, but on the price and marketplace we can expect tomorrow.
Bill Murray was born and raised in Alaska. He currently works on energy and tax policy at R Street, a Washington, D.C., think-tank. He previously worked as an energy markets reporter for Bloomberg News.