Thursday, December 22, 2005

Drilling the Arctic National Wildlife Refuge

On December 22, 2005, the Senate failed to break a threatened filibuster on a provision to allow drilling in the Arctic National Wildlife Refuge. On this issue, I have no strong sentiment one way or the other. However, I do have a strong sentiment that some of the reasons I hear for thinking we should drill in ANWR make little or no sense.

(1) It would reduce our dependency on foreign oil.

Opening up the oil field in Alaska is supposed to reduce our dependency on foreign oil.

I don't see how it is supposed to do that. No matter how I look at it, I see it as increasing our dependency on foreign oil.

To illustrate my concern, I wish to report that I preserve a fairly large pool of unused vacation hours at work. I am constantly hovering near the maximum that I can accumulate. I also save a fairly large percentage of my money, representing another pool of resources that I can draw upon.

As a result of having these reserves, if I should get laid off, I will get a few extra weeks of pay to help me through the rough times that will follow. Similarly, if I should come across an opportunity that will take me away from work for a few days, I have the freedom to take it.

The argument that developing the oil fields in ANWR will reduce our dependence on foreign oil sounds to me like saying that if I spend all the money in my savings account and use up all of my vacation hours, that I will increase my financial independence on the company I work for.

What is actually going to happen is that my employer will find myself in a situation where I have to accept anything my employer decides to throw at me. I would no longer be able to afford to quit my job. Nor will I have the liberty to pursue other options if they should be made available. I must go to work each day and I must not do anything to offend my boss and get him to fire me. By using up all of my reserves, I have destroyed my freedom.

As with my pool of vacation hours and savings, that pool of oil in Alaska buys us options we will not have once that oil is gone. It gives us an alternative of allowing us to risk our relationship with the oil exporting countries. However, it retains that ability only as long as it exists. Destroy it, and we destroy the options and the flexibility that it provides.

Now, it is true that while we are using up this Alaska oil, we are using less imported oil. It is also true that, while I was using up my vacation hours and my savings account that I am not at work. It is possible that some people can confuse this with genuine independence. However, this is a temporary freedom -- one that leads ultimately to a deeper dependence.

Using the Alaska oil will increase our dependence on foreign oil in other ways as well.

One of the effects of using this oil is that it can be expected to reduce the price of gasoline and other fossil fuel products in the United States. This, in turn, will benefit those industries that consume oil. This will yield an economy within which the importance of oil has grown. As such, as the stockpiles in Alaska ran out we would be in a position of needing more oil than we would have otherwise been. At the same time, we would have fewer options as to where to get it.

At the same time, the increased supply and lower price would reduce our incentive to invest in either conservation or in alternative energy systems. These alternatives would have to compete on the market with the lower oil prices. To whatever degree the supply from Alaska contributes to lowering the price of oil, to that degree our investment in alternative energy systems will be dampened.

Combine these three elements, and the effects of harvesting the oil at ANWR will be:

• A lower reserve of oil that we can draw upon in case of an emergency, giving foreign suppliers more power to dictate the terms under which we get their oil.

• An economy with a greater dependence on oil augmented by the lower price that will drive us to seek outside sources as the Alaska source is consumed.

• Lower investment in conservation and alternative energy that provides the best chance of reducing or eliminating our dependence on foreign oil.

It appears to me that harvesting the ANWR oil reserves will increase, not decrease, the power that foreign suppliers will have over us.

Note: See my blog entry "Energy Prices and the Folly of Price Controls" and "John Stossel: Price Gouging" for additional concerns. In particular, I want to repeat my earlier comment that energy assistance of some type for the poor is a necessity -- but it should not come through price manipulation.

(2) Free Ridership

Another concern with respect to the ANWR is that wildlife preservation is a public good. As I discussed in a previous blog, a public good is one in which a person can obtain something that he values without paying for it. If one person goes to the effort of preserving and protecting a species, all of those who value the preservation and protection of that species gets something of value. However, they get this whether they contribute to the project or not. As a result, people tend to contribute to public goods at a lower rate than their worth.

Military defense is a paradigm example of a public good. If we defend any part of a city, we defend all of it. As a result, any individual in the city can get a “free ride” on others who contribute to the city’s defense. If military spending depended on voluntary contributions, we would discover that our military strength to be tremendously under funded. As a public good, we can expect that wildlife preservation is also being tremendously under funded.

To correct for this defect, it is necessary for the government to take steps to promote public goods, such as military defense and wildlife preservation, to the degree that they would be funded if they were private (as opposed to public) goods. There is reason to dispute as to what the right amount is. However, there is no reason to believe that the value of these public goods should be ignored entirely. If they are, then our nation is made poorer – in terms of having fewer things of value – than it would have otherwise been.

(3) Buy-Offs

We also need to consider the fact that a significant motivator for opening up ANWR to drilling may well be a political faction's interest in repaying an investment that special interests groups made in that faction.

The way politics works, special interests groups invest in a champion – an individual who will use political power to transfer public assets over to that special interest group. These assets typically take the form of tax revenue or regulatory advantage, but it can also take the form of physical government assets. We know that the energy industry invested a great deal of money in the Bush Administration. We know that the Bush Administration has an incentive to repay these favors by transferring government assets (the Alaska oil) over to those industries.

We, the voting public, also have reason to discourage these types of deals. One of the ways of discouraging them is to require a presumption that these assets will not be turned over, unless the politician can provide proof beyond a reasonable doubt that it is necessary. This is the same standard we use in trials, where the accused is presumed innocent unless proven guilty beyond a reasonable doubt. It is the duty of those who advocate this transfer of oil to provide evidence sufficient to override this assumption. To the best of my knowledge, no such evidence has yet been provided.

Being Fair to Alaskans

There is still an important argument to be made on the other side of the debate that, to the best of my ability to determine, does not get the consideration that it should.

The main argument against drilling in ANWR is the claim that the untouched wilderness has more value than the oil. However, this puts Alaska in an unfair position. Of all of the values contained within this region, Alaska can only get paid for the oil. This gives Alaska reason to push for harvesting the oil at the cost of damaging these other values.

Imagine that you had a stack of $100 bills sealed in a case. The only way to get to the money would be to break the case. Only, the rest of society forbids you from breaking the case because of its intrinsic value. In doing this, society is forcing you to give up whatever you could acquire with the money.

If society truly values the case as much as they say they do, fairness seems to suggest that they should compensate you for the opportunities you have to give up to preserve the case. If, instead, they are not willing to pay this compensation, this suggests that they do not value the case as much as they say they do. They are only claiming to have such a great fondness for the case, because they value having the case more than they value you having the money inside.

This point identifies the main reason why I do not have any strong sentiments as to whether the federal government opens up drilling in the Alaska National Wildlife Refuge. The answer to this question rests on whether society cares about the wilderness enough to compensate Alaska for the oil revenue we are forcing Alaska to sacrifice.

We are acquiring a good from Alaska, but we are forcing Alaska to pay the entire cost involved in providing this good. This is not fair. If we do not value the wilderness enough to compensate Alaska for its lost revenue, then we should let Alaska harvest the oil.

3 comments:

MichaelBains said...

Happy (And Slurpy!) Holidays Alonzo!

I'm looking forward to more of your insights and analyses in the New Year.

Oz said...

In your analogy of the savings account, you are forgetting the crucial point that you have practically on-demand access to your emergency funds. If you are laid off today, the longest you will have to tighten your belt is two days, after which you can make a withdrawal from the branch on Monday. (More likely, your account is linked to an ATM card, which completely eliminates the wait.)
As it is now, the oil in Alaska is not availiable on demand. It would require a fair amount of preparation to get. It's more like my wife's case; she owns a fine violin worth at least $10,000. However, if we needed to liquidate that violin it could take us months to find a buyer, and to do it that quickly would require us to sell it through an instrument shop, and they would take a significant commission. All in all, it would be better financially for us to sell the violin now, when times are good, and put the money in an accessible acount.
If foreign suppliers decide to stick it to us and cut off supplies because they don't like whatever we're doing, we need an on-demand pool of oil on which to draw, even if it's just to get us through a transitionary period after which we can operate oil-free (unfortunately, not a likely scenario any time soon!). I agree that it would be folly to drill the oil just to use it now, but it must be drilled now before we can consider it ready for emergencies.

Alonzo Fyfe said...

Oz:

Actually, my savings assets are in a number of different forms, some more liquid than others. The idea is that the money that we have in more-liquid accounts will hold us until the money placed in less-liquid assets becomes available. In the mean time, we get to enjoy the benefits of those other assets -- as your wife enjoys having the violin.

In terms of oil, our country has the Strategic Petroleum Reserve (one billion barrels), as well as the Northeast Home Heating Oil Reserve and Naval Petroleum and Oil Shale Reserves to handle any immedite short-term crisis. Meanwhile, the Arctic oil, like your wife's violin, can be kept as a long-term reserve, allowing us to continue to realize the value of having a wilderness, until such time that an emergency requires us to tap into this less-liquid reserve.