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How Much Will Drilling in ANWR Affect Oil Prices?

by: Menzie Chinn June 19, 2008 | about stocks: DBO / OIL / USO    

Menzie Chinn

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As I type this post, the President is proposing once again drilling in ANWR, noting the "enormous" benefits. [1] [2] [3] I'd like to just note the analysis his Administration's DoE just published last month.

From Analysis of Crude Oil Production in the Arctic National Wildlife Refuge, published May 2008:

Summary

The opening of the ANWR 1002 Area to oil and natural gas development is projected to increase domestic crude oil production starting in 2018. In the mean ANWR oil resource case, additional oil production resulting from the opening of ANWR reaches 780,000 barrels per day in 2027 and then declines to 710,000 barrels per day in 2030. In the low and high ANWR oil resource cases, additional oil production resulting from the opening of ANWR peaks in 2028 at 510,000 and 1.45 million barrels per day, respectively. Between 2018 and 2030, cumulative additional oil production is 2.6 billion barrels for the mean oil resource case, while the low and high resource cases project a cumulative additional oil production of 1.9 and 4.3 billion barrels, respectively.

Crude oil imports are projected to decline by about one barrel for every barrel of ANWR oil production. Opening ANWR results in the lowest oil import dependency levels during the 2022 through 2026 time frame, when oil import dependency falls to the minimum values of 46 and 49 percent for the high and low oil resource cases, respectively. During that timeframe, the mean resource case and AEO2008 reference case project an average oil import dependency of 48 and 51 percent, respectively. Because ANWR oil production is declining after 2028, U.S. oil dependency rises to 51 percent in 2030 in the mean resource case, compared to 54 percent in the AEO2008 reference case. The high and low resource cases project a 2030 oil import dependency of 48 percent and 52 percent, respectively.

Additional oil production resulting from the opening of ANWR improves the U.S. balance of trade. Cumulative expenditures on foreign crude oil and liquid fuels between 2018 and 2030 are reduced by $202 billion dollars (2006 dollars) in the mean oil resource case and reduced by $135 and $327 billion dollars in the low and high oil resource cases, respectively.

Additional oil production resulting from the opening of ANWR would be only a small portion of total world oil production, and would likely be offset in part by somewhat lower production outside the United States. The opening of ANWR is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light crude oil prices of $0.41 per barrel (2006 dollars) in 2026 for the low oil resource case, $0.75 per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high oil resource case, relative to the reference case. [Emphasis added - MDC]

The message of the report is in large part summarized by these two graphs:

oilanwr1.gif
Source: Energy Information Administration, Analysis of Crude Oil Production in the Arctic National Wildlife Refuge, May 2008.

oilanwr2.gif
Source: Energy Information Administration, Analysis of Crude Oil Production in the Arctic National Wildlife Refuge, May 2008.

So, I think these calculations put into context what drilling can do. For your reference, below is the nominal and real (2006 prices) price per barrel of West Texas Intermediate.

oilanwr3.gif
Figure 1: Nominal (red) and real (blue) price per barrel of WTI. Real calculated using CPI-All. Source: St. Louis Fed FREDII, and author's calculations.

It's true that increased supply, ceteris paribus, should decrease prices. How much is as relevant as which direction prices would move (and, of course, as reader Buzzcut admonishes us, the opportunity costs as well, to which I would add that externalities should be taken into account).

Note the offshore drilling component of the President's proposal is congruent with McCain's. Fortunately, a holiday for the gasoline tax, which works in the wrong direction for reducing energy dependence, has dropped off the table. One has to be thankful for small blessings.

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This article has 14 comments:

  •  
    Jun 19 05:20 AM
    One observes that the most astonishing recent discovery of oil in the USA is happening on land ... in Montana and North Dakota.
    One also observes that the oil majors, Exxon, Chevron, Conoco, etc.
    are conspicuously absent from the area, preferring to sit back, watch the wildcatters, and
    use their profits to pay enormous benefits to their management and
    the rest to buy back stock from their stockholders.
    One hears that Cuba is aggressively drilling in the water and,
    with no easy means to check it out, one also hears that there may be more oil under Miami Beach and Key West than in the ANWR, but their don't happen to be a lot of multimillion dollar beach homes owned by people who give enormous amounts to the republican party, in the ANWR.
    One just doesn't have the means to check out this kind of talk,
    but after everything else we've seen happen recently, it would
    be consistent, wouldn't it ...
    Reply
  •  
    Jun 19 06:23 AM
    The market is based on the future not the present or past. When congress does everything it can to stop exploration for oil and calls oil evil, its only natural that prices will go up. A reversal of this will quickly cause oil to go down. This is common sense.
    Reply
  •  
    Jun 19 09:05 AM
    The cumulative effect of multiple domestic sources of new oil, even if it is many years away, just has to be a plus for US supply and price at the pump. Clearly the transition to alternative forms of energy is going to happen but in the mean time....
    Reply
  •  
    Jun 19 09:21 AM
    If history is relevant then we only need to look at the aftermath of the oil crisis in the 70s to see what the end result of opening ANWR and drilling the coastal waters. When oil prices went down the U.S embraced gas guzzlers like long lost friends, did away with the federal 55 mile/hour speed limit, built more suburbs where people could be assured of a long commute, did away with tax breaks for solar energy instillation. Well, here we are again, didn't learn a thing, screaming for more drilling and lower gas prices so we can drive that hummer to work.
    Reply
  •  
    Jun 19 09:33 AM
    nothing will be quick
    Reply
  •  
    Jun 19 10:37 AM
    I always enjoy your thoughtful analysis. In this case, I notice that you fall into the "too small to make a difference" camp, and I have a few comments. First, the North Slope produced a lot more oil than it was predicted to so we can't be too confident that ANWR will not do the same. Second, if ANWR alone isn't impressive enough, what about adding production off all coasts? Third, even if oil prices aren't reduced at all, it doesn't mean that producing our own oil is in vain. Drilling here means that the dollars stay at home, creating jobs here, and not further enriching dictatorships abroad; it also means a strengthening dollar and lower inflation since our trade balance will be improved. Finally, what is the risk of drilling? Oil leaks are much less likely than they were 40 years ago (the Santa Barbara spill). The caribou haven't died off on the North Slope, for example, and even the hurricane that sank New Orleans couldn't produce an oil leak in the Gulf. Let's ignore the hysterics and drill.
    Reply
  •  
    Jun 19 11:34 AM
    While I'm all FOR it, the likelihood at this time that we'll be drilling domestically for more oil and gas in the foreseeable future is dim at best.

    I would call your attention to the recent vote in the U.S. Senate on this issue. The proponents got only 42 votes of 60 required to end the Congressonal moratoria on domestic oil and gas exploration.

    While our standings have improved in national polls recently due to skyrocketing oil and gasoline prices, despite 70%+ of Americans favoring this idea, we don't have the votes in Congress to do it.
    Reply
  •  
    Jun 19 12:27 PM
    The obvious problem is Congress. However, if you "vote the bums out", some more bums take their places. Barnburner above, has a good point but how stupid are we to just keep making the same mistakes? Put some teeth in a reasonable program to maximize domestic sources AND alternatives.
    Reply
  •  
    Jun 19 01:27 PM
    This congress-bashing reminds me of the typical small shareholder rants... very shortsighted, always the management's fault. The congress already told its citizens that the problem cannot be drilled away. And with a new president the US may as well develop the ability to develop an energy policy that is good for more than just enriching the Texas cronies by any possible means. Also, without Guantanamo Bay etc such claims like keeping the money in the US rather than giving it to a oil rich human rights abusing dictatorships will regain some moral credibility. Until then, why not just use less of the black stuff while investing in new energy generating technologies. Just bridge the time this all takes to kick in with upgrading more US refineries to be able to take the Canadian tar sands and shifting the fuel mix back towards more gasoline. And I certainly won't be spending my holidays in the US if its coast as well as quite a few states (Montana, North Dakota, Utah, Colorado etc) are dotted with rigs/extraction sites. It would remind me of work.
    Reply
  •  
    Jun 19 01:27 PM
    The two differences between an ANWR barrel and a Saudi/Iranian/Nigerian barrel are:

    1) We pay AMERICAN WORKERS to drill domestic oil
    2) domestic oil is on the AMERICAN SIDE of the trade deficit
    Reply
  •  
    Jun 19 02:41 PM
    Exactly, Mr. Math. The only possible explanation I know is the Liberals must have cut their math and economics classes... or, more likely, that they just don't care about the rest of us.
    Reply
  •  
    Jun 20 12:42 AM
    No. liberals think animals, plants, dirt, are good, people are evil. They didn't cut math, econ, they took drama, phych 101, sandbox??, who knows. It was real fealie-goodie, but just wasn't real world....
    Reply
  •  
    Jun 20 02:25 PM
    Nice article the real answer is that we need less oil not more. We should be building windmills at the rate we produced tanks in WWII. If we don't we will return to third world status due to lack of energy to run our economy. Which now means keeping the lights on at McDonald's (service jobs). Since have moved our other jobs offshore? Alternative Energy would provide thousands of real jobs for American workers. Wake up America!!!
    Reply
  •  
    Jun 21 05:41 AM
    Its supply and demand. More oil lowers price its that simple. At $150 barrel oil supply increasing from drilling off the coast of US and ANWR will make a big difference. We cannot drill our way out of the problem but it will help immensely. The idiots don't factor that less oil will increase the price, much like now as we went from $70 oil to $140 seems to me that that is more then a few cents increase. The sooner we start drilling the sooner we get more supply, if Clinton did not stop ANWR we would be using that oil now and prices would be
    20 to 30 dollars a barrel cheaper and that is a fact
    Reply
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