Trump To Open ANWR To Oil, But Drilling Isn’t A Sure Thing
On Monday, the Department of Interior approved plans to open ANWR, the Arctic National Wildlife Refuge, for leases to drill for oil. This issue has been hotly debated since the 1970s. Some argue that the United States should open the area to oil drilling, because it would only impact a small portion of the refuge while creating jobs and contributing to national energy security. Others believe that the area should remain pristine and one of the truly untouched regions of our country with the habitats for many majestic animals. But the free market may solve this problem and reconcile the two sides for us.
Oil producers make their money pumping and selling oil, but even they will refrain from an opportunity to drill for oil if it’s not worthwhile. Maybe, after all of the debate over ANWR, we have reached a point at which production efforts there aren’t worthwhile. While there is likely oil to drill for in the Arctic National Wildlife Refuge, the reasons against operating there are many.
- Drilling in ANWR won’t be cheap or easy. We’re talking about the Arctic, a cold and isolated region which will require building new roads and pipelines just for access and transportation.
- It’s unclear how large the oil reserve in ANWR actually is. Companies would first need to conduct surveys and drill test wells to determine whether there is enough recoverable oil to make an investment worthwhile.
- Protecting wildlife and the environment will be necessary and expensive. Any operations will have to take extra precautions for protected species and the delicate environment that exists in the Arctic. Satisfying the government requirements for environmental and animal protection will add costs and time delays to any project.
- Oil companies aren’t spending money on new, expensive projects right now. Low oil prices from the coronavirus lockdowns and global recession have caused oil companies to slash their capital expenditures across the board on top of already low Capex commitments, so there is little cash available to invest in exploration and building out infrastructure in a remote location.
- Banks aren’t keen to provide financing for oil companies that might be interested. Many popular banks and financiers have already announced that they will not participate in funding oil drilling in ANWR, and without financial backing it is unlikely that an oil company will take the risk at this time.
- Drilling in ANWR isn’t worth the negative PR. Oil companies are always fighting an uphill battle when it comes to public relations. Drilling in the Arctic may not be worth the public relations nightmare and the expected legal battles from environmental groups.
Lessons From BP’s Alaska Drilling Experience
BP was a major player in the Alaskan oil production scene and even advertised its role there as recently as a few years ago. However, as public sentiment (a component of the free market) changed, BP chose to divest itself of those assets. Now, that sale is on hold after financing fell through amid the market turmoil caused by the coronavirus. However, BP’s about face regarding its interest in Alaska reveal a lesson in the power of the free market where conservation and the environment are involved.
If the Interior Department even goes through with its plans to lease oil production opportunities in ANWR, don’t assume this means production will happen—and it surely won’t start anytime soon.
Is Opening ANWR to Oil Leasing Even Necessary?
Some argue that opening ANWR to oil exploration is unnecessary because the world is already producing more oil than it consumes. This argument is short-sighted, because we cannot base energy policy for the future on the current situation. The market changes frequently and rapidly, and our energy policy must not assume that today’s conditions (low oil prices, lagging demand and high levels of oil production) will persist. This is a common mistake made by U.S. presidents. For example, the George W. Bush administration incorrectly assumed that the United States would continue to have a shortage of crude oil for many years and put in place ethanol policies that mandate mixing greater proportions of ethanol into our gasoline. Now, the U.S. is leading the world in oil production, but the ethanol mandates are still inflating the cost of our food, harming the environment and causing political headaches.
If companies bid for leases in ANWR, they would still need to explore, secure funding and build infrastructure. Only then could real drilling begin. Along the way, they would be fighting protests and court challenges. In short, ANWR would not produce oil for many years down the line. At that point, however, the balance between oil supply and demand would very likely tiled in another direction.
This column isn’t taking a stance on whether ANWR should be opened to drilling or not. The environmental issues and the need to protect vulnerable species are complicated and should be discussed by those with specific expertise. However, if oil leases in ANWR are auctioned off, we should understand that those leases may never be used. The free market will have a say before anyone begins building or drilling. The debate is not over.