Sunday, April 23, 2006
ANWR Development, Negligible Price Impact to Consumers
On April 21, the oil-vested Voice of the Times, Anchorage, Alaska raised the laughable proposition that ANWR production would make a difference in the price of gas at the pump-this despite the fact that the United States has just 3 percent of the world's oil reserves yet consumes 25 percent of oil production.
Let's examine the shibboleth of price impact, nevertheless because it is bound to be repeated by all the ANWR boosters in Alaska.
Price-Impact of ANWR Development Would Be Negligible
I thank Tim Haab email@example.com and John Whitehead firstname.lastname@example.org for the following analysis (see their blog: "Environmental Economics" http://www.env-econ.net/2005/10/impact_of_anwr__2.html )
A decent estimate of the annual barrels of oil generated from the Artic National Wildlife Refuge (ANWR), I think, is 100 million/year. Dividing this by, say 333 days, gives a daily estimate of 333 thousand barrels/day (b/d) produced in ANWR.
By how much would this bring the price of oil and gas down?
Given the following info/assumptions:
U.S. consumes about 20 million/b/d (source: EIA)
Long run demand elasticity (e) = about -0.5 (source: Cooper 2003)
ANWR supply increase = 333,000/b/d (and assuming that the U.S. consumes all of the increase)
Next solving for the change in price using the demand elasticity formula (e = %ΔQ ÷ %ΔP):
e = %ΔQ ÷ %ΔP
.5 = .333/20 ÷ %ΔP
%ΔP = .0167 × 2
%ΔP = .0333 = ΔP/P
If the future price of oil is $63/barrel ($$$), then the change in price (ΔP) is equal to $63 × .0333 = $2. The price of a barrel of oil would fall to $61. Since crude oil makes up about 56% of the price of a gallon of gasoline, the price of gasoline would fall by about .56 × .0333 or .019. With gas at $3/gallon, the price might fall by about a nickel and a penny ($3 × .019 = $.057)?
The proponents of ANWR place a higher production estimate in the Environmental Impact Assessment, 400 million barrels per year vs 100 million barrels per year.
The above EIA assessment puts the mean production figure at 400 million barrels per year from to ANWR 10-02 area, which calculates to 1.1 million barrels per day; not 333-thousand bbl/day as you have reasoned. This makes ANWR capable of meeting 5% of U.S. daily oil consumption, which is not insignificant. Substituting into your elasticity equation and solving, I get a percent change in price of $6.93 per bbl, and a gasoline price reduction of 18.5 cents per gallon.
Thus a reduction in price from added supply of ANWR oil ranges from $.06 - $.185--at least temporarily.
Price-Impact of ANWR Development Would Be Short-Lived
Now, assume this to be a reasonable projection, there is no guaranty that any price impact at the pump would be long-lived. In fact there are reasons to believe that price benefits will be short-lived.
First, oil is a fungible commodity. That means that it and the revenues it generates may be a source of replacement or substitution for value at any point along the supply and production chain. In the past two decades, the energy industry has become a web of refiners, distributors & brokers integrated in a chain of price & supply. During the Bush era, this chain has been virtually unrestrained and uninvestigated by the federal government or congress. For short-hand convenience, I will refer to this chain as the oilgopoly.
Second, price savings are quickly absorbed by "the system". Take the case of Sonny Purdue and the State of Georgia. Right after Katrina, the legislature for the State of Georgia and Governor Purdue agreed to temporarily cut the state tax on gasoline and fuel oil in order to mitigate the impact of rising prices of benchmark crude by the oil brokers.
Georgia Gov. Sonny Perdue said the tax break in Georgia could cut the cost of gas by about 15 cents a gallon. The month-long break in gas tax collections could cost the state $75 million.
With its 15-cent gas tax suspended, Georgia's average price of gas dropped by two cents immediately — from $2.98 per gallon to $2.96 per gallon, and AAA Auto Club South said the tax moratorium probably was the reason, The Associated Press reported.
There is no indication of further price drops in Georgia during the 30 –day moratorium.
Clearly, any "savings" generated by added supplies, however small, would not impact the pump price, however tiny, as the economic mechanics outlined above suggest. Remember, every penny in price difference represents an additional billion dollars to the oil economy. 6 cents or 18 cents will quickly be sucked up by that insatiable maw.
There are three solutions to the high price of gasoline at the pump and NONE of those solutions are compatible with the agenda of the Republican-controlled congress or the White House--despite election-year rhetoric to the contrary. Certainly these solutions will not find their way into the Voice of the Times.
1. Political solutions. Put regulatory teeth into price-fixing and the 'coordinative supply' environment generated by the oilgopoly. Think of what we now know about Enron and the manipulation of supply and price by the company and Enron's brokers. Is it such a leap to suspect the same behavior only writ larger albeit more subtly in today's socio-political environment of lax regulators and laissez-faire legislators? One must ask, in the context of this solution: where are the regulators, the investigators, the congressional overseers and the politicians elected to protect all of us against such abuse?
2. Demand-side Solutions. Changing behavior. For years the environmental community has been advocating conservation as a more efficient source of energy economic balance than drilling for oil. And for years, the Chambers of Commerce have laughed the greenies out of the room. For years the increasingly conservative and self-indulgent masses moved to the 'burbs, bought SUVs and developers demanded asphalt cloverleaf shunts from the aching backbone of gridlock. We build water-dependent cities in the middle of deserts. We spread our civilization out instead of building it up in an integrated and efficient arcology. America will have to fundamentally change its expectations and behavior. Initially small changes can save equivalent to an ANWR with greater savings to follow as we become a more consciously affective culture and we become more rational in our social and political choices.
3. Supply-side Solutions. Alternative Energy Sources. Here we have to look for solutions that are not embraced by the oil companies themselves and turned into another part of their integrated, price-managed system. In general, any "alternative" like clean coal, that preserves "The Grid" is favored by Republicans and the oil companies. The vision of home-grown, decentralized energy resources is not encouraged by the Bush Department of Energy. Ethanol that is produced by Con-Agra is good, ethanol produced by Farmer Jones is not. Massive Wind Farms that generate energy for the grid are good; small distributed wind farms are not.