Economic Impact Report, 11/14/03 (team
8)
Team Goal:
We are responsible for predicting the economic impact of a decision to exploit or preserve oil resources at ANWR.
Short
Explanation of what we have done:
We want to keep this short and sweet, so here we go:
Question: Why did we make a model?
Answer: The most effective way to have a cost-benefit analysis is to design a model.
In our model are what figures/quantities we need to compute the costs and benefits for oil corporations and society. Our model is divided into costs and benefits for each of the two sides (society and oil corporations) and is subdivided into the specifics of those costs and benefits.
Question: Why did we split up the costs and benefits with respect to society and oil corporations?
Answer: Costs to one may be benefit to other (ex. wages versus jobs). Currently, we are working on a way to combine the two models of society and oil corporations. One possibility is to assume that the net benefit to oil corporations is spread throughout society. We could accommodate this into our model as an additional benefit for society on a per capita scale. Ultimately, though, how to arrive at a definitive decision about whether drilling is overall positive or negative is still to be determined.
Team Members:
Ruchi Jain (ruchij@mit.edu)
Jaime Q. (jaimeq@mit.edu)
Alex Morgan (armorgan@mit.edu)
Liz Gillenwater (egillenw@mit.edu)
Table of Contents:
Section 1- Model (chart form) with assumptions
Section 2- What figures we have gathered from research
Section 3- What information we need from other teams to
complete the model
Economic Cost/ Benefit Model: *superscripts represent teams
|
Benefits |
Costs |
Viewpoint |
|
1.
revenue from oil8 -how much oil/gas is
extracted -current price: -trend -probability
of conflicts/disruptions globally -time lag -demand curve and supply curve:
equilibrium price |
1.
exploratione -seismic
testing equipment -non-seismic
testing equipment -size
of area to be explored with each method 2.
transportatione -pipeline:
length*(cost of materials/unit length)8 -maintaining
pipeline/roads: cost of additional materials -roads:
surface area*(cost of materials/unit area) -shipping
costs 3.
productione/8 -how
many wells -depth
of well -type
of drilling technique -type
of machinery -machinery
replacement due to wear and tear -improved
recovery techniques 4.
wages8 - # of jobs (exploration,
production, transportation) -wage rate for each type of
worker (including incentives) - #hours/year for each
worker type (seasonal adjustments) 5.
clean-up of potential oil spills4 -how frequently spills
occur8 -cost of cleaning: -how
many people needed -how
bad the spill (area)8 6.
fund for workers (future)10 7.
refining ? -how much oil -cost of transporting it to
refineries |
Oil
Corporations |
|
1.
jobs8 -no. of jobs -wage rate -who fills the jobs: unemployed
or move from another job? 2.
access of Alaskans to infrastructure -greater
access to goods (lower living costs) -increase in no. of
schools, hospitals (value for this
access) 3.
fund for workers10 4.
revenues from leasing land |
1.
environmental4/8 -# (population size) and
type of wildlife affected 6/7 -value for the degree to
which they are affected 6/7 -rise in pollution levels -uniqueness of 1002 area in
ANWR5 2.
risk of oil spills- clean up and damage of what remains4 -how often (risk) -clean-up effort -cost of damage -impact of what is left
(pollution) 3.
disruption to culture of natives10 -% of people who’s lives
are negatively affected -value for degree of
alteration |
Society |
Assumptions for model:
1. No change in the price of
gasoline purchased by consumers:
OPEC producers effectively
regulate the price of crude oil because of their large market share and
capacity to increase production if necessary.
2. Political implications of
no net cost/benefit, therefore not directly included in chart:
Many of the values in the
chart are crude reflections of the opinions of groups of individuals regarding
drilling in 1002.
The two factors to be considered in determining the
monetary value of oil under ANWR is the amount of oil that is economically
recoverable and the world oil price for oil under which the oil extracted from
ANWR could be sold.
However, the amount of oil that is economically
recoverable is not an independent factor, since it depends on the amount of oil
that is technically recoverable and the world oil price for which oil extracted
under ANWR could be sold. However,
there is a sharp division of where technically recoverable oil becomes
completely uneconomically recoverable, and so the amount of oil that is economically
recoverable is roughly from an estimate by the USGS provided by team 1. Preliminary research from Team 8 found
various estimates for the amount of economically recoverable oil, averaging
13.2 billion barrels, with an uncertainty of almost 50%. The decision analysis discovered by team 1
provides a much better estimate of 3.4 billion barrels ± 9%. This
value is calculated by weighing the estimates for oil against their probability
of being precise.
As for the world oil price under which oil in ANWR can
be sold, Team 1 has stated that the oil from ANWR would be on the world market
eight years after drilling commences.
Although the oil would be on the market for an extended period of time,
as not all of the oil is extracted immediately, this estimate is sufficiently
accurate if about 8 more years are added on, which take into account how long
it is expected to be from today until oil companies actually begin drilling in
ANWR. The year 2020, however, at first
appears to be a difficult year for which to determine the oil price since it occurs
well after most modern predictions of the world oil production peak. However, neglecting such predictions, which
only take into account presently known oil and neglect the possible discoveries
of oil, there is still the issue of oil production from ANWR affecting the
world oil price. Research has shown
that the world oil price tends to increase along a roughly straight line, with
variations being caused primarily by decisions made my OPEC. The oil in ANWR is orders of magnitude less
than the global supply of oil, and so the world oil price is independent of any
sort of activity in ANWR. The only
threat to the linear growth model is a major policy shift by OPEC or an
international conflict that would spur such a shift. In these regards this model falters because it assumes an era of
relatively small conflicts, an era which doesn’t need to begin until about
2014, which provides for enough time for the oil prices to return to the
linear-growth model. Furthermore, peaks
in the world oil price are precipitated by steeper growth, and this is not
being seen today, so the assumption that there will not be a large peak in the
oil price is reasonable. Through a
simple procedure of extending oil prices along their linear pattern, the
average value of the price of oil around the year 2020 was $26.5, with an
uncertainty of about $2.5.
The final estimate of the monetary worth of oil in
ANWR is then $99.1 billion ± 9.5%
Demand
for Oil: (contact Liz: egillenw@mit.edu)
From
now until 2030 worldwide energy demand is set to grow by 1.7 percent per
year. Oil demand specifically, is
projected to rise from 75 million barrels/day to 120million barrels/ day in
this time period. 1 Although
an increase in aggregate demand often results in a price increase, if the
aggregate supply curve is also moved outward by increased production, then the
price of the commodity will remain fairly stable. This appears to be the case with oil, as it is claimed that
worldwide production increases will be able to handle the increased demand until
2030. Nevertheless, nationally,
production is unlikely to be able to keep pace with domestic demand. The U.S. will thus begin to rely more
heavily on foreign imports of oil.
1- Oil and Gas Journal (Oct.
14, 2002) page 36
Oil Corporation cost/ Society benefit: jobs and wages (contact Liz)
Oil
extraction figures:
-Estimated number of jobs if
ANWR opened to drilling:
(3.89 jobs/$1million sales3)*(oil revenue/ billion barrels
sold)*(5.7 billion barrels of recoverable oil/ 25 years to exhaust supply1)=
(#jobs/drilling period of 25 years)
-It
is estimated that 25,000 jobs will be created in Alaska alone by the opening of
ANWR to drilling.3
-A decrease in unemployment
(currently 7.7 percent or 25,000 people) due to drilling operations in ANWR
would be a benefit to the Alaskan economy2
Complications:
While the creation of jobs
always has a positive economic impact on society, the formation of jobs in
order to exploit the hydrocarbons in ANWR poses several complications. Due to the rather inhospitable conditions at
that latitude, significant incentives in the form of above-average wages may
have to be offered to prospective employees.
Furthermore, adequate living facilities and a societal infrastructure
for the influx of workers (and their families) would have to be
established. Another possible concern
is that a large work force would be needed initially to set up drilling
operations but only a much smaller force would be needed in the long run to
maintain operations. Finding and
attracting workers for the initial temporary positions may be difficult. Similarly, there is the potential for
seasonal variations in the work force needed throughout each year, which is
problematic (this depends on the actual development plan developed). To determine the most accurate cost/benefit
of the jobs from oil exploration and drilling, these factors should be
considered.
1- International Petroleum
Encyclopedia 2002; pages 37-42
*Dewey 2-
Employment and Earnings-US Dept. of Labor, Bureau of Labor Statistics *Dewey
3- “ANWR development
arguments and their limitations”, Oil and Gas Journal, May 5, 2003 *Hayden
Oil corporation cost: transportation- pipeline (contact Liz)
A proposed 2,000 mile
pipeline from Prudhoe Bay through the Yukon to Alberta is estimated to cost 10
billion dollars.1 A feeder
pipeline from the 1002 coastal plain in ANWR to the Trans-Alaskan Pipeline
would stretch 25 miles. Using the
figures for the longer proposed pipeline as a rough estimate for construction
costs, the ANWR pipeline would cost roughly 125 million dollars. However, this estimate does not include any
extra pipeline needed to link all of the separate drilling sites, as the
locations of these drilling sites are still unknown (team 1 research).
1- International Petroleum
Encyclopedia 2002; pages 37-42 *Dewey
Societal Cost: environmental damage (contact Alex: armorgan@mit.edu)
Potential harm to the
wildlife/ecosystem present at ANWR:
First we must analyze the actual
environmental effect that oil drilling and exploration will have.
1) The effects on ANWR:
-Irreparable damage will be done to the Arctic Tundra: claims of
environmentally friendly exploration are not supported by the facts.
-According to the U.S. Fish and Wildlife Service, far more damage to the arctic
tundra will be done by exploration, than what the public is being led to
believe.
-Implementation of new technology actually causes more harm to
wildlife/ecosystem
-Severe impact on polar bears (esp. maternal polar bears and their cubs)
2)The environmental and
economic effects of Alaska drilling:
-Environmental effects continue to grow despite efforts to minimize them
-Cutting edge technology will reduce or eliminate a number of the effects cited
by The National Academy of Science
-Abandoned equipment and buildings are likely to mar landscape for centuries
-Oil drilling in the North Slope has disturbed some endangered species and made
whaling harder
-Bowhead whales affected (changing their migration patterns)
-Caribou disturbed
-Predators such as arctic foxes, ravens and gulls have thrived on garbage
around the oil fields, but they also prey on rare and endangered birds
3)U.S. government study says
Alaska drilling is harmful:
-Environmental groups say drilling would destroy a scenic place sometimes
called "America's Serengeti" and would fail to yield any sizable
amount of oil for several years
-Government reports says drilling in the refuge could especially hurt the
Porcupine River caribou herd.
-Pregnant caribou "repeatedly shown to be sensitive to disturbance"
-Geese and oxen are also at risk
-Oil exploration may hurt the area's musk oxen if they are forced to move from
drilling area.
-It will take two decades before any crude oil pumped from the refuge could
reduce U.S. oil imports
4)Wildlife threats:
-The Refuge is home to millions of migratory birds, caribou, three species of
bears (polar, grizzly, black bears), Dall sheep, musk oxen, wolves, arctic, and
red foxes, wolverines plus may more.
-Arctic refuge contains one of the most fragile and ecologically sensitive
systems in the world. It is especially extremely vulnerable to long lasting
disturbance.
-Animals that are significantly affected
The aforementioned animals
are affected mainly by one or all of the following: noise, displacement due to
drilling and human encounters
-The possibility of oil spills is a huge cause for concern, oil spills would
seep through the cracked ice and breakdown more slowly than usual hence having
a prolonged harmful effect
-Oil spills would severely affect marine animals especially
Summary
There would certainly be negative impacts on the ANWR wildlife/ecosystem,
it will be attempted to ascertain the value (cost) of these effects. A way must
be devised in order to have some ball park figure
which may be used as a tangible cost to the environment. A plausible start to
achieving this would be conducting a survey just to see how important the
environment or the well being thereof is to the general public.
Ways we plan to place
values on the harm that will be done to the environment:
Contact team 4 and team 6 to see the
actual impact that will be done to wildlife and environment (quantities
preferably). Then it would be easier to asses overall value.
After obtaining information from team 4
and team 6 we plan to evaluate the data by the following means:
1) Check with Environmental Protection
Agency (EPA) to get methods of assessing the value of the environment.
2) Check information from oil drilling
areas close to ANWR (Prudhoe Bay) - see how they came up with figures about
harm to wildlife.
3) Look into previous work that has
been done to quantify value of ham to wildlife (even in different areas)
4) Contact environmental economists
5) Contact economists here at MIT
6) Contact lawyers, actuaries, representative
from oil drilling company, representative from environmental group
Oil Corporation cost: exploration/production (contact Ruchi: ruchij@mit.edu)
GRI
projects a 2 % annual increase in U.S. gas consumption over the next two
decades, from the current 21.5 tcf to more than 31 tcf in 2015.
Drilling
costs account for about one-third of the total cost of finding and developing
new onshore natural gas resources and about 40 % of the cost of new offshore
resources.
-- Total onshore and offshore drilling expenditures will increase slowly during
the 17-year projection period, growing from $ 16.4 bn in 1997 to $ 24.4 bn in
2015.
GRI
forecasts that drilling efficiency (measured in annual drilling footage per
active onshore rig) will improve at an average of 1.5 % per year, which is
consistent with the past three decades.
Drilling
costs per foot for each onshore depth interval are expected to increase slowly.
Because the depth of the typical well will increase by 500-600 feet, the
general trend will be to higher drilling costs per well.
From: http://www.gasandoil.com/goc/reports/rex92478.htm
In 1980 the national industry
average for holes drilled in the lower 48 states was $60 per foot of well depth
(cost of well logs, drilling fluids, etc.). The per- foot expense is less for
shallow wells than for deeper ones. Wells drilled no deeper than 2,000 feet
through rock types that present no unusual difficulties may be completed in 7
to 10 days. If the well is 10,000 feet or more deep, or if there are problems,
2 to 6 months may be spend drilling to total depth. Currently, costs for the
U.S. Gulf Coast drilling average $219 per foot. Expenses for an offshore
drilling structure with legs that raise or lower exceed $45,000 per day.
Semi-submersible rigs that have hulls and float cost nearly $90,000 per day.
According to Chase Manhattan Bank, spending for leasing and drilling will climb
from 1977s $15 billion to more than $60 billion per year by 1985.
From: http://www.indiana.edu/~librcsd/etext/hoosier/OG-05.html
What We Need From the
Other Teams:
Team 1: Hydrocarbon Potential
1) how much oil and gas
exists within the 1002 area
-both economically recoverable, and technically recoverable
-percent probability these estimates are correct (or potential error of the
figures)
2) where the oil is located:
-impacts the cost of team e's proposal (number of wells needed, amount of
pipeline and roads needed to transport the oil/gas)
-impacts costs of team 4 (how many animals/plants will be affected/displaced)
3) amount of oil/gas in 1002 compared to elsewhere (percentage)
Team e:
Exploration/Production Strategy
1) Definitive plan for
exploration, production, and transportation
-where each method will be
used (how much material and labor for each component)
Teams 4,5,6, and 7:
Environmental Impact
1) number and type of wildlife
affected
2) degree to which they are affected
-potential changes in population (deaths, impact of stress/pollution- forced
migration to elsewhere, if there is an elsewhere)
3) pollution- resulting change to current local/global levels
4) comparative uniqueness of ANWR compared to other locations on this planet
5) oil spills- clean up costs, degree to which can be clean-up (pollution from
what remains), how often they occur
Team 9: Political
Ramifications
1) List of the impacts from
drilling on politics (include upon whom)
*to be included in the
assumptions list of the model
Team 10: Sociological Impact
1) disruption to native
culture:
-% of people whose lives are altered
-value for degree of alteration
2) Jobs:
-no. of jobs
-wage rate
-who gets the jobs: willing (or unwillingness) of natives to work in oil
production; other potential oil production workers (unemployed of Alaska?)
3) Access to Infrastructure:
-decrease of price of goods in the area (due to easier transportation to the
area)
-greater access to goods (due to easier transportation to the area)
-increase in no. of schools, hospitals, etc. as population grows