Arctic Oil Drilling: Deluding Communities About the Benefits of Resource Extraction

by |September 14, 2015

President Obama’s recent trip to Alaska focused renewed attention on oil drilling in the frozen north. Alaska’s oil bounty has long kept state taxes low and has created employment for people working in and around the local energy industry. The problem with an overreliance on resource extraction for wealth is that it leads to a boom and bust cycle caused by fluctuating prices. Oil prices are quite volatile and are driven by speculation and unpredictable supply and demand. Sometimes the problem with resource extraction is not volatility, but reduced demand. The coal communities of West Virginia are in the midst of a long-term decline and the oil towns in Alaska will eventually suffer the same fate. Unless the wealth from resource extraction is invested locally in a sustainable, long-term business, the decline is not a matter of if, but when.

Writing about Shell’s effort to drill for oil in the arctic, Steven Mufson of the Washington Post reported that while the Wilderness Society and other environmental groups oppose the drilling:

“…Shell has received support in the debate over drilling vs. climate change from many Alaska Natives. They acknowledge climate change but say the threat it poses to their subsistence fishing culture means they need some other source of economic welfare. And new oil development is the only option.”

Mufson quotes geologist Richard Glenn, a director of the Arctic Slope Regional Corporation, who observed that:

“Climate change is real, but let’s say we don’t develop. Climate change continues with or without us, then who’s going to build schools for our grandchildren,” He added that the borough government on the North Slope “depends on oil and gas as the only tax base we have. What we have is what we have. We depend on development.

Shell has invested billions in exploring for oil and if sufficient quantities of petroleum are found, the company would invest additional billions in the infrastructure needed to extract and ship the oil. The risks posed by oil development to the fragile local ecology will be substantial—no matter how careful the industry is and how vigilant government regulators manage to be. Some local folks seem willing to take the risk in order to receive the benefits of development. Others feel trapped between the need for economic opportunity and the dangers posed by this inherently risky business.

Some of the wealthiest companies in the world and some of the richest people in the world have made lots of money by extracting resources from the earth. These businesses will continue, and our need for material resources will never end. But they are becoming a declining portion of most nations’ GDP. This is because the high value-added part of the economy is built on ideas, information and technology. Many companies understand this. For example, IBM, once the market dominator in personal computers, got out of the business when they saw PCs becoming interchangeable commodities. They saw a future of declining profit margins and felt their talents could bring higher rates of return in other areas of business.

The development of electric cars and renewable energy poses a deep threat to the fossil fuel industry. The oil companies know this and that is why some deny the existence of climate change and lobby ferociously to keep the energy industry locked into 20th century technology. They need to recover the billions they have invested in fossil fuel leases, extraction equipment, and fuel transportation infrastructure. Some will manage to profit from their investments, but some won’t. The future of the fossil fuel industry depends on the rate of innovation and advances in renewable energy technology, and the further development of energy storage and smart-grid technologies.

I am betting that human ingenuity and the huge profits to be made in developing new technologies make them inevitable. Moreover, it strikes me that the fossil fuel business is on the wrong side of history. Yes, extraction technology has advanced rapidly, but the fuel being extracted must still be paid for. And even though there is plenty of fossil fuel in the ground, it is still quite finite. The last time I checked, sunshine was still free and will be around for a very long time. When the underlying fuel is free, then price is simply a matter of the cost of technology. As technology gets better, the price of renewable energy will go down. Fossil fuels have the opposite long-term trajectory: as the fuel gets less plentiful and more difficult to extract and ship, its price will go up. Of course, when fossil fuels are replaced by renewable sources, their value will crash and then their price will go down. More likely, a small amount of these hydrocarbons will retain value and be used to manufacture plastics and other materials that take advantage of their unique properties.

The problem with Alaska’s economic strategy is that it is based on the economic facts of the past rather than the projections of the future. The choice is not between extracting fish or extracting oil. There are other options. Alaska is a unique and special place. The state and its people need to develop their niche in the global economy. I would not pretend to know the state well enough to suggest what that might be, but if they place their bet on the fossil fuel industry, they should be prepared for a brief period of growth followed by a long period of decline.

I am not arguing against all resource extraction. We continue to need resources that the earth provides and someday we may even mine other planets. But communities that rely on mining alone, or even depend on resource extraction as their primary source of revenue, are asking to be left behind in the modern global economy. As the economy evolves, mechanized manufacturing, industrial agriculture, and increased consumption of less material intensive goods and services are fundamentally changing how we spend our time at work and at leisure: Movies, recorded music, video games, live sports and entertainment events, tourism, internet-based messaging, audio and video chatting take up more of our time and treasure and those trends will continue to grow.

The other morning I walked by Riverside Park in New York City and watched a small movie studio set up shop on the street to make a film. I saw about a dozen trailers, huge portable lights and filming equipment, dressing rooms and well over a hundred people at work. A few decades ago, “location” filming was more primitive and represented a smaller proportion of the media’s outputs. These portable movie studios provide an example of the agility and flexibility needed to compete in the global economy. Over the past half century, New York City has seen its manufacturing base in clothing, small electronics, printing and similar goods replaced by education, health care, public relations, media, software, consulting and hundreds of service specialties. Finance remains, but it is a smaller proportion of New York’s service economy. The High Line, New York’s most visited new park, symbolizes that change. Once an elevated train that moved freight from the docks to the west side’s small factories, today it is a magnet for tourists. The docks are gone and so are the factories. The factory lofts now house high tech start-ups, residents and restaurants. The docks have moved to New Jersey and been replaced along the Hudson by parks and cafes.

Alaska’s economy must diversify and get into sync with the changes now underway in the world economy. Resource extraction attracts people, money and jobs. Local communities must build the schools, roads and the other infrastructure needed to house the new immigrants. When the boom goes bust, the local community is stuck with the bill for the half-empty school and underutilized power plant. Drilling in the arctic is a short-term, shortsighted economic strategy that will ultimately damage the state’s ecology, beauty and communities. People clearly feel they have no alternative if they are to survive economically. I believe they are wrong.


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