Question
Current world oil production is about 90 million barrels per day (mbd). Of this, the United States consumes about 20 mbd. The Arctic National Wildlife
Current world oil production is about 90 million barrels per day (mbd). Of this, the United States consumes about 20 mbd. The Arctic National Wildlife Refuge has been estimated to contain enough oil to supply about 0.8 mbd for the foreseeable future, or about 1% of world production. The price elasticity of demand has been estimated to be about 0.5. This suggests that with oil production from ANWR, prices would be about 2% lower (or $1.50 per barrel, assuming a projected future price of about $75 per barrel) than without ANWR production.
a. (15 pts) Given this information, what is the benefit to U.S. consumers of developing ANWR oil? Conceptually, what would you want to measure? If possible, calculate an approximate numerical value. If it is not possible to do such a calculation, what additional information would you need?
b. (10 pts) According to a report issued by the Energy Information Administration, "Assuming that world oil markets continue to work as they do today, [OPEC] could countermand any potential price impact of ANWR coastal plain production by reducing its exports by an equal amount." If this were to occur, how, if at all, would this modify your conclusion in part (a)?
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