Question

Estimates reveal that the Arctic Circle has buried beneath it tons of oil, natural gas liquids, and natural gas. Unlike Antarctica, there is no treaty prohibiting territorial claims over the Arctic Circle. Russia, Canada, the United States- all have a stake in the Arctic's icy real estate for exploration and for extracting natural resources such as oil. Amid concerns of pollution and environmental damage, who will drill and what is drilled for in the Arctic will depend on the global economy. Drilling makes sense when oil is selling at \(\$ 150\) a barrel and not so when it is at \(\$ 40\) a barrel. Source: CNN, January 2, 2009 a. Explain why the demand for access to the Arctic Circle has increased. b. Why is it better to drill in the Arctic Circle when oil is selling at \(\$ 150\) a barrel than at \(\$ 40 ?\) c. What could cause price of natural gas to fall in future?

Short answer

Demand has increased due to valuable resources and no treaties prohibiting access. Drilling at \)150/barrel is more profitable. Increased production or reduced demand could cause natural gas prices to fall.

Step-by-step solution

Explain why the demand for access to the Arctic Circle has increased

The demand for access to the Arctic Circle has increased primarily due to the discovery of large quantities of oil, natural gas liquids, and natural gas beneath the Arctic's ice. These resources are highly valuable and hold the potential to meet significant portions of global energy needs. Additionally, the fact that there are no treaties prohibiting territorial claims over the Arctic Circle allows countries like Russia, Canada, and the United States to stake claims on this resource-rich area, further increasing demand for access.

Analyze why it's better to drill when oil is at \(150 per barrel

Drilling for oil in the Arctic Circle involves high operational and environmental costs. When oil prices are at \)150 a barrel, the potential profit margins are significantly higher, making it economically viable to undertake the expensive drilling operations. Conversely, when oil prices are at \(40 a barrel, the profit margin diminishes considerably, making it not cost-effective to proceed with drilling due to the high costs involved.

Identify factors that could cause the price of natural gas to fall in the future

Several factors could lead to a decrease in the price of natural gas in the future: 1. Increased Production: Advancements in extraction technologies (such as hydraulic fracturing) could increase the supply of natural gas. 2. Renewable Energy: A shift towards renewable energy sources could reduce dependency on natural gas, leading to lower demand. 3. Global Economic Conditions: Economic downturns or reduced global industrial activity might decrease energy consumption, thus lowering the demand and price of natural gas.

Key concepts

global energy demand

In recent years, the global energy demand has been on the rise due to the growing population and increased industrial activities. We need more energy to power homes, transport, and industries all over the world. As developing countries grow and urbanize, their energy needs also spike.
This growing demand for energy resources propels countries to search for new sources of oil and natural gas, even in remote and challenging areas like the Arctic Circle.
Here, beneath the thick ice, vast reserves of natural resources are believed to exist, providing a potential solution to the world's energy needs.
However, accessing these resources is a complex and costly endeavor.
Furthermore, understanding energy demand helps explain why countries might compete for territorial claims in such regions.
It helps ensure energy security and supports their economic growth.

oil price impact

The price of oil significantly impacts the decision to explore and drill in challenging environments like the Arctic Circle. When oil prices are high, such as at \(150 per barrel, the potential profits justify the high costs of drilling operations.
At these elevated prices, companies can afford the expensive techniques, equipment, and labor necessary to extract oil from beneath the Arctic ice.
Conversely, when oil prices drop to around \)40 per barrel, the profit margins shrink drastically.
Many projects become not cost-effective due to the extensive operational and environmental costs involved.
Therefore, high oil prices incentivize drilling activities and resource extraction, despite the harsh conditions in regions like the Arctic Circle.

environmental and operational costs

Drilling in the Arctic Circle comes with substantial environmental and operational costs. Environmentally, the fragile Arctic ecosystem is at risk from potential oil spills, habitat destruction, and pollution.
These activities can disrupt the wildlife and indigenous communities living in the area.
Operationally, the costs are also very high.
The harsh, icy conditions make extraction processes difficult, requiring specialized equipment and technology.
Moreover, the logistics of moving equipment and maintaining operations in such an isolated area further add to the expenses.
All these factors mean that companies must weigh the heavy costs against the potential profits before deciding to undertake Arctic drilling.

natural gas price determinants

Several factors determine the price of natural gas. One major factor is the level of production. Technological advancements, such as hydraulic fracturing (fracking), can increase the supply of natural gas, leading to a potential drop in prices.
Another determinant is the global shift towards renewable energy sources.
If countries increasingly adopt solar, wind, or hydroelectric power, the demand for natural gas might decline, resulting in lower prices.
Additionally, the overall global economic conditions play a crucial role.
During economic downturns, industrial activity reduces, decreasing the demand for energy sources, including natural gas.
These aspects collectively shape the future price trends of natural gas.