Estimates reveal that the Arctic Circle has buried beneath...

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?

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?

Key Concepts

Environmental Considerations in Resource Extraction

This concept highlights the potential ecological risks associated with drilling and extracting natural resources, particularly in sensitive regions. Environmental concerns, such as pollution and ecosystem disruption, are weighed against the economic benefits of resource extraction. The balance between environmental protection and resource development is a crucial aspect of policy and operational decisions in this field.

Price Volatility in Energy Markets

Price volatility in energy markets refers to fluctuations in commodity prices due to changing supply and demand conditions, geopolitical events, technological advancements, and other global economic factors. Energy companies must calculate risk and return under such uncertainty, making investment decisions that can be highly sensitive to the price levels at any given time.

Break-even Analysis in Energy Extraction

Break-even analysis is a key economic tool used to determine when the revenue generated from extracting a resource covers the associated costs. In the context of energy extraction, especially from hard-to-reach areas like the Arctic, operators compare the cost per barrel of oil to the prevailing market prices. Only when prices exceed the break-even point does drilling become economically attractive, ensuring profitability.

Market Dynamics and Global Economy in Resource Extraction

This concept involves understanding how global economic conditions influence the decisions to invest in resource extraction. Factors such as commodity prices, demand, and international market trends determine the feasibility of extracting resources from challenging environments. When market conditions are favorable, investments in extraction become more viable despite high costs or technical challenges.

Geopolitical Competition for Natural Resources

This concept examines how nations vie for control and access to regions that boast significant natural resources. Countries may establish territorial claims or engage in diplomatic efforts to secure economic benefits, strategic advantages, and energy independence. The fierce competition is driven by both current needs and potential future gains from resource-rich areas.

Transcript

00:01 Okay, so the first part of the question asks, why does an increase in countries wanting the ability to control the rta? since there's a reservoir of natural resources, or natural, let me be specific, non -renewable resources, many countries will want to come there and try to acquire these natural non -renewable resources in the first place.

00:40 So they will try and stake their claim.

00:42 That's why demand for wanting control of the arctic will increase.

00:48 The second part of the question asks why it's better to drill for oil in the arctic when oil is $150 a barrel compared to $40 per barrel.

00:55 There's three key reasons for that.

00:58 Firstly, nobody will drill unless they make a profit.

01:17 It's pretty simple business terms.

01:19 If you don't make a profit out of it, there's no point in doing it, obviously.

01:24 In order for drilling to even happen in the first place, the cost has to be less than the profit.

01:34 And the cost is including setting up the drills in the first place, actually finding the oil reservoirs, which will take a lot of time and energy.

01:43 So at $40 a barrel, that won't be achieved.

02:01 But at $150 a barrel, it could be possible to make a profit.

02:25 Second reason is geopolitical concerns.

02:39 So essentially, a lot of countries will be vying for control, as i already stated above or earlier...

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