Why Shell Abandoned the Arctic: A Primer on Market Forces for Activists
While the laudable efforts of activists have been given credit for ending Arctic drilling, environmentalists could benefit from a better understanding of the dynamics at play. Attributing Shell's decision to cease its drilling operations in the Arctic to environmental protest is an undeniably compelling narrative. If only a handful of passionate kayaktavists could stop Shell from drilling in the Arctic. The problem is that it is not true.
It is clear that there are global and local environmental benefits from Royal Dutch Shell's recent decision to abandon its drilling off the coast of Alaska. The decision has implications well beyond the Burger J well in the Chukchi Sea. As the leading cause of climate change, fossil fuel use should be radically reduced. It is sensible to cease looking for new sources of hydrocarbons when we cannot afford to burn existing reserves. There are also well warranted local concerns as Arctic drilling operations come with serious risks, including the possibility of a spill and pollution from boat traffic. However, the oil industry's sensibilities do not extend beyond their pursuit of profits and the environmental considerations were not part of the decision to suspend drilling.
Arctic drilling did not end because of the activists who scaled Shell’s rig in April or the blockade that delayed one of Shell’s ships in July, it was not even the millions of people all over the world who signed petitions. By citing noise concerns on wildlife, activists did manage to reduce the number of Shell's operations by half. They also managed to further stigmatize an industry that is the most reviled in America.
However, activism did not stop Shell. You would never know this if you were following the diverse array of environmental groups who were giving themselves credit for Shell's abandonment of Arctic drilling.
A Mother Jones article described the decision as a major win for environmental groups and Greenpeace wrote "this is YOUR victory." Greenpeace USA Executive Director Annie Leonard defined it as, “a victory for everyone who has stood up for the Arctic.” Greenpeace, International Executive Director Kumi Naidoo said: “It’s a huge victory for the millions of people who stood up against Shell and a disaster for other oil companies with interests in the region.
A Treehugger article said, "The announcement is a huge win for environmentalists, and the many activists who campaigned against the project." On Twitter, 350.org co-founder Bill McKibben gave activists the credit for stopping Shell’s Arctic drilling, saying: “I think great activists are big reason why. Huge win!”
No environmental epiphany for shell
Shell's activities were complicated by lawsuits, regulations, a rig that ran aground and an ice breaker that hit uncharted shoals. However, even these issues did not end Shell's Arctic drilling. Nor was the drilling stopped because of environmental activism. So if it was not protest, lawsuits, regulations or a serious of mishaps, what did end Shell's Arctic drilling?
In two words, it was the market forces, more specifically, the sagging price of oil and the expectations that low oil prices will be with us for the foreseeable future.
As explained in a Washington Post article, an anonymous Shell official said, “Our decision to stop exploration for the foreseeable future was based purely on the well results of Burger J.”
A TriplePundit article went further, saying:
"Sometimes the correct result occurs for the wrong reason. Shell’s — and Big Oil’s — big defeat had nothing to do with a sudden environmental epiphany. Ultimately, it was a dollars and cents decision to end a project that even Shell had to admit made no sense."
The truth is that if environmentalists are to succeed in stopping big oil's wanton pursuit of fossil fuel extraction, they will need to understand some of the basics of the system that many of them revile. The oil industry is a soulless reflection of capitalism and the decisions made by the fossil fuel sector are a reflection of the dictates of the free market.
Shell walked away after spending ten years and seven billion dollars without getting a return because there was too little oil at too high a cost. As Shell explained in a press release, they "found indications of oil and gas … these are not sufficient to warrant further exploration." Shell's press release indicates the decision to pull out of the area was due to “the high costs associated with the project.”
Activists who oppose fossil fuels deserve our adulation. However, if we are to meaningfully challenge the extraordinary might of the fossil fuel industry, we must understand the issues that govern big oil's conduct. To take on the fossil fuel industry, we will need to understand the way the free market works.
What can activists take-away from Shell's decision to leave the Arctic? It’s all about prices and costs: the price of a barrel of oil and the costs of extraction. The magic formula that should be the goal of all who want to radically reduce our exploitation of fossil fuels are low oil prices combined with high extraction costs.
We are already seeing evidence of how this works with the tar sands, shale oil and even fracking for natural gas. Arctic oil is some of the most expensive in the world, like shale oil in the US or the tar sands in Canada, it ceases to be economically viable to extract these dirty sources of fuel when oil is hovering around $40 a barrel. Like other expensive forms of oil, Arctic oil is only feasible when oil prices are at least $70 a barrel. Lower oil prices also mean that there is less money available for exploration, particularly in an area as expensive as the Arctic.
Greenpeace did get one thing right, Arctic exploration is by no means over.
“Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.,” said Marvin Odum, president of Shell USA, said in a statement. Shell still holds 275 Outer Continental lease blocks in the Chukchi Sea and they would resume plans to drill tomorrow if the price went up over $70 a barrel.
Politicians like Sen. Lisa Murkowski (R-AK) are hardly ready to throw in the towel on Arctic drilling. “Development in the Arctic is going to happen – if not here, then in Russia and Canada, and by non-Arctic nations. I personally believe that America should lead the way. The Arctic is crucial to our entire nation’s future,” Murkowski said.
What the Senator does not address is the fact that independent of nationality, market forces dictate the actions of oil companies.
The fact that Shell is withdrawing indicates that the company has little confidence that oil prices will rebound any time soon.
For decades, the fossil fuel industry has shown a flagrant disregard for environmental activism and public opinion. We have no reason to believe that popular protest has changed the minds of oil industry executives.
Activists who are serious about reducing our use of oil should be working on making fossil fuel production more expensive by advocating things like carbon pricing and renewable energy.
The only way to significantly curtail fossil fuel extraction is by making it unprofitable.
Richard Matthews is a consultant, eco-entrepreneur, green investor and author of numerous articles on sustainable positioning, eco-economics and enviro-politics. He is the owner of The Green Market Oracle, a leading sustainable business site and one of the Web’s most comprehensive resources on the business of the environment. Find The Green Market on Facebook and follow The Green Market’s twitter feed.
Image credit: Climatedesk.org