According to the Berkeley Earth Surface Temperature study, there is now conclusive evidence that the average world land temperature has gone up by 1° Celsius since the mid-1950s.1 And whether it’s caused by human activity, natural phenomena, or a combination of the two, it’s likely that global warming will make the Arctic region increasingly accessible to commercial development over the next 20 years.
This commercial development of the Arctic is extremely important for the world economy for at least four reasons.
- First, the Arctic represents a vast new frontier for oil and natural gas exploration. Huge deposits of oil and gas have already been discovered in the Arctic and these likely represent only a tiny fraction of what can be extracted. According to the United States Geological Survey, as much as 13 percent of the world’s untapped oil and 30 percent of its untapped natural gas could lie under the floor of the Arctic Ocean.2
- Second, the region is likely to yield a wealth of minerals. As explained in a McKinsey Global Institute report titled Resource Revolution,3 the world’s demand for minerals such as iron ore, uranium, copper, manganese, and gold will grow explosively over the next two decades. The mineral deposits outside the Arctic that have not yet been exploited are increasingly expensive to mine, lie in politically unstable regions, or both. However, a report by Polaris Project Partners estimates that the Arctic sea floor is brimming with massive deposits of gold, copper, coal, diamonds, iron ore, lead, zinc, and nickel. All of these were considered inaccessible until the ice began to melt.4 Now, according to a Lloyds/Chatham House Risk Insight5 report, Russia is already operating 25 mines in the Arctic, while Alaska’s exports of zinc, lead, gold, and copper amounted to nearly 40 percent of the state’s foreign export earnings in 2010.
- The third reason for the Arctic’s high economic value is its potential role as a global trade route. Since the 1500s, businesses have dreamed of accessing a shortcut between Europe and Asia via the “top of the world.” However, Arctic shipping routes which, until recently, remained impassable year-round are now open for months at a time in the summer. These sea lanes through the Arctic can dramatically reduce shipping costs and times. The U.S. Coast Guard recently reported that the number of ships crossing the Bering Strait has doubled versus just a few years earlier, with about 400 passages counted in 2011.6 That means over $1 billion in goods went through the Bering Strait during the year. According to a study conducted for the U.S. Navy by the National Research Council, by 2030, as temperatures continue to climb and the ice continues to melt, ships may be able to pass through the Arctic year-round.
- The fourth reason for the Arctic’s importance is its strategic military location. The Arctic is the one place on Earth where the two strongest military powers ? the United States and Russia ? share a common border. Already, the U.S. has dispatched nuclear submarines to the Arctic to patrol the area and protect its interests, and other countries have been conducting military exercises there.7
The Trends editors argue that commercial development of the Arctic alone has the potential to more than offset any economic costs incurred due to warming over the next two decades. However, this will only happen if the EU, Russia, and the United States peacefully harvest the natural resources.
To prevent conflicts, a 1982 United Nations treaty called “The Law of the Sea,” divided the resources of the world’s oceans, including those that could be accessed by drilling, mining, and fishing, as follows: Every nation is entitled to exclusive economic rights to all of the natural resources, both on or beneath the sea floor, within 200 nautical miles of its natural shorelines.8
According to the treaty, the eight countries that surround the Arctic ? the U.S., Canada, Russia, Norway, Denmark, Sweden, Finland, and Iceland ? can each claim vast areas of sea floor that are likely to be loaded with precious resources.
But getting to those resources and harvesting them, while avoiding environmental disasters is more challenging in the Arctic than in most places. For example, one of the challenges of extracting the estimated minimum of 90 billion barrels of oil from the Arctic is that drilling equipment must be designed to withstand the freezing temperatures. Also, because the Arctic’s permafrost is thawing, the ground isn’t stable, so precautions must be made to keep buildings from collapsing and equipment from sinking through the icy crust. Most important, a major spill would be even harder to stop than a similar spill in the Gulf of Mexico. For these reasons, experts estimate the costs of exploring and drilling for oil in the Arctic will be 50 to 100 percent higher than in Texas.
But even when these higher costs are factored in, the benefits of exploiting the Arctic resources, including oil and natural gas, metals, and shorter shipping routes, will create an unprecedented economic windfall for the global economy. For that reason, the Risk Insight report from Lloyds/Chatham House predicts that capital investment in the Arctic will total at least $100 billion over the next decade.9
Based on this trend, please consider the following forecasts:
First, the opening of the Arctic will bring billions of barrels of oil to the global market over the coming decades.
This will offset the growing demand for energy as the “consumer class” expands in the developing world, and it is likely to marginalize widespread adoption of so-called “green” energy sources, such as photovoltaic and windmills.
Second, Russia will increasingly partner with multinational oil companies to extract oil from the Arctic.
Russia expects to get 40 percent of its oil production from the Arctic by 2030. Exxon Mobile has recently launched a joint venture with Russia’s Rosneft to drill in the Arctic;10 Chevron has been negotiating with the Russian Ministry of Natural Resources for the right to look for oil in parts of the Arctic that are currently closed to foreign companies.
Third, several Russian companies will profit from the commercial development of the Arctic.11
According to an investment bulletin from Citigroup’s Moscow office these companies include:
- Rosneft, the state oil company that has partnered with the multinationals on drilling projects in the Arctic.
- Norilsk, a Russian mining company that can now ship nickel and copper from its mines across the Arctic Ocean without spending most of its profits to hire ice breakers, as it did in the past.
- Gazprom and Novatek, Russia’s two biggest natural gas suppliers.
Fourth, the U.S. will shift resources to military technology and training geared to managing potential conflicts in the Arctic.12
This won’t be easy. While the U.S. fleet of nuclear-powered submarines ? which can stay submerged beneath the ice for months at a time ? provide an advantage no other country can match, in other areas the U.S. is not well prepared for a conflict in the Arctic. The U.S. Naval War College ran a simulation and concluded that the Navy is “inadequately prepared to conduct sustained maritime operations in the Arctic.” To build its military capabilities, the U.S. will need to improve its Arctic communications, build support stations in the Arctic region, and procure surface ships that can navigate in icy waters. According to an Associated Press report, the U. S. Navy has no ice-breakers of its own, and officials are debating whether to spend billions of dollars to add them to its fleet.
Fifth, as warming gradually continues, sea levels will rise, and today’s shorelines will be covered by water.
According to the “Law of the Sea” treaty, that would imply that the natural resources that each country can claim will shrink over time. For example, the United States has exclusive rights to oil deposits that are beneath the sea floor 200 nautical miles from the current Alaskan coast, but as sea levels rise, some of these may be beyond the limit in the future. This suggests a strategy of targeting the resources that are located farthest from the shoreline first, while the country can still legally claim jurisdiction.
References List : 1. For more information about the Berkeley Earth Surface Temperature Study, visit their website at: http://berkeleyearth.org 2. For more information about oil and natural gas deposits in the Arctic, visit the U.S. Energy Information Administration website at: http://205.254.135.7 3. McKinsey Global Institute, November 2011, "Resource Revolution: Meeting the Worlds Energy, Materials, Food, and Water Needs," by Richard Dobbs, Jeremy Oppenheim, Fraser Thompson, Marcel Brinkman, and Marc Zornes. ⓒ Copyright 2011 by McKinsey & Company. All rights reserved.http://www.mckinsey.com 4. To access the Polar Conservation Organizations article "Copper Rush," visit their website at: http://www.polarconservation.org 5. You can access the Lloyds/Chatham House "Arctic Opening" report by visiting the Chatham House website at: http://www.chathamhouse.org 6. Alaska Dispatch, April 9, 2012, "Begich Panel Considers Deepwater Port to Support Arctic Shipping," by Alex DeMarban. ⓒ Copyright 2012 by Alaska Dispatch. All rights reserved. http://www.alaskadispatch.com 7. Fox News, April 16, 2012, "The New Cold War: Militaries Eying Arctic Resources." ⓒ Copyright 2012 by Fox News Network, LLC. All rights reserved.http://www.foxnews.com 8. To access the article, "Who Owns the Arctic?" visit the Geology.com website at: http://geology.com 9. You can access the Lloyds/Chatham House latest Risk Insight report which explores the rapidly changing Arctic environment by visiting the Lloyd’ of London website at: http://www.lloyds.com 10. The New York Times, October 17, 2011, "Warming Revives Dream of Sea Route in Russian Arctic," by Andrew E. Kramer. ⓒ Copyright 2011 by The New York Times Company. All rights reserved.http://www.nytimes.com 11. Ibid. 12. Fox News, April 16, 2012, "The New Cold War: Militaries Eying Arctic Resources." ⓒ Copyright 2012 by Fox News Network, LLC. All rights reserved.http://www.foxnews.com
