Researchers at Cornell University have identified trigger prices—ranging from $15.55 per barrel to $31.42 per barrel of crude oil—that would justify drilling for oil in the Arctic National Wildlife Refuge (ANWR). The trigger price must be high enough to lead to expected discounted revenues that would cover the cost of field development, the cost of production, and the loss of a “wilderness amenity dividend.” Dr. Jon Conrad, Cornell University professor of resource economics, and Koji Kotani, a Ph.D. candidate in the department of Applied Economics and Management, are the authors of a soon-to-be published paper, When to Drill? Trigger Prices for the Arctic National Wildlife Refuge. The paper will be published in Resource and Energy Economics, a journal concerned with the economics of development and utilization of natural resources. “The decision to allow exploration and production of the oil suspected to lie beneath Area 1002 in the ANWR has been a contentious issue since 1998,” said Conrad. “If oil reserves are developed, it may be impossible to restore the area to arctic wilderness. For many people, oil development would result in the permanent loss of an amenity value. The models we have developed assume that this amenity value, or wilderness dividend, ranges from $200 to $300 million per year. The paper applies real option theory to determine the price of crude oil that would justify the investment in field development and the loss of wilderness amenity value.” Central to the research was the need to numerically solve for a value function that would be used to identify the trigger prices. In the mathematical model where oil prices followed a “mean-reverting process,” the calculation of the trigger prices for 11 amenity values was taking five days on a PC. Conrad and Kotani sought the assistance of Research Associates Linda Buttel and John Zollweg at the Cornell Theory Center (CTC). Running on high-performance computing clusters at the CTC, the calculation time was reduced from five days to less than three minutes. “All models are abstractions,” said Conrad. “We tried to capture what we felt to be the most important economic aspects of a decision to drill in the ANWR. If the wilderness amenity value is infinite, then no finite price for oil would justify drilling in the ANWR. If the amenity loss is between $200 and $300 million per year, then, depending on the model and other parameter values, the trigger prices ranged from $15.55 per barrel to $31.42 per barrel, well below the current spot price which has been fluctuating between $40 and $50 per barrel.”