The Fight to Control the Arctic Economy
The
Arctic is changing—fast. In fact, within the next 30 to 40 years, the
region could be ice-free. So why are countries and companies lining up
to get their share of the Arctic pie? And what does a melted Arctic
mean for the global economy?
Why does everyone want the Arctic?
These
days, countries are fighting tooth and nail to stake their claim to
the Arctic. But a century ago, you couldn’t give the region away. When
American explorer Robert Peary reached the North Pole in 1909, he wired
President William Howard Taft to let him know that he’d claimed the
territory for the United States. Taft’s response? “Thanks for your
interesting and generous offer. I do not know exactly what I could do
with it.”
Taft’s indifference reflected the prevailing sentiment of the day: Why would anyone want an inhospitable, frozen wasteland?
The
Cold War changed this line of thinking. Suddenly, the Arctic became a
choice piece of real estate. It was the perfect surveillance point for
listening in on enemies and the quickest bombing route between the
Soviet Union and North America. By the 1950s, generals were eyeing the
region as the strategic lynchpin for the next World War.
The Cold
War may have ended more than two decades ago, but nations are still
salivating over the Arctic—just for very different reasons. For
starters, there are vast riches buried in the Arctic’s ocean floor.
Geologists estimate that nearly 20 percent of the world’s undiscovered
oil and natural gas may be lingering beneath its frigid waters. Indeed,
the Arctic could contain more than 90 billion barrels of oil, which is
enough to supply the world’s current demand for three full years.
Further, the United States Geological Survey has estimated that there
are 1,670 trillion cubic feet of untapped natural gas in the area, about
one-third of the world’s reserves.
You’d
think figures like that would have sparked an Arctic gold rush, but
until recently, extracting those resources has seemed like a long shot.
As the 2010 oil spill in the Gulf of Mexico has shown, getting black
gold out of the ocean’s floor is no simple task, and the potential for
environmental damage is real. While Arctic oil drillers don’t have to
contend with the Gulf’s hurricane season, the region has its own
problems. Cutting through the ice is difficult and expensive, and
massive icebergs threaten to topple offshore rigs. (In the past, some
companies have dealt with this problem by pulling the icebergs away with
what amounted to giant lassoes.)
But as the
ice melts, these hurdles are disappearing. The crowning irony of the
Arctic is that by burning fossil fuels, we’ve helped to melt the
Arctic, which has given us access to more fossil fuels. Soon, oil
companies could be able to tap into these vast reserves without
fighting through packed ice and battling icebergs.
That isn’t the
only reason countries are eyeing the region, though. The new Arctic is
also revolutionizing the shipping industry. In 2007, high summer
temperatures melted enough ice that the Northwest Passage—the
once-fabled shipping route through Arctic waters near Canada—was
navigable all the way from the Atlantic to the Pacific for the first
time in recorded history. This ice-free Arctic is a serious boon to any
country that currently ships exports around the world. Take China, for
instance. In 2009, the nation’s exports totaled an eye-popping $1.2
trillion. If Chinese companies can get their goods to the United States
and Europe through the Arctic instead of the Suez Canal, they stand to
cut their trips by 5,000 miles, reaping huge savings along the way.
Germany also has been tempted by the prospect of going north. In
September 2009, two German ships navigated across the melting Arctic
ice to transport heavy cargo to Siberia. The trip was much faster, and
thanks to savings on fuel and supplies, the cost was $300,000 less per
ship than navigating traditional routes.
So, who owns the Arctic right now?
Figuring
out who owns what part of the Arctic might seem straightforward, but
it’s not. By United Nations’ conventions, the countries with coastlines
in the region—the United States, Canada, Russia, Norway, and Denmark
(thanks to its ownership of Greenland)—all have control of an economic
zone that extends 200 miles beyond their shores. Also, Arctic nations
can expand their territorial claims to include 350 miles of the seabed
on the continental shelf.
If you can’t visualize exactly what that
means, don’t worry; neither can anyone else. Figuring out where the
seabed begins and ends is a maddening task, and there’s a good deal of
ambiguity about what defines a country’s continental shelf. U.N.
conventions also state that if a country wants to extend its
territorial claim in the Arctic, it must present geological evidence
showing that an area is part of its continental shelf. But getting such
a claim approved by the U.N.’s panel of scientists is far from easy.
In 2001, when Russia asked to expand its territory in the region, it
got shot down because of insufficient evidence.
The issue of
ownership in the Arctic is further complicated by the fact that the
United States has failed to ratify the U.N. Convention on the Law of
the Sea, which created a lot of these rules. Ronald Reagan refused to
sign the treaty in 1982, fearing that it would hinder American deep-sea
mining, and it’s been sitting in limbo ever since. The Obama
administration is currently attempting to convince the Senate to
finally ratify the treaty, but until it does, the United States can’t
expand its territory in the region.
If the ice melts, who will benefit the most?
Let’s
preface this answer by saying that an unfrozen Arctic is unequivocally
bad for the world. Nobody will be dancing in the streets when ocean
levels start to rise and thawed methane gas is being released into the
atmosphere. However, the economic reality is that if the Arctic as we
know it disappears, one country will benefit more than any
other—Greenland.
At first blush, Arctic thawing seems like bad
news for an island that has 80 percent of its surface covered in ice.
But from a political and financial standpoint, the warmer temperatures
may be just what Greenland’s 57,000 residents need.
Although
Greenland has enjoyed self-governance since 1979, the country is still
a part of Denmark. In fact, Denmark props up Greenland’s economy with
an annual grant of about $650 million, a subsidy that represents about a
third of the island’s GDP. Without that cash, Greenland couldn’t
support itself. Its exports, mainly shrimp and fish, simply don’t cover
the expenses. Greenland has been taking steps towards independence for
decades, but until it finds some additional streams of revenue, the
island will continue to remain a Danish protectorate.
That new
stream of revenue, oddly enough, may come from global warming.
Greenland’s residents hope that as the ice thaws, they’ll be able to
drill down to previously inaccessible oil and mineral deposits on the
northern tip of the island and offshore, where about 50 billion barrels
of oil are buried. (That’s worth about $5 trillion in today’s market.)
Greenland has already made a deal with Denmark to split the profits
from these resources. Still, Greenland’s share will be more than enough
to give it some financial independence—and put full autonomy within
its reach.
Would anyone else profit from Arctic ice disappearing?
The
United States would definitely enjoy tapping into oil and gas reserves
in the Arctic, but it doesn’t need to in order to remain economically
viable. The Russian economy, however, is a different story. Because
Russia is the world’s largest exporter of natural gas and the second
largest exporter of oil, its economy depends on exploiting its natural
resources. Russians have done of good job of this lately, too. Gazprom,
the country’s state-controlled natural gas firm, was the world’s most
profitable company in 2009, with a net income of $24.5 billion. If
Russia’s natural resources dry up, its economy could tank.
Since
2007, the Russian government has been building up other money-making
sectors, such as technology, to reduce its reliance on oil and gas. But
progress has been slow. Gaining access to a huge new pool of resources
in the Arctic could give Russia a lot of wiggle room as it tries to
modernize its economy.
The United States also stands to gain from
the Arctic thaw. While America might not need the Arctic’s fossil fuels
with the same urgency that Russia does, getting our mitts on fresh,
offshore oil would mean a lot. Every U.S. President since Richard Nixon
has promoted the idea that decreasing our dependence on foreign oil
would improve national security. If we could only get our oil from
home—say, Alaska—then our country might be safer.
About 10.4
billion barrels of oil sit under Alaska’s Arctic National Wildlife
Refuge, but that’s a drop in the bucket compared to Alaska’s offshore
reserves. A 2008 study from the United States Geological Survey
estimated that Alaska had nearly 30 billion barrels of undiscovered oil
resources—roughly four years’ worth of American demand—under its
surface and coastal waters. Although drilling for that oil could be
dangerous, tapping into this Arctic bonanza could significantly change
our relationship with the Middle East.
But global warming is still bad, right?
Yes.
If you’re thinking globally, then nobody really benefits from
defrosting the Arctic. A 2010 study by the Pew Environment Group pegged
the global cost of the melting Arctic ice at more than $2.4 trillion
over the next four decades. This estimate takes into account the
Arctic’s function as Earth’s air-conditioner. Once our AC unit melts,
heat waves and flooding will increase across the world, and rising sea
levels will force people living on the coasts to move inland.
People
living in the Arctic region may end up in rough shape, too, despite
the economic potential in their neighborhoods. Most of the
infrastructure in the Arctic has been built on permafrost. When
designing roads, houses, and buildings, engineers made the assumption
that the permafrost was as permanently frosted as the name implies. But
that’s no longer the case. When the frost thaws, it will wreak a unique
type of havoc on the towns and cities. Roads will crack, warp, and
buckle on top of the soggy ground, and houses will sink or collapse
altogether. Additionally, water and oil pipelines will burst, and the
fixes won’t be cheap; oil pipelines cost up to $2 million per mile.
In
fact, all of Alaska’s problems will be expensive to fix. A
Congressional study estimated that fixing the public infrastructure in
Alaska could cost $6 billion by 2030. On the other side, somebody is
going to get very, very rich while retrofitting these buildings and
bridges to survive the warmer weather.
Clearly, the Arctic thaw is
going to leave the world in a tight spot, and the drama that’s set to
unfold in the region will demand global attention. So although the
Arctic may be losing its ice, its stock in the political arena is just
starting to heat up.
