Sustainable Development of Oil Production in the Arctic Shelf and Evolution of Fish Stock

Introduction

Growing scarcity of exhaustible resources, especially hydrocarbons, puts forward oil and gas extraction in the areas that have not been considered economically before. One of such areas is the Arctic Ocean. Amid the global warming, a gradual decline of the Arctic area covered with ice is observed. At the same time, geologists discover more resources there. Now the Arctic is considered to be a very rich area in hydrocarbons. It is also rich in natural ecosystems. Its economic development has been postponed due to hard climate. Within this chapter, a focus is on its fish resources. Overfishing in the North Atlantic puts the Arctic as an important area for future fishing.

The future of the Arctic depends on the sustainable exploitation of both marine resources and hydrocarbons. Fish resources are already highly exploited, at least in the area uncovered by the ice. As for the hydrocarbons, their exploitation is postponed. At present, the cost of extraction is relatively high, both in absolute terms and in comparison with other reserves. It is very important to consider the future exploitation of hydrocarbons in the Arctic in its interaction with the dynamics and sustainable harvesting of fish stock. It is known that oil exploitation bears the risk of oil spill danger with a negative effect on both fish stock and harvest (Hale et al., 2015; Langangen et al., 2017).

Due to the situation of a joint extraction of non-renewable (oil and gas) and renewable (fish) resources in the Arctic, it is important to have a correct valuation of both. However, there are some ambiguities. It may happen that in some years the economic value of extracted oil can be substantially above the value of fish. Does it mean that market value of fish can be neglected?

First, economic models always use a discount rate, and for some countries (like Russia), it may be high due to the high interest rate. This leads to a relatively high valuation of short-term effects and a substantial discount of long-term effects. By definition, renewable resources can be extracted for the unbounded period of time (in the case of sustainable harvesting). Contrary to them, non-renewable resource live for only finite time horizon (typically 20-50 years). At the discount rate of 10%, the future after 20 years becomes almost negligible (Figure 1). High discount is typical for Russia also because of the high interest rate. The value of discount rate plays a very important role for the policy implications of the optimization models in economics. It is especially important due to the mix of exhaustible and renewable resources, because there might be a policy reversion after some threshold in a discount rate.

Figure 1.

Discounted values after 10-50 years with annual discount value at 1%, 2%, 3%, 5%, and 10%

Source: Author’s development

Second, sustainability issue calls for the analysis of the models without discount, because any positive discount downplay the value of long distance future. In order to study both economic optimality and sustainability, the models need to consider discount rate as a parameter. Their analysis in the limit of discount going to zero is also very important.

Background

Since this study is interdisciplinary, it has several backgrounds. Studies of oil reserves and fisheries are typically independent research fields. The method of analysis is a combination of optimization (profit maximization that is classical in economic literature) and dynamic analysis of ecological systems (typical in environmental literature). The problem of joint optimality of the exploitation of both exhaustible and renewable resources is a hot topic, but its mathematical formulation has not been development in the economic literature. On the other hand, there are studies about negative effect from oil extraction on the fishery stock. Almost all economic models include discount rate, but in the case of joint exploitation of exhaustible and renewable resources, its role is especially pronounced.