Determining power consumption with Arduino and JeeLib
What board are you using? For example, the Uno has a lot of other components that will consume power, even if you sleep the main processor. Instead use something like a Pro Mini. 

You can bypass the voltage regulator, and just supply 4.5v by using 3 AA batteries. You can even use just 2 AAs if you have the 3.3v version. The lower the voltage the less current the ATMega uses. 

Most importantly, measuring the power consumption using a multimeter. Measure the current the led uses. Disconnect the led, and measure how much the arduino uses. Use this handy Battery Life Calculator, and just fill in those numbers.

Run the led with the lowest current, where the led is still visible enough. Running a power-led at just 1mA will still give a decent amount of light.

In your situation, if coded correctly, power usage of the ATMega is negligible. The only real power user is the led. If you run the led at 1mA, and use a set of AA batteries, you get around 3.5 years of running time, no problem.