Debate: Should the U.S. ban offshore drilling for oil?
Should the U.S. ban offshore drilling for oil?
What are the merits of offshore drilling?
•A significant portion of the domestic oil production comes from the offshore Gulf of Mexico region. Similarly, substantial oil reserves in this region will result in oil production for some years to come.
•As a global commodity, the price of oil is determined by the worldwide forces of supply and demand. The oil produced in the offshore Gulf of Mexico region, while significant for the U.S., makes up a very small percentage of the worldwide oil supply. As such, the removal of offshore oil from the global oil supply will not have a lasting material impact on the price of oil.
•The government earns revenue through royalty fees and other receipts on the offshore drilling industry. These revenue receipts can be used for the general benefit of society.
•Pollutants are released into the air and water through drilling activity.
•Offshore drilling causes risks to employees. The average fatalities are 7.5 per year.
•Offshore drilling negatively affects onshore infrastructure, causes underwater noise pollution, and results in destruction of the ocean floor. These lead to loss of tourism, loss of fishing, and health costs.
•Clean-up costs resulting from oil spills are expensive and damaging.
oThe BP oil spill caused severe losses for the tourism and fishing industries.
oThe heavy damage of the BP oil spill has prompted a costly regulatory response.
oWhen the dispersant mixes with crude oil, humans face danger of: vomiting, skin rashes, respiratory problems, liver and kidney failure, ulcers, neurological problems, and death.
Given the overwhelming costs and relatively modest benefits of offshore drilling, we will be better off without it.
A review of the NET Benefits (Costs and Benefits) Related to Offshore Drilling:
We conducted a cost benefit analysis on offshore drilling in order to establish why offshore drilling should not be banned. We found that there are $64.1 billion dollars in positive benefits associated with Offshore drilling. Some assumptions that we made were that we only included the costs, benefits, and spills on offshore oil rigs, platforms, and pipelines. We did not include those costs/benefits associated with transporting oil. We assessed our data over 10 years (2000-2010) and used data from FY 2009. To begin with we assessed the probability of an oil spill even occurring. As it turns out the probability is actually quite small, 0.5%. In order to determine this we accessed the Bureau of Ocean Energy Management statistics for the number of oil spills, over 50 barrels that have occurred over the past 10 years and found that number to be 174 - when you divide the number of oil spills, by years, and the number of oil platforms (3398 total for U.S. Offshore drilling), you will come up with the probability of an oil spill occurring, which one can see, is very low.
Next we examined the private costs to oil companies for offshore drilling. Using both the oil spill occurrence probability that we determined and data from the Deepwater Horizon oil spill and BP’s costs, we identified these private costs per year for companies. To summarize, those numbers are:
• Costs of Oil Spill (includes damage to oil rig, containment costs, cleanup costs, lost oil and litigation costs multiplied by the probability of an oil spill): $136 Million
• Operational Costs (Includes insurance, labor, supervision, payroll, food expense, labor transportation, surface equipment, operating supplies, communications, and administration: $34 Billion
• Maintenance Costs (Annual costs to maintain an adequate safety program and added regulatory costs): $34 Billion
• Additional Public Relations Costs (Includes costs to restore reputation of industry and companies after oil spill multiplied by the probability of an oil spill): $0.05 million
• Total: $340 Billion
To determine indirect costs associated with offshore drilling we examined the loss to the economy due to fatalities and/or injuries. • Value of lives lost on oil platforms from 2000-2010: $12,972 • Value of injuries on oil platforms from 2000-2010: $5,073
We also examined the effect of offshore drilling and a potential oil spill on the fishing and tourism industries. We focused our research on the Gulf States and the data from the 2010 Deepwater Oil spill. We also took into account a multiplier effect of lost spending and tax revenue due to the loss of the tourism and fishing industry.
• Mississippi Expected Loss: $1.23 Million
• Alabama Expected Loss: $5.14 Million
• Louisiana Expected Loss: $7.84 Million
• Florida Expected Loss: $10.24 Million
• Multiplier Effect of Lost Spending and Tax Revenue: $34.24 Million
Finally, the damage to ecosystem from drilling for oil was determined to be: $37,141,314. This estimation will be discussed in further depth in a following paragraph.
The total of all costs is: $68.2 Billion
There are many monetary benefits to offshore drilling that help to offset the costs. First when one examines these quantifiable measures, according to our cost benefit analysis and using data from the FY2009 Office of Natural Resources Revenue and several other sources, the U.S. each year gains $132.3 Billion in benefits from various sources. Broken down into subcategories, this amount is comprised of:
• Revenue from Leases ($5.8 Billion),
• Revenue from Jobs ($9.5 Billion),
• Total Revenue for Producers ($100.8 Billion), and
• Energy Security Benefits ($16.1 Billion).
Our estimations were based on very conservative numbers for revenue, employment figures and price of oil per barrel ($50). To determine the amount of job revenue we determined the number of projected employees generated from offshore drilling, their average income, and then applied a multiplier affect of 1.4 to account for spillover. For example in the Gulf of Mexico, there were 109,800 projected employees with a $45,253 average income, thereby generating a total potential income of $4.97 billion. Although one could quibble over the number of potential jobs created, we purposely used a conservative estimate for both income and employment creation for that very reason.
Furthermore, when determining the energy security benefits we were able to deduce that there is an annual price-reduction benefit and an annual reduced economic benefit, both totaling $13.7 Billion. To determine these amounts we multiplied the projected U.S. oil production by the amount the U.S. consumers would benefit by from this increase. This amount of $4 was determined by Hahn and Passell in their research for their article on the effects of increased U.S. oil production. We calculated these amounts under the assumption that since the U.S. has such a large market share and buying power, that if the U.S. were able to produce more oil and buy less from domestic suppliers, then there would ultimately be an increase in Supply and thereby a decrease in overall price and consumer surplus. Admittedly this is a transfer from foreign producers to U.S. consumers, however it is in the U.S. best economic interests for this shift to occur.
•Recap of Costs/Benefits to Producers: •Total Annual Costs: $68.2B •Operational Costs: $34B •Maintenance Costs: $34B •Oil Spill Costs (in the event of an oil spill): $136M •Public Relations Costs (in the event of an oil spill): $0.05M •Total Annual Benefits: $100.8B •Producer Revenues: $100.8B •Total Net Benefits to Oil Companies: $100.8B - $68.2B = $32.6B
References for Oil Companies: •Achenbach, J. and Fahrenthold, D., “Oil spill dumped 4.9 million barrels into Gulf of Mexico, latest measure shows,” The Washington Post, August 3, 2010. •“BP Establishes $20 Billion Claims Fund for Deepwater Horizon Spill and Outlines Dividend Decisions,” BP Press Release, June 16, 2010. •Bureau of Ocean Energy Management, Regulation and Enforcement: “Proposed Final Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012,” 2007. •Cohen, M., “A Taxonomy of Oil Spill Costs,” Resources for the Future, May 2010. •“Crude Oil Price History” New York Stock Exchange, 2010. •“Gulf Oil Spill Containment Attempt Fails” Environment News Service, May 10, 2010. •Hahn, R., and Passell, P., ”The Economics of Allowing More U.S. Oil Drilling,” 2010, Energy Economics, 32 (3): 638-650. •Niland, K., “Offshore oil execs fought new safety improvements before Gulf explosion,” Beasley Allen Legal News, April 28, 2010 •“Oil and Gas Lease Equipment and Operating Costs 1994 Through 2009,” U.S. Energy Information Administration, September 28, 2010. •Scott, M., “The Oil Rig Fire's Costs Are Mounting Fast,” DailyFinance, April 22, 2010.
What are the risks of US dependence on foreign Oil?
The U.S. meets about a quarter of its oil needs from domestic sources. Of the domestic oil production, less than a third comes from the offshore Gulf region. This means that oil coming from the offshore region is a much smaller part of the domestic oil needs. There are not enough domestic resources available, onshore or offshore, which will reduce our dependence on foreign oil. We cannot drill our way out of dependence on foreign oil. Instead of bearing the heavy cost of drilling offshore, we should focus our attention on alternative sources of energy. Clean energy is on the horizon. Alternative energy sources are solar, wind, water, biomass, geothermal, hydrogen and fuel cells. Benefits include reduction in dependence of foreign oil, growth of “green” jobs, and increased price stability.
ConThe United States consumes about twenty-three percent of the world’s supply of oil while only producing ten percent domestically. As a result, the United States is dependent on imports for fifty-two percent of its oil consumption according to the US Energy Information Association.
The United States could mitigate or eliminate this economic and political risk by increasing its domestic supply of oil through the expansion offshore drilling. Increasing offshore drilling and reducing US dependence on foreign oil also has annual price-reduction benefits and annual reduced economic-disruption benefits (Hahn). Annual price-reduction helps consumers by reducing demand for imported oil that could marginally decrease the price of a barrel – transferring surplus from foreign exporters to consumers. Increasing domestic production also results in a transfer of economic surplus from foreign producers to US producers, which translates to higher US tax revenues. Annual reduced economic-disruption benefits refer to the reduction in economic costs of disruption associated with the US economy adjusting to rapid oil price fluctuation. Additional political benefits include diminishing the power of cartelized oil supply, creating stable domestic oil supply and buffer stocks, and strategic military advantages that come from less dependence on middle-eastern oil exporters (Leiby).
What are the environmental costs associated with offshore drilling?
Offshore drilling poses a multitude of detrimental effects to the ocean, land, and plant and animal life – essentially every ecosystem it enters.
•Oil slicks are formed during oil spills when oil spreads out throughout the water at the top of the ocean. These oil slicks consist of a thick layer of crude or refined petroleum oil (also known as “mousse ”), becoming stickier over time and coating and clinging to rocks and sand when they reach a beach. If they move further into coastal marshes, mangrove forests, or other wetlands, they are absorbed by and damage the plants and grasses. These regions experience erosion and contamination and ultimately become unsuitable to function as wildlife habitats.
•Oil slicks also cover and poison the plankton, marine algae and marine invertebrates, and the bodies of animals in their vicinity (including fish, birds, and other food species). They weigh down the feathers and fur of these animals , which can lead to drowning, hinder the ability to escape from predators, and cause hypothermia due to reduced insulation ability.
•As a result of this contamination, marine and coastal animals experience damage to their central nervous system, liver, and lungs, ingestion – the reduced ability to eat and digest food due to cell damage in the intestinal tract - reproduction problems, and mass mortality, which ultimately interrupts the natural food chain.
•Among many other ways, healthy oceans and coastal ecosystems provide value by removing carbon from our atmosphere and stabilize temperature. When contaminated by oil spills that may occur due to offshore drilling, their ability to acquire and store atmospheric carbon for long periods of time is significantly diminished .
Links:http://www.greenlivingtips.com/blogs/164/Effects-of-oil-spills.html http://environment.about.com/od/petroleum/a/oil_spills_and_environment.htm http://marinelife.about.com/od/conservation/tp/effectsofoilspills.htm http://www.waterencyclopedia.com/Oc-Po/Oil-Spills-Impact-on-the-Ocean.html http://www.environmentamerica.org/home/reports/report-archives/ocean-conservation/healthy-oceans/too-much-at-stake-dont-gamble-with-our-coasts
The total environmental costs associated with offshore drilling are calculated using a combination of an estimate of the public’s willingness to pay to avoid a large oil spill, the public’s willingness to accept oil drilling (status quo) and an estimation of the use value of the areas in which drilling occurs. The nonuse value for the areas where offshore drilling occurs are virtually zero, as the oil rigs are usually positioned a great distance from the shoreline in water that is generally not considered “pristine.” To estimate these quantifiable environmental costs, the US Department of the Interior developed an Offshore Environmental Cost Model. The model calculates use value, the largest portion of environmental costs, based on an estimate of the value of adverse impacts on air and water quality, marine and land habitats and animal populations, as well as tourism onsite and in the nearby coastal areas (MMS). For this analysis, only those environmental costs that are easily quantifiable are considered, and they are calculated using an Offshore Environmental Cost Model developed by the US Department of the Interior. The model estimates that the total environmental costs associated with offshore drilling to be $700 million per 10 billion barrels, or alternatively, $0.07/barrel. Given the 2009 US offshore oil production rate of 530,590,200 barrels/year, the environmental costs for US offshore oil drilling amount to about $ $37,141,314 per year. US oil companies must offset this cost to the environment by earmarking $900 million per year to environmental preservation and public/private economic programs. Thus, although it is somewhat unclear how offshore drilling will fundamentally change the ecosystem, monetary benefits for the environmental impact of offshore drilling are likely to offset and possibly even outweigh costs to the environment.
How will banning offshore drilling affect employment in the region?
•Oil spills (partly due to offshore drilling) impose detrimental effects on employment. Not only do offshore oil rig workers lose their jobs, but those working in other industries dependent on an unpolluted coastline (such as tourism and recreational and commercial fishing) suffer to a much greater extent.
•U.S. oceans and coasts are actually worth more as wild regions than oil fields offshore drilling, then, should be banned so that jobs of those working in these industries are protected from potential (and catastrophic) spills.
•More than 4.5 million people in coastal counties of the United States work in the tourism industry and in recreational and commercial fishing and processing , and in coastal counties of the Gulf of Mexico, the number of jobs in the tourism and fishing industries (777,000) exceed that of the natural extraction and mining industry (which includes oil and gas drilling) – 154,000 - by five times.
•In regions of the United States that utilize offshore drilling, the annual value of tourism and fishing ($204 billion) is almost 4 times larger than that of any oil and gas pumped from those areas.
•The recent BP oil spill in the Gulf of Mexico will most likely lead to a 15 percent loss in tourism and 50 percent loss in fishing revenue, through which people will lose about $822 million overall (including $500 million in earnings), and state and local governments would lose almost $76 million in tax revenue.
•Most likely, the harm done to the economy will last beyond this year, as in even the best-case scenario, the region will experience a loss of $1 billion and 13,000 jobs. (n the worst-case scenario, tourism loss will move to 30 percent and fishing losses to 80 percent, and the overall economic loss would move past $3.3 billion, with almost 49,000 jobs lost and up to $150 million lost in state and local tax revenues.
Another perspective on effects on employment can be taken in regards to alternatives to offshore drilling. With a ban on offshore drilling, we posit a more aggressive push will be made to implement alternative energy throughout the country, leading to a growth in “green” jobs.
•The ocean conservation group Oceana states that offshore drilling actually threatens the creation of new jobs and that focus should be shifted to expanding upon renewable energy opportunities, as these opportunities would go further in creating jobs. Offshore drilling will have to engage in competition with the renewable energy industry in the future, and this will only serve to make all sources of energy more expensive to introduce to the market.
•Though moving forward in the alternative energy sector requires major and long-term investments, the fact that the United States should move in this direction speaks for itself. The $80 billion set aside within the federal stimulus program to promote an economy based on “green energy” has been effective.
•For every $1 million invested in clean energy technology by the United States (including solar, wind, smart grid projects, and construction of retrofits), three times more jobs are created than if this money was invested in the oil and gas industry.
•Between 2000 and 2008, an estimated “green” construction projects had created an estimated 2.4 million jobs in the United States , including projects to weatherize buildings, rehabilitate older buildings to save energy, and renewable energy initiatives. According to the government consulting firm Booz Allen Hamilton, between 2009 and 2013, “green” building projects projected to take place will add $554 billion to the United States gross domestic product.
One of the primary reasons not to ban offshore drilling is job creation and job preservation. In addition to the jobs that could be created with allowing new leases for offshore oil rigs, there are a substantial number of unskilled jobs that are currently associated with offshore drilling. Currently, there are 150,000 employees on oil rigs, in addition to the 25,200 projected employees needed for expanded drilling in Alaska and 15,000 projected employees needed in Virginia. This is a substantial number of people employed on offshore oil rigs, in areas that have been disproportionately affected by the decline of the manufacturing industry and 2008 recession. Mississippi and Florida, two of the states with offshore oil rigs in the Gulf of Mexico, have two of the highest unemployment rates in the country (at 9.7% and 11.9%, respectively). Employees on offshore oil rigs earn an estimated $45,000 per year on average, which is directly invested back into the local economy through income and sales tax. Although the salaries of offshore oil rig employees are captured in the operating cost of an oil rig, there is also an indirect economic benefit to the incomes that offshore oil rig employees earn. This is accounted for with a multiplier effect of 1.4, bringing the total economic impact to the area of $8,607,120,600 per year. Eliminating this income and sales tax revenue with a ban on offshore drilling, in addition to the revenue generated from leases for offshore oil rigs would have a significant negative economic impact on the region.
External links and resources:
Achenbach, J. and Fahrenthold, D., “Oil spill dumped 4.9 million barrels into Gulf of Mexico, latest measure shows,” The Washington Post, August 3, 2010.
“BP Establishes $20 Billion Claims Fund for Deepwater Horizon Spill and Outlines Dividend Decisions,” BP Press Release, June 16, 2010.
Broder, John, “Obama to Open Offshore Areas to Oil Drilling for First Time,” The New York Times, March 31, 2010.
Bureau of Ocean Energy Management, Regulation and Enforcement: “Proposed Final Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012,” 2007.
Cohen, M., “A Taxonomy of Oil Spill Costs,” Resources for the Future, May 2010.
Continental Shelf Oil and Gas Leasing Program 2007-2012”; Hahn, R. and Passell, P. “The economics of allowing more U.S. oil drilling,” 2010 Energy Economics, 32 (3): 638-650
“Crude Oil Price History” New York Stock Exchange, 2010.
“Gulf Oil Spill Containment Attempt Fails” Environment News Service, May 10, 2010.
Hahn, R., and Passell, P., ”The Economics of Allowing More U.S. Oil Drilling,” 2010, Energy Economics, 32 (3): 638-650.
Leiby, P. "Estimating the Energy Security Benefits of Reduced U.S. Oil Imports," 2007 U.S Department of Energy.
Niland, K., “Offshore oil execs fought new safety improvements before Gulf explosion,” Beasley Allen Legal News, April 28, 2010
“Oil and Gas Lease Equipment and Operating Costs 1994 Through 2009,” U.S. Energy Information Administration, September 28, 2010.
Scott, M., “The Oil Rig Fire's Costs Are Mounting Fast,” DailyFinance, April 22, 2010.
“Vitter: Obama’s Temporary Moratorium on Deepwater Drilling Causes More ‘Devastation’ than BP’s Oil Spill,” Climate Progress, June 9, 2010, available at: http://climateprogress.org/2010/06/09/vitter-obama’s-temporary-moratorium-on-deepwater-drilling-causes-more-‘devastation’-than-bp’s-oil-spill/