Weighing the Benefits & Costs of Offshore Drilling

Offshore drilling remains a risk well worth taking, even in the wake of the oil spill disaster.

Two weeks ago BP’s Deepwater Horizon oil drilling rig in the Gulf of Mexico exploded, killing 11 workers. The exploratory well began gushing oil at an estimated rate of 5,000 barrels per day when the blowout prevention system failed. The growing oil slick menaces the marshes and beaches of Louisiana, Mississippi, Alabama, and Florida. Should the slick come ashore, previous research suggests the deleterious effects on fisheries and wildlife would be substantial and long-lasting.

As someone who has enjoyed the sugar white sands of Alabama’s beaches, it is a terrible shame that they are at risk of being despoiled by oily muck. But as someone who also enjoys the conveniences of modern civilization including the on-demand mobility offered by airplanes and automobiles that enable me to visit those beaches, I understand trade-offs.

Opponents of offshore drilling have jumped on the spill as evidence that offshore drilling is inherently dangerous, and not worth the risk. They see the blowout as evidence that the recently lifted moratorium on offshore drilling in parts of the outer continental shelf should be reinstated. Miyoko Sakashita of the Center for Biological Diversity decried “the absurdity of the claims by the oil industry and politicians beholden to that industry that offshore oil and gas development is safe." As a consequence, the center is urging the Obama administration “to reinstitute a moratorium on new offshore oil leasing, exploration, and development on all our coasts.” The Natural Resources Defense Council is also calling for a “time-out” on any further offshore oil drilling until an independent investigation of the BP spill is completed. On April 30, the Obama administration heeded the call for a time-out and halted plans to expand offshore drilling until an investigation into the causes of the BP blowout are complete.

But in deciding whether or not to continue offshore exploration for oil and gas, a calm quantitative approach makes more sense than a rush to ban drilling after seeing some pictures of oily birds. It would be useful to figure out if the costs, economic and ecological, outweigh the benefits of producing offshore oil and gas. Luckily, a recent study by Georgetown University economist Robert Hahn and Milken Institute economist Peter Passell offers some insight to this question. Published in the December 2009 issue of Energy Economics, their study “The economics of allowing more U.S. oil drilling,” finds that the benefits of producing offshore oil greatly outweigh the costs.

In their analysis, Hahn and Passell look at three types of benefits: producer revenues, lower prices to consumers, and less fluctuation in oil prices. These benefits are considered in a scenario in which oil is priced at $50 per barrel, and in another in which it goes for $100 per barrel. (The current price is around $85 per barrel.) At $50 per barrel they estimate that 10 billion barrels of oil would be recoverable from the off-limits outer continental shelf, and at $100 this rises to 11.5 billion barrels.

On the cost side of the ledger they calculate that it would cost $17 per barrel to produce offshore oil at $50 per barrel and $20 per barrel at $100 per barrel. They incorporate a Minerals Management Service estimate of $700 million as the cost of the environmental damage [PDF] caused by producing 10 billion barrels of oil offshore. They include an estimate of damage caused by greenhouse gases produced by burning the oil as fuel, and the direct costs of local air pollution, and traffic congestion and accidents. So what did they find?

At $50 per barrel, the benefits of offshore oil production in the formerly off limits areas of the outer continental shelf would garner $492 billion in revenues, $42 billion in lower oil prices, and reduce the cost of oil price disruptions by $42 billion, yielding total benefits of $578 billion. The direct drilling costs would come to $166 billion, environmental costs $1 billion, greenhouse gas damages $1 billion, local air pollution $28 billion, traffic congestion $28 billion, and traffic accidents $32 billion, for a total cost amounting to $255 billion. So at $50 per barrel the benefits of producing 10 billion barrels of offshore oil would be $323 billion greater than its costs.

At $100 per barrel, outer continental shelf oil production of 11.5 billion barrels of oil would reap $1.15 trillion in revenues, lower oil prices by $99 billion, and reduce the costs price disruptions by $51 billion, resulting in total benefits of $1.3 trillion. Drilling costs would be $238 billion, environmental costs and greenhouse gas damages would total $2 billion, the costs of local air pollution, traffic congestion, and traffic accidents would be $22 billion, $33 billion, and $38 billion respectively. So the total costs of producing 11.5 billion barrels of offshore oil would be $332 billion. Hahn and Passell calculate that at $100 per barrel, the net benefits of producing offshore oil would come to $967 billion, or a trillion dollars. They note that even if the total costs were doubled in both scenarios, “the qualitative conclusion that resource development passes any plausible benefit–cost test still holds.”

But perhaps the environmental costs used by Hahn and Passell are too low. Could they be wrong about the cost of greenhouse emissions? Hahn and Passell note that even at the highest social cost of carbon at $321 per ton suggested by British economist Nicholas Stern, the total benefits of producing offshore oil are still positive. In that case, the net benefits drop from $325 billion to $120 billion at $50 per barrel, and from $975 billion to $725 billion at $100 per barrel.

As for other environmental impacts, analysts at the Environmental Protection Agency (EPA) have devised a Basic Oil Spill Cost Estimation Model to try to figure out the costs of various types of spills. For example, the EPA model projects that the socioeconomic costs of spills over a million gallons is about $60 per gallon and the environmental costs are $30 per gallon. So if the BP blowout continues as-is for a total of 50 days, it will spew 10 million gallons into the Gulf, resulting in $900 million in costs. Applying the model’s highest socioeconomic sensitivity adjustment factor of 2 raises those costs to $1.2 billion, and applying the EPA formula including the highest vulnerability (wildlife) and habitat sensitivity factor (wetlands) raises those costs to nearly $1 billion, for a total of $2.2 billion.

This figure is basically the same as the total clean up costs of the biggest oil spill in U.S. history: In 1989, the Exxon Valdez oil tanker leaked 250,000 barrels of crude oil (about 10 million gallons) after being run aground on a reef in Alaska’s Prince William Sound. The BP blowout will eclipse the Exxon Valdez spill if it continues flowing for another 33 days. The ultimate clean up costs for the Exxon Valdez accident amounted to about $2.2 billion, with additional legal costs and damage payments of $2.3 billion. Some analysts are estimating that the costs for clean up and payment for economic losses from the BP spill might reach as high as $12.5 billion. As it should be, BP’s corporate leadership has declared that the company will be responsible for paying for the costs of the spill.

In his book, Normal Accidents: Living with High Risk Technologies (1984), Yale University sociologist Charles Perrow noted that when a technology fails, it often does so because “the problem is just something that never occurred to the designers.” Assuming no malfeasance, whatever went wrong with the Deepwater Horizon drill rig will likely uncover just such a problem and future designers will fix it. Progress is a trial and error process, and increasing safety results from learning how to make better trade-offs over time between risks. Despite this current disaster, offshore oil drilling remains a risk well worth taking.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is available from Prometheus Books.

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  • ||

    Drill bitch!

  • ||

    34,000 people were killed in automobile accidents in the U.S. last year, with hundreds of millions in property damage occurring as well.

    But no one is suggesting that we abandon the automobile. The benefits of the automobile, both in personal freedom and the crucial ability to travel to employment as well as transport materials, make the automobile so overwhelmingly beneficial that we accept the deaths as an unavoidable consequence.

    Oil spills should be viewed the same way. Oil powers the global economy and makes it possible to feed, clothe and house billions of human beings every day. An occasional accident is an infinitesimal price to pay for such a benefit.

    Let’s learn what we can from the inevitable mishaps -- and meanwhile drill like crazy!

  • Best way to clean up the spill||

    A hurricane!

  • MNG's Ass||

    But I wouldn't want drilling in my back yard. And that math stuff is really hard. I say the risks outweigh the benefits.

  • ||

    Upon what basis are you postulating that the risks outweigh the rewards? Do you have hard, irrefutable data to support your position?

  • MNG's Ass||

    Why do you hate birds and the Chesapeake Bay Mike?

  • ||

    Are you kidding? I have gone on several road trips specifically to see the Orioles and partake of crabcakes.

  • Brett L||

    I think I've lost a couple friendships in the last week by challenging people to defend their more hyperbolic statements (our beaches will be ruined for decades!!!). Apparently I'm a monster because those Exxon-Valdez oil sodden birds don't elict hatred of BP and Big Oil.

  • Kroneborge||

    Actually, I've read some estimates that if oil reaches the shore, it could take decades for it to return to normal.

    That doesn't mean we shouldn't ever drill, but it does mean we have to take that into account.

    The fact of the matter is, until we can get off oil (which will take decades) we will need oil.

    So yes let's push for alternatives, but let's not pretend that we don't need oil in the meantime.

  • Brett L||

    Citation please.

  • Drax the Destroyer||

    I wonder...if someone owned (currently owns?) the beaches in danger, and brought divine property rights justice down on BP to the tune of billions, would these accidents be much less likely to happen in the future? I know McDonalds sure as hell does its damndest to make sure people don't get burned by hot coffee anymore.

  • George||

    Barry, you're doing a heck of a job.

  • Suriously||

    Exxon-Valdez was Reagan's Katrina!

  • MSNBC||

    killing 11 workers

    They weren't mine-workers, were they?
    Because mine-workers are special.
    Oil-workers...not so much.

  • Tom||

    Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!! Drill Baby Drill!!!

  • China||

    I drink your milkshake.

  • ||

    But in deciding whether or not to continue offshore exploration for oil and gas, a calm quantitative approach makes more sense than a rush to ban drilling after seeing some pictures of oily birds.

    Why do you hate birds, Ron?

    Wait until they see the picture of $4 gas.

  • Kroneborge||

    while it's true that we can use the off shore oil, and it should generate a net economic benefit, it wouldn't materially effect the price of gas.

    It will just mean that we import a bit less (which is still a good thing)

  • ||

    Kroneberge: You are correct. Hahn and Passell calculate that additional U.S. offshore oil would reduce the price of oil by around 1 percent, 2 percent at most.

  • ||

    Just to be clear, I was exagerating for effect, but frankly, I had no idea that the effect of increased off-shore drilling would be so negligable.

    The numbers you quote, Ron, sound like a poor risk-benefit ratio.

  • ||

    The gulf states make billions in tax revenue from offshore oil drilling. The gulf states are most at risk from the oil spills, but I bet it is a risk that they are willing to take. Even if it costs them 14 billion to clean up the mess, and BP only pays for 6 billion, that 8 billion dollar cost is nothing compared to the revenue of tens of billions of dollars per decade.

  • melman||

    it is, of course, the worst environmental disaster which man has ever faced, and will render this hemisphere uninhabitable for millenia

  • ||

    Between this and global warming, what chance do we have?

  • .||

    Melman!

  • Brother Wolf||

    Well we're facing a double-doomsday scenario once you put global warming in the mix. The sky is falling for real this time!

  • ||

    So Michael Bay is producing a movie "based" on this, directed by Roland Emmerich? They'll figure out a way to blow up the Statue of Liberty in the Gulf...somehow!

  • ed||

    Not to worry. He'll include a shot of the heroes walking away from the blast, in slow motion. This, I have learned, always leads to a comforting conclusion.

  • ||

    I must now kill you for getting "Remember Me" by Journey stuck in my head, you scum.

  • ed||

    Never heard of it.
    Not that I don't feel your pain.

  • Drax the Destroyer||

    As long as there are transforming farting racist caricature robots, this thing practically writes/sells itself.

  • ||

    Why did I just picture Charleton Heston screaming "GODDAMN YOUUUUUU!" standing on a Bama beach with a curiously misplaced and broken Statue of Liberty half in the surf?

    Sorry, that was too easy.

  • ||

    When the pole shift hits, (http://www.apelosurgentes.com.br/english/index.php?/how-everything-began.html
    we will have many, many more oil rigs ripped open, but it will be least of our problems.

  • ||

    For kicks I googled poll shift. You want your daily dose of crazy, check this out.

    http://survive2012.com/index.php/geryl-pole-shift.html

  • Brother Wolf||

    "Scientifically this can only be explained by the fact that the earth will start rotating in the opposite direction, together with a huge disaster of unknown proportions."

    Well, if it's Scientifically.. then it must be correct

  • qwerty||

    Everyone knows that when the Earth rotates the other way, time goes backward! Didn't they see Superman?

  • ||

    Is the poll shift the one that makes libertarians popular?

  • Jimmy 'Crack' Corn||

    +3

  • ed||

    +1.37 for Jimmy's handle. I laugh every time.
    Almost every time.

  • X||

    And I don't care.

  • ||

    +10 - I do not care either, but in the grand for what its worth dept. NASA has declared shananigans on the whole 2012 thing.

  • Jamie Kelly||

    This disaster represents the blackest day in this nation's history, besides Election Day, 2008.
    That was pretty black. This is not quite as black, but it's real black.

  • ||

    Trouble maker! Rabble rouser!

  • ||

    Daycist!

  • Ivan||

    Can't we all just get along.

  • .||

    Anyway, Hardball is about to start, and I need my daily dose of crazy.

    Drill!

  • ¢||

    If you're trying to sway environmentalists, you have to come up with numbers showing that offshore drilling starves Africans. They're for die-offs, not trade-offs.

  • ||

    +1

  • ed||

    I'm pretty sure that oil drilling starves coal miners, too. And America needs more coal miner's daughters, if only for the porn trades.

  • ||

    I came across this article which claims that,

    " . . .[t]wice an Exxon Valdez spill worth of oil seeps [from natural sources] into the Gulf of Mexico every year . . ."

    http://www.sciencedaily.com/re.....082228.htm

    If true, and the article seems legit it does seem to add a little perspective.

  • Pip||

    It's likely true. The same holds true for the Pacific coast.

  • Atanarjuat||

    The article describes that amount coming out of many small, widely dispersed natural seeps. The oil spreads out extremely thin on the surface of the water (a hundredth of a millimeter) and is broken down by bacteria. The effect the Deep Horizon spill will have on the coastline can't really be compared to the effect of the natural seeps. I'd agree that it adds some perspective on the resilience of a natural system (I was unaware that there were oil-eating bacteria).

  • Chad||

    You may be surprised, but I support drilling, and this incident hasn't changed my opinion on the matter. However, I won't sell the oil cheap. If you want drilling, the following four things must happen.

    1: 100% of the royalties and all associated tax revenues should go towards conservation, environmental protection, public transportation, clean energy R&D, etc. Yes, EVERY LAST PENNY goes to the environmentalists wet dream fantasy projects. Get over it.

    2: We should jack royalties, jack them some more, and then jack them again. And then shoot anyone in the face that even tries to get a loophole put in. We charge some of the lowest rates in the world currently, and even then layer on the loopholes. No more!

    3: Full accountability for spills: no $75 million or $10 billion limit - nothing short of bankruptcy for the company will do. NO BAILOUTS.

    4: A $25 billion fund, set aside by Big Oil, for future cleanups. They can have their respective shares of the money back when they finally give up drilling forever.

    Oh, that might do for now.

  • ||

    Yeah Chad, just take all of the money to be made from drilling for oil. The oil companies will still want to spend billions drilling with no hope of making a profit. Businesses are just like that. They often are willing to spend their money and get nothing in return.

    So chad, do you believe in poll reversal?

  • Jimmy 'Crack' Corn||

    Is Chad a hoot?

  • Brother Wolf||

    Remember, you are asking for a private company to assume 100% of the costs and liability. You can only jack the royalties so high until it's not worth drilling.

  • Chad||

    Clearly, we can jack rates much higher. Just look at...oh, any other country in the world but Canada.

    Actually, I would invite you to look at the state-run oil company of Norway, Statoil. Of course, you won't, because it serves as proof that one of your core ideologies is false. The company is well run, despite being majority owned by the state. Note that this means the government gets both the royalties AND the vast majority of the corporate profits.

    Why do libertarians defend selling OUR oil for anything less than the absolute maximum we can?

  • The Gobbler||

  • Kroneborge||

    Royalties could be signifantly higher without reducing the likely hood of off shore drilling.

    It's not unreasonable to make companies pay a market price instead of a subsidized price to get public resources.

  • ||

    And then there is PeMex and Petróleos de Venezuela.

  • ||

    Personally, I'm cool with just buying Canadian & Mexican oil until we're done drinking their milkshake.

    Drill in the US only when the world supply of easy-access oil is gone and the stuff costs $400 a barrel. Then you could charge the oil companies an absurd fortune for drilling rights and everybody involved STILL gets filthy stinking rich.

  • Cthorm||

    Thanks for rubbing in the fact that Scandinavians have a better work ethic than Americans. They're stingy, practical and generally modest. It's their culture. Different value system = different results.

  • Marc||

    Why do libertarians defend selling OUR oil for anything less than the absolute maximum we can?

    I have to say... I just don't know what the fuck you're talking about half the time.

  • Woody Guthrie||

    As through this world I've wandered,
    I've seen lots of funny men;
    Some will rob you with a gun;
    And some with a fountain pen.

  • sup||

    and if one drop of oil lands in the water they all get senteced to death. and their families.

    sure will attract a lot of companys to actually do the drilling.

  • ||

    I'm for a free market. It is not a free market if the owners of the resource (the public) are not entitled to royalties, and the royalties should be based on the market as they are with on-shore drilling, where the owners of the property are generally well compensated for their oil. If the royalties here are artificially set much lower than elsewhere, that's a market distortion.

    Second, liability limits are just plain offensive to any idea of a free market. If they're not responsible for the full costs of their mistakes, they have insufficient incentive to not make mistakes. That includes both the cost of cleanup and the economic losses caused by the spill.

    Support the free market! End corporate subsidies!

    In other words, I'm for letting them have the oil if they'll pay for it and take full responsibility for the damages.

  • CrackerBarrel||

    Steve,

    I agree with your last sentence, but I think your post needs a clarification or two.

    In a free market, how do "the public" become the owners of off-shore oil? The only way that comes to mind is if government assumes ownership in the name of the public. But that is the antithesis of a free market, isn't it? And even if that mechanism worked ideologically, this 1/300,000,000th of the "public" would be very skeptical about receiving his share of the royalties, in any form whatsoever, directly or indirectly.

    You're right about liability limits, and I second your plea to end corporate subsidies. No subsidies for anyone!

    CB

  • ||

    Good point! We often speak of land held by the government as "public property," but it is not; it is owned by the government. I should not conflate public ownership of commons with government ownership of so-called "public property."

    Ideologically, I believe the government should hold those resources in trust for the public, with a fiduciary duty to get the maximum price for them. Unfortunately, that's not how it works.

    These resources belong to the government, the same way that the timber in National Forests belongs to the government. I want the government to charge market rates to those who extract resources from government land. In the case of timber, that would be based on what timber companies pay to private landowners to extract timber. In the case of oil, it would be based on what oil companies pay to others who hold offshore oil, that is, governments in the North Sea, the Gulf of Mexico, and other areas.

    That is, as the owner of resources, the government should be a player in the market, not a pawn of mining, logging, and oil companies.

  • Chad||

    billion. The direct drilling costs would come to $166 billion, environmental costs $1 billion, greenhouse gas damages $1 billion

    Umm, are they only counting the "greenhouse gases" from the drilling itself? Because 10 billion barrels of oil is about 5 billion tons of CO2. For the math to work, they would have to be using a price of $.20/ton, when it should be more like $30. That only adds $149B on the "nay" side of the ledger. Given that kind of mistake, I have little reason to figure they are honest about anything.

  • Jeffersonian||

    Did you pull those numbers out of your ass, or did they just fall out?

  • Chad||

    No, I "pulled" them out of my knowledge of stoichiometry and the peer-reviewed literature on the economic consequences of CO2 emissions.

    I know that both are a bit over your head, but please try to work through it on your own.

  • Pip||

    Great put down! Do it again, bitch!

  • Chad||

    No, I "pulled" them out of my knowledge of stoichiometry and the peer-reviewed literature on the economic consequences of CO2 emissions.

    I know that both are a bit over your head, but please try to work through it on your own.

  • Pip||

    Thanks. You're so easy!

  • ||

    Chad,
    I am confused. When someone says 'ton of Co2' - what exactly do they mean? because in real weight a ton of gas would take up a ridiculous amount of space. Please help me out here.
    Also, you said half the tonnage of oil pulled is = to the amount of Co2 generation in 'tons'. Now I am no chemist so I hope you will forgive my ignorance, but how does a ton of oil breakdown to half a ton Co2 alone?

  • Zeb||

    When someone says "ton of CO2" they are most likely referring to the mass of the gas, as gases are difficult to weigh. C is most of what makes up oil by mass. When burned efficiently, most of the mass of oil becomes CO2 and water. The mass doesn't go anywhere and because the O2 doesn't come from the oil, there is actually a greater mass of gas (including the water) produced than oil consumed.

  • ||

    Thx Zeb

  • ||

    Chad: Since the article is by subscription only I quote a portion of their reasoning on greenhouse gases below. But don't forget they also include the $321 per ton of carbon (not CO2) rate used in some of Stern's analysis. From the article:

    The greenhouse gas damage can be calculated as the product of the number of additional oil barrels consumed, the metric tons of carbon per barrel of oil consumed, and the social cost per metric ton of carbon.56 The choice of the social cost of carbon requires the most judgment, and depends on whether one should include the well-being of non-U.S. countries in the analysis. For our initial analysis, we consider the value of carbon dioxide reductions from the perspective of the U.S only, where a value of zero is assigned to the welfare of non-citizens. We use a value of $0.91 per ton of carbon taken from Anthoff and Tol (2007), and apply it to the total increase in global carbon emissions.57 This value is far below the social cost of carbon from a worldwide perspective, and we discuss the impacts of using a higher social cost of carbon in our sensitivity analysis below.

  • Chad||

    So clearly, they are cherry picking the lowest data they can find. Again, as soon as I see something like this, I can be certain that these people are partisans and their conclusions are suspect. The median values run around $30, not less than one.

    Unfortunately, my hands are tied by the firewall so I can't be more specific.

  • Sidd Finch||

    They're only counting the CO2 for the "additional barrels consumed."

  • ||

    Lowest data? A sensitivity analysis that includes a social cost of $321 per ton of carbon? You're kidding, right?

  • Chad||

    Ron, I must be missing something. Burning the ten billion barrels of oil will create about five billion tons of CO2. That doesn't come out to $1 billion in damages unless you assume a price even lower than Tol does.

    In any case, I agree that conventional oil (not tar sands or shale) probably passes cost-benefit in most cases, and therefore should be drilled (and all profits diverted towards conservation and clean energy). It is coal where the cost-benefit fails, by a big margin.

    We should drill, with the caveats I noted: maximum profits for the state, all such profits diverted to the environment, and absolute and total full responsibility for accidents on the shoulders of the corporations who do the drilling.

  • Sidd Finch||

    You are missing something. I've pointed it out in several places.

  • ||

    Chad; You might also want to look at these two analyses of the social cost of carbon by Anthoff and Tol, here and here. Considerably lower than Stern's assumptions.

    But again the point is that even assuming Stern's absurdly high cost numbers, the benefits of offshore drilling would still outweigh the costs.

  • Chad||

    I have seen these before. As I have said many times, cost-benefit is bunk in this matter, because the pulled-out-of-our-rear discount rate matters far more than any actual data.

  • Sidd Finch||

    still missing it . . .

  • Marc||

    As I have said many times, cost-benefit is bunk in this matter, because the pulled-out-of-our-rear discount rate matters far more than any actual data.

    Well, shit, why didn't you just say that in the first place?

  • Marc||

    As I have said many times, cost-benefit is bunk in this matter, because the pulled-out-of-our-rear discount rate matters far more than any actual data.

    Well, shit, why didn't you just say that in the first place?

  • Sidd Finch||

    Is it your contention that oil not drilled in the Gulf is forever gone, not to be replaced by oil from other sources?

  • Sidd Finch||

    (Being nice b/c unlike most lefties you seem to have done some research on this, and I know nothing about oil.)

    My 30 sec in my head calculation is 840 lbs CO2 per barrel of gas and 900 for diesel. Would that be lower for thicker Gulf crude because more of it would be used for plastics, etc?

  • ||

    I have no problem at all with expanding offshore oil drilling. Exploitation of all energy sources* entails some environmental disturbance.

    I've no problem at all with BP paying for the clean-up, the economic damage they've caused others and a hefty penalty for being careless, incompetent or, as is most likely, both.

    * Even solar powered rainbow farting unicorns have detrimental environmental effects.

  • ||

    ..and what if the conclusion is that Transocean, BP met all requirements set by the government and this was simply a failure of a cutting edge technology (BOP) combined with a quirk event that appeared unlikely until it happened (gas migration around cement). Do you still apply a huge punitive penalty to BP/Transocean in such a muddy situation?

  • ||

    well then there may be a claim against the designer or manufacturer of the technology. In addition, I believe that the reason for the limited damages liability is that the company responsible is deemed strictly liable for the clean up costs. Similar to liability for dynamite demolition.

  • ||

    Punitive damages is meant to punish a company for doing something which went against current rules or incurring unneccessary risks understood before the accident, not use hindsight to capriciously thwack companies with an angry stick. In theory...

    Limited liability from a compensatory side is an entirely different issue.

  • ||

    If you think that there is even a remote possibility that incompetence or malfeasance by BP didn't play a role in this I'm going to charitably assume you never worked the engineering, operational or maintenance end of things that go boom.

    I have and BP unquestionably fucked up in multiple areas. The investigation will bear this out.

    Dollars to donuts.

  • ||

    woah, mighty strong words J Sub D. I respect you, but I've been following this VERY closely and have yet to see any blatant red flags. I'd like to know what evidence you have that "BP unquestionably fucked up in multiple areas".

    And just so you know, I have worked in engineering around things that go boom. I'm by no means an expert, but I'm not unfamiliar to this type of work.

  • ||

    Drill all you want. It might keep the cheap oil flowing for a year or two, if we're lucky.

  • ||

    CSI wins the Paul Erlich award.

  • Matt||

    I might agree that there is a net benefit to drilling offshore. Your analysis however is weak, you assume that there will be no more spills, as I see no mention of your expected frequency of occurance of spills and their expected cost, you only mention the BP spill. This would bring the net benefit down, although likely still positive. The other issue is that you ignore is that there may be a net benefit, but the benefit goes to one group of people and all the costs to a different group. When there's a problem the fishermen, taxpayers, and others are left with the bill, not the oil company. As it stands now, even though BP says they will pay for the full cost of the spill, they are only legally required to pay a paltry $75 million. Other companies might not be so concerned with their public image and just pay the max $75 million in the future and leave everyone else holding the bag. This is typical of many extractive industries, the company takes the profits and leaves the taxpayers with the cleanup bill. If somehow the company ends up on the wrong side of a court case and has to pay the full cost, they just declare bankruptcy and its all for nothing anyways.

    And my final complaint is that you sound like a central planner anyways, like you can calculate all the societal benefits vs. costs of some particular action and come to some sort of calculated decision about what particular action should be taken. You of course, can't possibly predict all of the side-effects, unexpected consequences, etc. This is just a classic example of the tragedy of the commons. We need to privatize the oceans.

  • ||

    Matt: All in favor of privatizing the seas. With regard to central planning, even private entities try to figure out benefits and costs of projects. And finally, the argument does not assume no future spills. For example, I did run the example of the EPA spill cost model and noted that the EPA calculated that spills cost about $2.7 billion between 1980 and 2002.

  • Matt||

    I don't want to get bogged down in numbers, but hasn't the BP spill already exceeded $2.7 billion? Between 1980 and 2002 was there any offshore drilling even in the US? Will offshore drilling likely lead to more or less oil spills than with no drilling? (I think we know the answer), so I think I'm right in stating that you don't fully account for the cost of future spills.

    Secondly, I agree that private entities try to do cost vs. benefit analysis, obviously. However, your analysis is lacking in one key area : private entities are also concerned with opportunity cost. A private entity will ask how else they can employ their capital and if it provides a more desirable cost/risk profile. In this context we should be asking if the people and capital could be going for oil somewhere other than off the US shore, in different places that are more desirable. They could be more desirable either because it is cheaper to extract (unlikely), or the risks (due to environmental problems) is lower. In this case I don't think the math would be so clear cut. (I'm suggesting the Alaskan wildlife refuge here provides a better cost/risk tradeoff than offshore).

    But again, this is the type of pointless wrangling that happens when we don't have private markets giving us price signals.

  • Pip||

    "But in deciding whether or not to continue offshore exploration for oil and gas, a calm quantitative approach makes more sense than a rush to ban drilling after seeing some pictures of oily birds"

    Why the pictures from Boston Market?

  • ||

    Seems to me the risks far outweigh the benefits.

    Lou
    www.whos-logging.se.tc

  • Ragin Cajun||

    Definitely has jumped the shark.

  • ||

    The best part is that Anon Bot has an AOL email address.

  • Becky Chandler||

    I am not going to be as presumptuous as you are in throwing around speculative figures--at the end of the day the oil companies will make a determination of whether this is something they wish to engage in.

    Actually, it will be their insurers (and the insurers of their insurers) who will make the call.

    I suspect, like Lindsay Lohan, new off shore drilling in the United States may no longer be insurable. Unless of course, the federal government bails them out—and, other than the usual greedy concerns of the plutocracy, this will be done for political purposes —Energy Independence —you betcha—drill baby drill.

    The idea of Energy Independence is as stupid in the context of drill baby drill as it in Barack Obama's dream of kick starting a Green Technology Economy.

    Not only is Energy Independence unattainable--it's undesirable. Rather than ramble on I am just going to cite an article Stossel did a while back on this: http://bit.ly/95UJLA

  • ||

    Becky Chandler: With all due respect I've been pointing out the futility of pursuing "energy independence" for like, oh, decades. For example, see my 2004 column "Energy Independence: The Ever-Receding Mirage" here. And as I note above for Matt, as speculative as they may be private entities also benefit/cost analyses.

  • Kroneborge||

    It should be noted that BP self insurers. So they will be paying the full cost themselves.

  • ||

    Stossel's opinion is just that: an opinion. He is just wrong on the proposition that energy independence, in and of itself, is bad.

    Some libertarians just do not understand that there is nothing inconsistent with the voluntary free market pursuit of energy independence, unshackled by legislative and regulatory constraints, and the peaceful, voluntary, free market exchange of goods and serivces with any person anywhere. These items are not mutually exclusive.

  • CrackerBarrel||

    Libertymike,
    I agree that there's no inconsistency of energy independence with free markets, at least in theory. If U.S. reserves of oil, gas , coal etc., were much larger than they are, it might indeed be cheaper to satisfy all of our energy needs from within: de facto energy independence. In reality, that isn't the case. In practice, I think that it's likely that there would almost always be somewhere else where the cost of energy production would be lower for at least some of a country's needs: globalization by way of practicality.

    CB.

  • PabloKoh||

    Is there a police force or court system in the US that can force BP to reimburse the victims for BP's negligence? Who decides who is a victim? Can Bubba Gump Shrimp be compensated for the increased cost of seafood? Or are "victims" limited only to those directly impacted by the oil?

  • ||

    Yes, any state court in the US can force BP to compensate those damaged by its actions the same way the court enforces any other money judgment. If they don't pay, BP's property can be seized and sold to satisfy the judgment. Whether any particular claimant is entitled to compensation can be determined by the court's application of standard principles of tort law.

  • ||

    wait its not that simple, there needs to be nexus of proximate cause for a claim to be meritorious. I doubt many people injured will be able to plead and prove proximate cause. There is also a possibility many people will be unbable to get damages because they are merely economic injuries. Tort law reimburses injuries to person and property, the inability to use a public fishery is not property. Most other injuries are neither personal or to the victim's property but to their pecuniary interest in some public resource or the general market.

  • Kent||

    It would take at least 6 months for Deepwater Horizon to discharge as much oil as the Iraqis dumped into the Persian Gulf during the first Gulf War. Using the estimate of the volume of the spill recently used by the New York Times ( http://www.nytimes.com/2010/05/04/us/04enviro.html ), it would take about 500 years. The oil was 5" deep in places in a body of water about 16% the size of the Gulf of Mexico and with a much smaller outlet to the ocean.

    A study sponsored by the UN - obviously a shill for Big Oil - determined that there was little long-term damage. I think the beaches of my native Alabama will somehow recover.

  • Nitori Kawashiro||

    A moratorium on offshore drilling: that's the way to energy independence!

  • MNG||

    "But as someone who also enjoys the conveniences of modern civilization including the on-demand mobility offered by airplanes and automobiles that enable me to visit those beaches, I understand trade-offs."

    I love how on this issue the utilitarian hating deontologist libertarians suddenly become utlitarians!

    Really. I should risk my cherished local natural resources because of TEH OVERALL GOOD TO HUMANITY FROM TEH TRADEOFF.

  • ||

    Not a deontologist libertarian. Read Hayek.

  • MNG||

    Well of course you're not a deontologist Ron. I don't think any Reason writers are. You're smart enough to know that nutty stuff won't sell much. It's so many of your regulars here that are.

    Many libertarians are libertarians because they think government intervention will cause overall human welfare to fall. That's every writer at Reason that I can think of.

    Other libertarians will tell you that libertarianism is about how some actions are just TEH WRONG apart from any effect on human welfare. That's a good chunk of the posters here Ron.

  • Drax the Destroyer||

    MSG, if you have to point a gun at someone's head for a fleeting chance to temporarily achieve your desired outcome, you have to accept that you have crossed the same line as a whole host of monsters before you that drew it in the sand.

    The utilitarian rhetoric is made to convince people from a historical, practical standpoint that evidence suggests the fallibility of a large, unwieldy, hardly accountable organization such as the government. Governments the world over have wrought death and destruction in the name of god, the king, "democracy", and "the people" for the entirety of human existence. Is it ridiculous to suggest that trusting the “right people” to do the “right thing” with incredible power is the occupation of those not only morally repugnant, but historically ignorant as well?

    Just because 21st century technology currently allows you to read the huffingtonpost while beating off to copious amounts of free pornography, it does not mean that the right “crisis” couldn’t have us clamoring for the next savior that will only bring the opposite of what he promises. Wait a second...didn't Obama promise to end those bullshit wars. Oh fuck...

  • The Libertarian Guy||

    Okay, MNG... let's give up all mobility. No more cars, no more planes.

    But you go first. We insist.

  • Marc||

    I love how on this issue the utilitarian hating deontologist libertarians suddenly become utlitarians!

    I sure didn't. And there's a big list of regular players who didn't.

    Maybe you should make that point to individual people instead of arguing with a straw collective.

  • MNG||

    Sure, my local beach is ruined, but I can take solace in the fact that overall humanity in general has benefited from oil exploration in general!

    You guys have principles that shift faster than Proteus when the big business donors of your think tanks demand it...

  • ed||

    MOUNTING FRUSTRATION IN THE GULF!

    Katie Couric: Why won't the oil come ashore?

    Brian Williams: This is ridiculous! Doesn't the oil know how many resources we have committed to this disaster?

    Diane Sawyer: Environmental photographers despair over the dearth of oil-covered sea-fowl.

  • IceTrey||

    Um, let's get this straight, the Deepwater Horizon was owned and operated by Transocean. You should correct that Ronald. BP had only hired the rig to do some drilling. The company that was working on the rig at the time of the accident doing the cementing in was Halliburton. So while everyone is bashing BP they probably had actually the least to do with the accident.

  • ||

    IceTrey: However, the lease (and therefore the well) is BP's. The lawyers for BP and Transocean will be spending a lot of time together.

  • Coeus||

    Thanks for that, I was gonna point it out. More than likely, there was only one BP employee (the company man) on the entire rig.

  • ||

    The oil was BP's (and Anadarko's and the MMS's due to royalty agreements). The oil is now all over the gulf. While its technically correct to say this might not have been the fault of BP/Anadarko/MMS, legally they are liable for all the oil now floating around the Gulf. Its up to the court system to decide if Transocean/Halliburton/Cameron may have to refund the above for mistakes their employees or equipment made.

  • IceTrey||

    Were in my post did I say anything about liability?

  • ||

    You didn't. I was just adding information on liability, regardless of fault. It probably wasn't your intention to focus on that, but I believed it would add to the discussion.

  • ||

    Once bought, always bought, Ron?
    Totally kidding. And I appreciate you responding to comments.

  • cost||

    The risk is worth taking for the nation as a whole, but not worth it for the local residents. Frequently, only the local residents get a vote on whether to drill off their shores. NIMBY may prevail regardless of the benefit to the national interest.

  • MNG||

    Wow. Should the locals be forced to allow this locally for the good of the nation?

    And it's you people that are anti-Kelo?

    WTF?

  • ||

    In answer to your question, yes this pole shift will definitely result in a poll shift. We will have a complete destruction of centralized government, central power plants, public water, etc. The Libertarian society we have all been waiting for is just around the corner; the estimated survival rate is around 10%.

    The Zeta Aliens have teamed up with the Virgin Mary; both are predicting this; the VM has had many hits lately, she predicted the Chile Quake, the Madeira Floods, etc. a few months prior.

  • MNG||

    Anybody see the article about the wind turbine that exploded leaking massive amounts of pollutionous wind into the Massachussets Bay?

    Me neither.

  • Sidd Finch||

    Anyone see the article about wind powering transportation? Me neither.

  • MNG||

    Anybody see the article about massive, sustained subsidization of alternative energy transportation (you know, the same kind of massive, sustained subsidization oil based transportation got)?

    Me neither.

  • Sidd Finch||

  • Atanarjuat||

    Anyone see the article about wind powering transportation? Me neither.

    Ever heard of sailing ships*? Kidding aside, plug-in electric cars could be powered by wind turbines. The better argument against wind replacing fossil fuels is that it's not windy enough near most existing urban areas, also wind doesn't produce well at times of peak demand.

    *Also, blimps with teams of harnessed birds.

  • Sidd Finch||

    Understood. I was just riffing on how all the know-things (trolls, media, etc.) confuse transportation energy with utility energy. Also, with good enough batteries it wouldn't matter when or where the power was originated. But at $500 for a 1 kW-h, we're not remotely close yet.

  • Atanarjuat||

    Yeah, "let's trade gasoline for wind" has popped up quite a bit lately.

  • Drax the Destroyer||

    I can't wait for the government-run hostpitals to have random blackouts due to poorly conceived wind turbine power grids. I'm assuming some bastard making a profit somewhere will be blamed. You know, because he's evil and shit.

  • Sidd Finch||

    know-nothings, obv

  • Sidd Finch||

  • Coeus||

    Apparently my googlefu is weak, as I have been unable to find an explanation why the BOP didn't close properly and why they were unable to trigger it manually with the robots. Anyone here know?

  • Gray Ghost||

    As far as I know, no one is quite sure why the BOP didn't seal off the well. Some thoughts/rumors/other ex rectum thinking that I've read on the subject include: a smaller kick 3 hours prior to the big one damaged the BOP, preventing it from fully closing; the BOP wasn't adequate for the thicker casing required for that well and depth (18,000 feet below mud, 5000 feet under water); the BOP partially closed, but high pressure and abrasive content is wearing away the ram surface; the BOP had a software lockout preventing automatic activation and the driller didn't get to manually activate it in time, etc...

    Lots of rumors, not many hard facts I've read yet. (And considering this incident is likely to be full employment for lawyers, I'm not sure how many hard facts will be making it out soon into the public eye.) Off the top of my head, I can see potential liability for the operator, TransOcean; the lease owners, BP and Anadarko; the BOP manufacturer, Cameron; the cementing service provider, Halliburton; the cement manufacturer; the loggers/core analysis people/geophysicists...tons of more people besides. People will be pointing fingers at each other, both in court and in the media, for awhile.

    The Oil Drum website has some interesting articles for lay people concerning deep water offshore operations, what could have gone wrong, and what's likely to happen next.

  • Lefty Troll||

    Oil companies are evil, and want to eat your children with fava beans and a nice chianti!

  • ||

    I don't think anyone knows why the ROV can't get it done, Coeus. My FIL - an engineer who designs valves for offshore oil rigs (this wasn't one of his) - says, if I understood him correctly, and I probably didn't, that when they tested the BOP thingy to see if it would close, they ran the tests above ground, using a lot more pressure than the ROV is working with (under?) down on the ocean floor.

    Does that make sense?

    Oh fuck it. I'm a librarian.

    I have a feeling that this is all that's being discussed at OTC, which is currently in town and seriously screwing with the traffic in my neck of the woods. It's like the rodeo +10.

  • Coeus||

    So, basically the backup hydraulic controls were never tested under the pressure in which they were supposed to operate? Or was it that they tested the primary controls (lots of power) and not the secondary manual ones (stored hydraulic power)?

  • Sidd Finch||

    As I understand it(not very well), the BOP is FUBAR probably from the 5,000 foot riser collapsing. In other words, everything that should close the BOP doesn't.

  • TP||

    How can anybody possibly begin to determine the cost/benefit while this hole is still spewing crude, and nobody has any real idea on how to shut it the fuck off? This has the possibility of getting a lot worse before it gets better.

    http://www.zerohedge.com/article/oil-spill-how-bad

  • TP||

    And don't forget, BP's loss is Procter & Gamble's gain:

    http://dawn-dish.com/en_US/home.do

    Just think about all of the jobs that are going to be created. This is really an economic Stimulus, overall.

  • ||

    This is the stupidest thing I have ever read from Reason.

    1.) The EPA models estimate environmental damages at 2.2 billion when projections for the current smaller oil spill are around 12 billion right now. Are these the same models that are used to estimate Earth's mean global temerature in 2100?

    2.) "...when a technology fails, it often does so because 'the problem is just something that never occurred to the designers.' Assuming no malfeasance, whatever went wrong with the Deepwater Horizon drill rig will likely uncover just such a problem and future designers will fix it. Progress is a trial and error process, and increasing safety results from learning how to make better trade-offs over time between risks." So, it never occured to anyone that oil might leak during a drilling event, and it never occured to anyone that this poses a real threat ($12 billion) to the company operating the drilling equipment. FAILURE TO PLAN IS A PLAN TO FAIL!

  • Drax the Destroyer||

    It never occured/mattered(which is worse!?) to NASA bureaucrats that colder than seasonal temperatures or foam traveling at high-speeds could destroy two Space Shuttles.

  • LifeStrategies||

    The top technical expert for the Shuttle manufacturer refused to sign off on the cold-weather launch since it was too cold. Political pressure was applied to keep to the schedule and the man's boss - an ignorant bureaucrat - signed off saying it was safe instead.

    Yet neither he nor the politicians responsible were ever bought to book, and the country wasted billions unnecessarily fixing what was actually a political-pressure problem...

  • ||

    I understand the author's point, but it completely leaves out the moral and social implications of endangering biological systems - animals and plant life. This article quotes many different monetary figures - I'm not so sure that people are interested in that. We complain about paying $3.00 / gallon for gas in Philadelphia, but people have no choice but to do it. This may be balanced out by foregoing other luxuries for the time being while oil prices wax and wane. My point is that we tolerate it. Substantial article if you get excited by number crunching.

  • ||

    Less than a month to go till Hurricane Season too. If they still have a slick and one of those passes through and makes landfall the tidal surge will spread that shit everywhere. I don't think people comprehend how bad this might be to the S. La. coast and marshes, you will never get the oil out of there like you can a beach. My family has oyster beds very close to the slick that have been in my family over 100 years, looks like they will be in danger of being wiped out.

    Still I know we need oil and killing offshore oil in S. La. would be the left hook to the oils right straight cross. If you live on the coast in La. you either work in fishing or oil that is all we have.

    Personally I think it is time La. starts to cut fucking states off that refuse to drill for oil yet are energy sluts of the highest order, YEAH YOU CALI! Fuck you California, you don't want to drill then fucking walk or pay $10 a gallon for OUR gas that we drill and refine right here. We shouldn't be paying more than $1 a gallon here since we are taking the chances you claim are not worth you taking yourself. If that is the case I think you need to pay more.

  • Zeb||

    What about the people in California who want drilling there? They should be punished too?

  • Smokelessjim||

    There are several factors that have not been widely addressed.

    The first is the difference between in-shore vs deep water drilling. The reason this spill cannot be contained is that it is so deep. Closer coastal shelf drilling would have allowed available technology to contain the flow without having to resort to automated deep water devices. I might add that I suspect a single coastal rig might provide much more energy with less scenic impact than the famous Cape Cod wind farm. Drill closer to the continental shelf and any accident, of which there have been probably less than a handful, could have been resolved quickly.

    Secondly, ANWR. First - no one goes there - it is a frozen hell hole in winter and a mosquito infested bog in summer. It is on land or on the near-in coastal shelf, has a proven safety record, a nearby pipeline and an extensive record of exemplary environmental protection. No fisheries or tourism is involved. So, if you do not want deep water rigs that endanger fish, shrimp, sea birds, turtles and other things (and I do not want them hurt) go the the end of the earth to drill for oil - it is safer, less environmentally dangerous and has the existing infra-structure and safety record.

    P.S. This is NOT Sarah Palin

  • ||

    When the cost of fuel gets high enough to eliminate profit business in this country will start to collapse. Further, dependence on foreign oil only benefits the brokers. We have plenty of domestic oil and time to develop new energy but suicide seems a bit extreme.

  • Antonio||

    The military needs oil, so the US will continue to drill to maintain the military industrial complex. If you want to get the US away from oil dependence (and I think that would be a great idea), you need to convince the military first.

  • ||

    They're already convinced.

    http://www.nytimes.com/2009/08.....=1&hp;

  • Liezer||

    "..a few oily birds." 5,000 barrels of oil per day gushing into the Sea of Cortez will garner much more than a few oily birds. That's BARRELS of oil, folks - not gallons!

  • Liezer||

    Let me do the math - 42 gallons per barrel, 5000 barrels per day = 210,000 gallons of oil gushing into the sea. While you are blowing smoke about the benefits the entire southern shoreline of the USA is threatened. It's way more than cost per barrel now.

  • Kevin||

    The article misses two main points:

    *in all that extensive number crunching, the cost to the region's seafood industry, tourism industry, health and employment of millions of American citizens is not even factored into the equation

    *the liberty of those affected citizens could have been preserved if a government regulation requiring an inexpensive automatic shutoff switch were required, similar to the regulations enacted in Brazil and Norway

  • Justen Robertson||

    There's an even simpler situation than getting a bunch of committees together to do cost/benefit analyses and lobbying congressmen and all that nonsense. BP should pay every penny of the cost to clean this up and restore the environment and any persons affected to their state prior to the oil leak (or as close as physically possible, in the case of families who lost breadwinners to the explosion).

    Leave the market to sort out the cost benefit. If the risk of causing damage and being obliged to repair it is too high, market actors will mitigate that risk until it is approachable or they will find other means of meeting demand.

    In any case repair the harm and there is no foul (resisting urge to make bad pun).

  • Kevin||

    But Justen, in the case you propose, a spill has to happen before the market can punish the offending corporation to the point where they make sure it doesn't happen again.

    Common sense regulations would have prevented it. We don't get another Gulf of Mexico. That the market may or may not correct BP's behavior (did it work for Exxon after Valdez?) does little to prevent or replace the Gulf of Mexico, and the ecosystem that's now severely harmed for possibly decades.

  • ||

    This whole thing was a failure of the US government, again. The MMS failed to uphold regulations, again. Sex seems to be a major distraction in our F-ed up government, The MMS were so busy screwing BP secretaries, they forgot to enforce regulations that would have prevented this mess.

  • Kevin||

    Wouldn't the answer be to strengthen and enforce regulations? How would no regulations or self-policing on BP's part solve anything?

  • DT||

    Come on, this is a libertarian site. No regulations are always the answer...

  • ||

    I have no problem with this premise of this article if BP pays the true cost of lost lives, property, and jobs of those effected. Exxon had a much smaller spill and has paid millions for years to avoid so doing!

  • ||

    Actually the total damages Exxon paid to plaintiffs was about $507 million. Which they average in profit in about 4 days. Exxon got off easy.

  • Timberati||

    Tom Ashbrook's WBUR show, "On Point" will be discussing off shore drilling Monday, May 17 at 10AM EST. We might want to call in and give an alternative view to the folks that think no US off shore drilling is the best idea.

  • ||

    So much doom and gloom and so many incorrect statements made here. While the BP blowout is unquestionably a large spill and will cause short-term environmental damage, it's not the end of the world. The Ixtoc blowout (also GoM) was much more severe ....or how about the Amoco Cadiz tanker disaster in 1978. A total of 1.6 million bbls spilled on the French Coast when the tanker broke up. Needless to say, the beaches and fisheries recovered. As pointed out elsewhere, oil is a natural product and while it may overwhelm natural clean-up processes temporarily, it will degrade quite quickly once dispersed. This is particularly true in the warm waters of the GoM. We need to balance the media sensationalism with a dose of reality.

  • me||

    boo

  • me||

    booo no way this snicks

  • me||

    it was ok thank u

  • offshore oil drilling||

    I say drill 'til the wells run dry! It sucks but we are dependent on petroleum based products, and will be until we can replace them with something else, and we all know that day won't come soon. Until then, drill away!

  • Scarpe Nike||

    is good

  • Athletic Shoes||

    very good.

  • ||

    I certainly enjoyed reading it, you can be a great author.I will be sure to bookmark your blog and may come back someday.www.itunes.com/download

  • nigahiga||

    B===========D~~~~~~~~~~~~~

  • nigahiga||

    ITS A PENIS

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