Monday, July 19, 2010

Thoughts on the Gulf Oil Spill

I've talked before about the gulf oil disaster when answering a reader's question about boycotting BP. However, I decided to hold off on my full evaluation until the leak had been stopped (hopefully) and the situation could be measured. Let me first say I underestimated how big a deal the issue would be. When I first heard about it I filed it under "overblown scary news" category and moved on. Here we are 3 months and 2.5 million gallons of oil a day later and it has become the worst man made oil spill in American history. Like anything newsworthy, the disaster in the Gulf is not always correctly considered. So here are 4 things to consider: Perspective, Incentives, Accidents, and Options.

Perspective: There has been somewhere between 93-184 million gallons leaked from the Deepwater Horizon oil spill. As breathtaking as that number is, the US pumps 2 billion (that's 2,000 million) barrels of oil off the coast per year. Though the costs of offshore drilling are now seen as enormous, they are only a small percentage of the benefits. This is a strong argument against Obama's struggle to put a moratorium on offshore drilling.

The other important fact to recognize is that oil naturally seeps into the ocean, although never in such large amounts at one time. The amount of the spill is less than the the amount naturally leaked all year. This does not mean the crisis isn't real, but it does mean zero contamination is not the goal.

Not only does oil naturally seep into the ocean, it also spills in other ways. Shipping oil from nation to nation ends in 4 times the amount leaked from drilling. Also, runoff from car and boats results in over 12 times more ocean oil than leaks in extraction. These numbers are different after such a large spill, but it's worth noting just how rare drilling spill like this are and what impact ending US drilling could have.

Incentives: The primary problem is not corporate or regulatory, but property. Everybody owns the ocean, so nobody owns the ocean. For this reason markets cannot be fully functional. The solution to this is messy and can't be fleshed by me and certainly not in one post. The good news is that there are some markets. For example BP has already been punished. Like I linked in June, it has lost 1/3 of it's value in the stock market, which is probably a farily good assessment of how much the crisis will cost them. It's a good reminder that we certainly don't want small businesses running oil drilling. We don't want companies without deep pockets causing big problems.

Accidents:  Sometimes incidents like this are just calculated accidents. No matter how much you want to blame someone, it may just be a risk we were willing to take. That is probably not the case here, because it seems obvious that BP did not correctly assess the cost and benefits of leaks and cleanup. The reason why is probably some combination of bad corporation and government incentives. This accident idea is shown nicely in this satirical Onion video entitled: Truck Accident That Killed Rafters in Canyon Sparks Truck-Canyon-Rafter Reform Debate

Options: More regulation from Congress won't solve the problem because the original laws weren't being enforced. Also, most oil in the world isn't produced by companies but by nations. For those two reasons, "green energy" isn't the solution. Solar, wind, etc are years from profitability and it's well known that biofuels are largely a disaster. Not only are the crop subsidies destructive to market allocation, they are extremely destructive of natural resources. The growing of sugar cane and corn encourages farmers to cut down valuable forests. It also adds to the Gulf's "dead zones" created by fertilizers washing into the ocean.

Oil, comparatively, has been one of the most important products in human history. It helped with deforestation when it replaced wood as the primary energy source. Despite oil's bad press this century, it was one of the most important resources two centuries ago. Fossil fuels powered the industrial revolution that brought humanity out of continual poverty. Though not as safe to produce as nuclear (earlier post), it is safer than coal. Speaking of nuclear power, my biggest fear is that the spill will become my generation's Three Mile Island resulting in heavy regulation that harms workers and consumers for decades.

Outrage like this can lead to bad ideas like the dispersant that has mostly been effective in getting the problem out of sight, while actually hindering real cleanup efforts. The solution is not easy and it is not complete. No matter what we do there will still be millions of oil in the water for a very long time. What I'd like to see is the US government enforce the legal obligations BP and it's affiliates have. Paying for the cleanup, lost wages, and other legal obligations. Then, and this is easier said then done, I want a simplification of the oil regulatory system. One less reliant on hard working and honest regulators. Although the public anger over the spill is appropriate, I'd like to see if harnessed correctly.


  1. Excellent analysis! Is the PIAO structure your own, or is it taught as part of disciplined thinking in Econ?

  2. It was just the organization the links I'd been harnessing over the last month. That's kind of become my method for thinking about big topics. Collate data, organize it, post about it.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.