Course:ECON371/UBCO20010WT1/GROUP3/Article1
Summary:
In response to the Gulf of Mexico oil spill over the summer, Obama’s administration issued a six-month moratorium on all deepwater-drilling for oil. Recently, BP issued a statement saying that there will be a ‘phased restart’ to offshore oil and gas operations.
This phased restart will occur because certain oil rigs will be better prepared to handle a variety of new regulations that will, theoretically, prevent the occurrence of another oil spill.
There has been much criticism of the drilling moratorium for causing severe damage to the region’s economy as many rigs, when the moratorium was established, simply moved to foreign waters. Although some of them may choose to come back, others may decide they like drilling in waters off the coast of the more loosely regulated Latin American countries. This is highlighted by the fact that the United States’ oil spill commission is currently discussing mandating the latest oil-spill response capabilities on all rigs and additional expenditures.
Analysis:
Public Ownership Obviously, the water in the ocean in which the drilling is taking place is a public good. Millions of people along the coasts of North America utilize this resource. The task of cleaning up this resource when crises arise is a source of conflict. In the case of the Gulf of Mexico oil spill, the blame was placed squarely on the shoulders of BP. However, there are a number of social costs that can be difficult to calculate and, therefore, difficult to find somebody who is willing to pay for them.
Social Costs of Oil Spills -Externalities
The effect on tourism in the region was vast. Despite the minimal amount of oil that reached the shores, many people cancelled their trips, wanting to avoid the risk of having an idyllic vacation on the Florida coast ruined by sticky, oily beaches. Some analysts even estimate the cost to tourism reaching billions of dollars. The damage caused to coral reefs, seafood habitats, and tourism activities such as surfing and sport fishing will likely last for multiple years. These costs are externalities because they are a result of the actions of BP’s oil spill, but the company will not be covering the cost, or be held directly accountable for this loss of revenue. In a geographic area where tourism is a vital economic lifeline, this oil spill will negatively affect a lot of people. (Source)
Because of these externalities, BP will be producing at a point that is below the level of social efficiency (the point where their Marginal Private Costs will equal their Marginal Revenue or the price).
Government Policy
Clearly, the government policy towards offshore oil drilling is not at a socially efficient equilibrium (the point where marginal social benefit will equal marginal social cost). While there are considerable social costs (potentially) avoided in preventing another oil spill, the social benefits of producing and selling oil within our own continent cannot be ignored. It is the government’s goal to maximize net social benefit, and this is not being achieved when there is a moratorium on offshore oil drilling. Oil is a resource which is primarily imported from the Middle East or other remote parts of the globe (relative to North America). Thus, there is a considerable social cost in transporting it to North America. By utilizing the large offshore oil deposits, we can avoid these social costs.
Furthermore, if the government chooses to implement a tax, or force the oil companies to contribute to a trust fund, the marginal costs of these companies will increase. This will make the quantity of oil produced fall (as illustrated in the graph to the right) and could even force some firms out of business.
Prof's Comments
You have identified some externalities. The policy impact of taxes or contributions to a trust fund will drive up costs. You are right to point out that there are large benefits from using the oil, ranging from security of supply through to simply the value of the oil in use relative to the costs and risks of getting it.