Course:ECON371/UBCO2010WT1/GROUP1/Article2
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Group 1
Article 2: Gulf of Mexico Oil Spill (2010)
Summary
The article itself is a summary of the various reports released prior to and after the oil spill. It includes the actions taken by the government and the BP company, the review of the blowout valve, and the unknown environmental impact that is yet to occur. The BP oil spill is also now the largest accidental oil spill ever. Its impact was first felt on land and Louisiana, impacting tourism, coastal communities, fishermen and the general environment. On September 19th, the government finally declared the oil well dead, after nearly five million barrels of oil had gushed from it.
The release of a confidential survey of the workers on the Deepwater Horizon rig, allowed an insight into the BP Company and its operation of the oil rig. The survey revealed multiple areas of concern regarding the lack of regard for safety procedures. Measures in place for the prevention of such blowouts typically require inspection every 3-5 years, though the Deepwater Horizon rig's had not been inspected since 2000. Further inquisition from Congress revealed reports regarding damage to the well that gave cause to concern about BP's practices. Blame for the blowout, and the issues surrounding the ability to cap it efficiently is still being shifted from party to party; including BP, the contractors, and the company commissioned to seal the well, especially Transocean and Halliburton. Blame will still continue to shift until further reports are aired in a courtroom setting.
The government's response to the incident was slow, plagued by a lack of "preparation, organization, urgency, and clear lines of authority" among all levels of government, and BP itself. Eventually, the White House announced a ban on offshore drilling, both new and current, until a proper investigation into the current safety regulations and offshore wells was conducted. Despite this, the Interior Department continued to issue permits and waivers for drilling projects, which as a result led to mass critics saying that the ban was "being interpreted too narrowly".
President Obama's speech to the Oval Office used the event as a platform to suggest sweeping change in energy policy, and appointed a long-term recovery coordinator. He also demanded BP acknowledge it's fiscal responsibility in regards to the event. As a result of the government intervention, BP agreed to allocate $20 billion dollars towards an account that will compensate victims of the incident. Payments of dividends to shareholders was also put on halt for the year 2010. However, BP announced that they would not be allowed to afford said payments, should they not be allowed to continue to offshore drill in the future. Also, Obama’s plan to expand offshore drilling came to a stop. The Mineral Management Service was then split into two sectors; one to inspect oil rigs and enforce safety and the other to oversee leases for drilling and collection of royalties.
The process of closing the leak, lasted longer than expected with more than a few attempts. The discourse between the government and BP was in regards to the use of dispersants, chemical sprayed on the oil spill, allowing the oil molecules to break up and sink to the bottom of the Ocean. The environmental impact from this action, and the general spread of the oil spill is still unknown and requires more studies. Various attempts to cap the leak included; dropping a 40-foot steel containment chamber above the area, drilling fluids into the leak and finally using robots to shut off valves near the leak was the solution.
Scientists still claim to be cautiously optimistic about the overall impact of the oil spill, in comparison to what it could have been in a worst-case scenario.
As the claims and settlement process has started, it has left many people wondering about the process and restrictions of action. Individuals compensated have a choice of taking the settlement prior to fully understanding the official impact or not accepting the settlement and taking the company to court.
Analysis of Article
The graph to the right only shows this specific oil drilling facility while ignoring other oil drilling done by BP, which shows an increase in price and decrease in quantity of oil extracted. Numbers are not mentioned at all, because as the article mentions the external cost of the damage done to the environment is ambiguous. The graph is merely a model that illustrates the impact in this sector of the economy, which is an increase in actual social cost, while the quantity of oil extracted is reduced.
Below are graphs used to illustrate an example for countries affected by the oil spill. They represent the effect it as a vertical marginal abatement cost curve as a result of the oil spills external quality relative to these outside countries. The vertical line on the first graph also represents the oil spill as an inelastic curve because the price of fixing the leakage, and subsequent damage cannot be calculated. Thus each country's spending on emission reduction is increased because the amount of emission reduced will never exceed the inelastic external cost of emission. This can also be represented as it is in the second graph. The slope is shifted upward along the price axis because the oil spill is a considered a sunk cost. The second also shows that the marginal damage can no longer intercept with the marginal abatement cost, because it is likely that the damage can not be fully reversed. Although this graph only shows a temporary situation, it shows the relative cost to other countries.
Impact on Energy Policy
There is a huge impact on the energy policy in the United States, not only policy changes, but enforcing new regulations, measurements and re-structuring related organizations. The splitting of the Minerals Management Service agency into two parts, one to inspect oil rigs and to enforce safety, and the other to oversee leases for drilling and collect royalties, will increase the enforceability of policies and regulations. As the two main steps in enforcement is monitoring and sanctioning, the two divisions of the agency can specialize in one area more effectively. In addition, the Gulf of Mexico increases international awareness of environmental regulation.
Conclusions
As the individual impacts on markets such as tourism, fishing and shipping, etc. were addressed in the Article 1 analysis, they have been left out of this discussion.
The long term environmental effects is still unknown and will only gradually become more evident in the future. The social and economic cost of the oil spill has increased, with no visible benefit in regards to the lost oil, and environmental degradation. There may be some benefits in the way of improved environmental policy, but these are not likely to outweigh the costs of the oil spill.
While environmental policies are being enforced to prevent further pollution, many moral questions are being raised by the public. According to the workers on Deepwater Horizon the explosion could have been avoided, but the company's priority was to keep costs at a minimum, at the expense of safety. The damage caused by the spill do not only pose monetary costs (in the realm of billions of dollars) but also unpredictale damage to the environment. This increase in third party costs will lead to an overall increase in social cost. From a layman's perspective, adding a little amount to cost to prevent an explosion of the nature of the spill would have been not only efficient but entirely worth the while. Clearly the BP was drawn to risk and as such were willing to make the gamble.
Prof's Comments
The economics of spills are a little different from what we have been talking about so far. A big issue is the fact that a spill is a one-of catastrophic event, not ongoing pollution. Thus, we are dealing with expected damage, not ongoing damage. It is best to think of this in terms of liability, so that the firm chooses a level of precaution, not a level of emissions. The higher the precaution, the higher the cost, but the lower the expected cost from a lawsuit.
Daniel's Reply
I don't know if you'll read this or not, but anyway: I appreciate what you're saying, and I agree in regards to most oil spills, however I also think, that given the size of this spill (again, the largest in history) that is poses an effect of an unprecedented magnitude. The cleanup efforts will last probably 15-20 years, and we'll be able to see the impact on the ocean floor, and shorelines in places for 50+ years. At what point do we start viewing it as more of an ongoing damage? I see it as similar to suddenly realizing that due to accumulation, our SO2 levels are way higher than they should be, (paralleled to our large quantity of oil) and having to suddenly stop production of anything with SO2 as a byproduct, and dealing with the subsequent damage caused by the dramatically high SO2 levels...
To clarify, I agree with you about liability - but we just learned about that today :P ; we're working with what we've got