Course:ECON371/UBCO2011WT1/GROUP2/Article 8 : Revival of the Gulf?
Article
Summary
Currently the gulf coast is under major restoration efforts after the large oil spill causing catastrophic damage to the surrounding ecosystems. This includes the destruction of the largest wetland habitat in the United States. These wetlands are an incredibly important ecosystem, being the habitat of many species, including 70% of wintering ducks in North America. These wetlands also contribute to a third of the fishing industry and is an integral part of the entire US economy. Due to the oil spill much of the gulf wetlands have already been completely destroyed with many chain islands no longer existent. Not only are these chain islands valuable ecosystems they also serve as protection to the mainland for storms leaving large parts of the gulf more vulnerable to hurricanes and flooding. This problem is made worse by man made techniques to avoid flooding from hurricanes such as levies which change the flow of the water leading the islands to be washed away in the excessive water flows. Part of the now underwater land used to be crop land further harming the regions economy.
"Bird Deaths and Injuries—Collected Live: 2,079 • Dead: 6,104"
"Marine Mammal Deaths and Injuries—Collected Live: 9 • Dead: 100"
"Sea Turtle Deaths and Injuries—Collected Live: 535 • Dead: 609"
Analysis
The oil spill in the gulf is an example of an episodic form of pollution. Before the oil company would have started up in the area they would have done a cost benefit analysis using the expected values of their venture. The company would have analyzed the risk of an oil spill and the cost of such an event if it should happen. This would then be contrasted with the amount of income that could be received if no spill occurs factored by the probability of no event. This value would be the expected payoff for the company. When BP was making this decision they must have placed the risk of the spill at a low enough value for this to have been a fair venture, however now they must face this large negative externality and the backlash on their company for several years to come.
(Potential earnings)*(1-probability of spill) (probability of a spill)*(cost of spill)
To find the value of the costs of an oil spill the company would have to take in the many negative externalities it would have. First of all the large environmental factors would need to be measured. The impacts on wildlife would be difficult to measure however because of the large fishing industry in the area there would be an effective way to monetize the lives of the fish counting the economical loss from the destruction of the local fishing area. The other organisms in the area that do not have a significant role in the economy are more difficult to measure and would need to be determined through contingent valuation. A company would most likely do a willingness to pay analysis opposed to a willingness to accept analysis because it is normally a significantly lower value which would support completing the project. There is also a large recreation value of several areas in the gulf and a spill would reduce the tourism, causing more economic loss. This loss could be measured directly by the amount people spend to travel and enjoy the areas that could potentially be destroyed by a spill. There is also the simple value of the oil spilled and the equipment damaged which is quite simple to compute.
A difficulty in analysing the environmental spill is the uncertainty of the spread and distribution of the oil and where it will eventually end up. Weather patterns at the times could have substantially different effects resulting in different areas being damaged or more or less damage. The speed reaction to a spill can also greatly differ the overall costs with more spread occurring potentially very rapidly. The speed of clean up would depend on the location of the spill, the availability of workers and the surrounding conditions.
There is a problem with this theory due to the way corporations are structured. Large companies such as this have designed themselves to avoid large liabilities such as this and if such catastrophic events occur they can move their funds to shareholders and declare bankruptcy. This lack of liability can enable companies to take larger risks and only have their reputation to be concerned with. It also leaves large costs that should be that of the companies to have no one to pay them. These types of structures and loopholes make the Pareto optimality realistically unattainable.
Furthermore damage will occur for many years after the initial episodic pollution spill. Due to the furture damage an appropriate discount rate will be required to find the actual present value of the damage. A discount rate is very difficult to determine and an incorrect selection can have very drastic effects, for example if a very high discount rate is chosen the damage will be close to nothing and therefore the analysis will most likely be favorable; however if a discount rate close to zero is chosen the project will have high costs and should not be completed.
Conclusion
Due to the many negative externalities and high risk oil drilling is a controversial subject but due to the large potential profit it continues and spills will inevitably happen. To prevent future spills and decrease the damage money could be put into the research and development of methods to reduce the risk of spills, the speed and efficiency of spill clean-up, and the spills general negative effects. As long as there is a demand for oil and such a large profit margin drilling and spills will continue and damages will continue unless society does something to prevent these damages and even despite these negative externalities it is socially efficient to continue drilling because the benefits exceed the costs.
Profs Comments
The risk of bankruptcy is there. However, it seems the US government went after BP, rather than the company that operated the rig. So, that escape was not there.
9/10