Course:ECON371/UBCO2010WT1/GROUP1/Article8
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Group 1
Article 8: Gulf oil spill: Offshore drilling firms threaten to go abroad
Summary
Following the golf spill, the Obama administration banned all new drilling in the country. The ban has since been lifted but there have still been very few permits approved. This has resulted in critics to "charge that a de facto moratorium remains in place. Due to this implied moratorium, companies and rig servicers are threatneing to carry their business to other countries, because of the losses they are incurring.
According to Daniel Fiorino, an environmental policy expert, the Obama administration is faced with a trade off, between short term economic growth, or the possibility of long time environmental disaster. The Government explains these moratoriums as safety precautions, and environmentalists say these safety precautions are required to maintain a safe environment.
Despite its positive impact on the environment, this ban on drilling will put a lot of oil industry workers in danger of losing their jobs. Accroding to critics, the administration's reluctance to involve the oil industry in its permitting deliberations is caused by political ambivalence on the part of the president and his advisers. One critic mentions that the administration excluded Louisiana, Mississippi, Alabama, and Florida a long time ago politically, beause they dont think they will win those states in the 2012 election.
According to Joshua Busby, a public policy professor, before the spill, the Obama administration had political reasons to expand deep water drilling, those political dynamics have since fallen apart due to the spill, leaving the white house with nothing to gain from appeasing the oil industry.
Analysis of Article
After the Gulf of Mexico spill, more people are concern about oil spills, as well as their impact on the environment. The center of the article is the dilemma between short term profits VS increasing risk of long-term environmental pollution. One thing that environmentalist are concerned about is that the next generation should be at least as well off as we are now; therefore, president Obama should tighten regulations without exception. The solution of this dilemma will be an important political precedent for any environmental policies.
The article suggests the Obama administrative are indifferent between the two choices they are presented with: to start drilling, or stall until it is absolutely necessary. Seeing that USA is the largest oil consumption country in the world, eventually, the well will run dry, pardon the pun. More wells will need to be created, or alternative energy solutions examined. However, it would seem that the current situation is that the Obama administrative wishes to stall the drilling processes until some political or economic gain can be achieved to cover the cost of the damages done, and potential future damages. Since BPs oil spill in April, it is suspected the White House plan for economic expansion was lost and the USA faces a huge environmental cost. Thus, the Obama administration does not wish to face another disaster which will damage the country and cause many additional environmental disputes.
It is understandable why the Obama administration cannot decide whether to excavate the oil well now or later since both will generate losses in different areas. If they stall the process, the majority of the economic loss will be in the short run. If allowed prior to the creation of the proper assurances in the forms of regulations, et cetera, there is a potential for another catastrophic oil spill. Even if the possibility of another oil spill is low, the Obama administrative will still have to convince the environmentalists and state governments.
From the public’s perspective, the approvals for many offshore drilling ventures before BPs incident, is somewhat of a black box. The approvals are unknown or even arbitrary, which raises many liability questions towards the federal government. And according to the critics, the profit might not be the only motivation. It is suspected that are also possible motivations in the way of for economic expansion, but this suspicion lacks evidence to support it.
Looking it at from an economic perspective, the stall of wells being drilled will cause many deadweight losses and even unemployment if the stall remains. By decreasing the supply of oil both globally and domestically, it will shift the supply curve left and its new equilibrium will be at a higher price. The effect will likely be larger in the US as well. Thus the consumers will lose some surplus and it will create what is similar to a deadweight loss, in the sense that the true equilibrium for the country is unattainable due to a disputed government policy. The potential shift in oil production to other countries could have a legitimate impact on the US GDP as well, depending on where the larger oil companies decide to base their companies out of, and spend their capital.
If the Obama administration opens up the allowance of new wells, the initial dispute will be with the environmentalists and possibly the majority of the Southeastern state governments. In the short run, the economy will remain generally stable; however as it enters the long run, the environmental damage may become noticeable. The abatement cost will likely be paid by the producer, but it is also possible to involve the people of USA.
However, the continuation of the stall is inefficient because no profits are being made and more costs are being added in having these debates. As well, there is definite potential for a transfer of resources resulting in a shift of the world's oil production, with a smaller percentage being produced by the US. But again, it is also argued that to reach an efficient point to satisfy the political and economical view takes time to achieve, which is another dilemma.
Conclusions
The Obama administration is faced with the decision to either allow off-shore drilling right away or protect the environment. The public opinion since the recent event of the BP oil spill has allowed the population to become more concerned with decreasing environmental damage. The decision to become more protective when it comes to the environment is an important decision for the government and the general population. Although there may be a decrease in economic activity within the oil sector the long term benefits for the environment will hopefully outweigh the economical loss.
Prof's Comments
I'd describe the administration's dilemma, absent politics, as comparing the present value of benefits against the present expected value of losses for two situations. With delay, the PV of benefits is lower. However, the expected costs are probably lower as well, if better regulations are developed. Which is best? The other element is the distribution of those impacts, which is what the political battle is about.