Gulf oil spill: same old arguments

Last month’s oil spill in the Gulf of Mexico has reignited the on-again, off-again public angst about our nation’s energy policy — or lack thereof. Environmentalists are using the accident as a political club against expanded drilling on public lands. Republicans are using it as yet another reason why we need to do more to subsidize energy production. It is a dispiriting debate that illustrates the profound intellectual poverty animating our public conversation about energy policy.

Politicians are right to decry the environmental damage associated with the accident and to insist that the responsible parties fully compensate those harmed by the spill. But that’s hardly controversial. Calls for regulatory measures to ensure that this never happens again, however, are something else.

First, we don’t know for sure exactly how this happened or exactly who was at fault and why. Until we do, it’s impossible to say exactly what public regulators could do to reduce risk.

Second, how much to spend to reduce risk is unclear. There are obviously diminishing returns on expenditures, and those expenditures will increase production costs and, thus, consumer prices. Nevertheless, producers have every incentive to spend whatever makes economic sense. BP has lost 19% of its market value in the stock market — a bit more than $36 billion — from the April 20 explosion until May 11, so BP shareholders are taking a big hit financially. Oil companies do themselves no economic favors by underinvesting in safety.

Third, the implicit political demand for zero environmental risk is unrealistic. As long as human beings are involved in drilling (or coal mining or petrochemical refining or nuclear power operations or oil transport or natural gas delivery), accidents will happen.

The environmentalists’ call to flatly reject expanded offshore drilling as unacceptably risky is ill-considered. The logical implication of the argument is that all offshore drilling ought to be prohibited, not just plans to expand drilling zones at the margin. The fact that few Americans are willing to shut down existing platforms suggests that, for the most part, we intuitively understand there are benefits to drilling that ought to enter into the conversation.

What are the benefits of expanded offshore drilling? If we accept the best (albeit speculative) estimates from the Interior Department’s Minerals Management Service about how much oil and gas could be produced from offshore areas currently off-limits to industry, Oxford University economist Robert Hahn finds that the value of the oil and gas we could put into the market is probably about $1.3 trillion over the productive lifetime of those fields, once we subtract production costs. Hence, the central question is whether the cumulative environmental harms from drilling are likely to exceed $1.3 trillion. If that is an unlikely proposition (the minerals service estimates that the total costs of any spills, conventional air and water pollution and lost tourist and recreational dollars would be about $700 million), then we are better off opening up those fields.

The Republican argument, however, is little better than the environmentalist argument. House Minority Leader John Boehner issued a news release May 3 arguing that the spill is but one more reason to adopt the GOP’s “all of the above” energy agenda. Exactly why an oil spill implies the need for more subsidies to oil, gas, coal and nuclear energy companies is unclear. If the argument is that energy companies will (for some unexplained reason) underinvest in energy production (the only foundation on which one can build a case for production subsidies), then why does a spill provide more evidence for that proposition? If the argument is that energy companies will invest only in what is profitable, leaving us short on energy so that we’d need to force investments through subsidies in what isn’t otherwise profitable, then that’s a curious position for Republicans to take. One doesn’t create wealth by using carrots or sticks to compel companies to make otherwise unprofitable economic decisions.

Instead of moving the debate on energy policy forward, the spill is being used to grind preexisting policy axes. Unfortunately, those axes were none too sharp to begin with, and the grinding now in play does more to confuse than to enlighten.

Jerry Taylor and Peter Van Doren are senior fellows at the Cato Institute; Van Doren is also the editor of Regulation magazine.