Thursday, May 27, 2010

Oil and water eventually do mix

Lost in the Gulf: Perspective, By Ron Ross

Every drop of sea water all over the world contains decomposed oil, along with trace amounts of almost all other elements.

An inevitable casualty of an event such as the Gulf of Mexico oil spill is perspective. There are at least three prime examples of this -- emphasizing costs of something while ignoring the benefits, focusing on the short-run and ignoring the long-run, and forgetting that everything is relative. . .

The reaction and reporting of the Gulf oil spill is a sad example of perhaps the simplest but most common error of economic thinking. Politicians and media are focusing almost exclusively on only one side of the ledger -- the costs, while ignoring the equally important consideration of benefits.

Drilling in the Gulf has been going on for over 70 years. There are currently over 700 rigs in operation. This is only the second significant spill during that entire period. The oil rigs have even weathered numerous hurricanes. The Gulf of Mexico provides over one fourth of U.S. domestic oil production. Gulf oil production is currently over 1.3 million barrels a day and natural gas production is over 6 billion cubic feet a day. Gulf oil and gas production contributes over $100 million of benefit to the U.S. economy daily.

Everyone wishes the spill had not happened. Nevertheless, what will be the extent of the long-term, irreversible damage done by the spill? The largest oil spill in history occurred in the Persian Gulf during the first Gulf war, compliments of Saddam Hussein. The spill dumped approximately 8 million barrels of oil into the Gulf. Nevertheless, a UNESCO-sponsored study found only one year later that fisheries showed "few unequivocal oil pollution effects attributable solely to the 1991 oil spills." . .

It is no accident that accidents have been so rare. A spill is the last thing any oil company wants to see occur. The companies involved have strong incentives to prevent such disasters. They don't want to see their considerable investments lost or have to pay for the cleanup, and they definitely do not want to see lives lost. . . The rarity of blowouts demonstrates that the incentives work extremely effectively. The economic incentives are far more powerful and ever-present than regulations can ever be.

In the real world it is impossible to have a perfect track record. Real life necessitates choosing among imperfect alternatives. What if the probability is one major spill every fifty years? Should we cancel all future offshore exploration and recovery? We've had 70 years of highly beneficial production and only two significant spills. Much will be learned from the current spill which will reduce the probability of future spills.

The media has focused on the damage the spill has imposed on the fishing industry. They have not pointed out that the economic value of the oil and gas are over 50 times greater than the value of fish taken from the Gulf. How much of your own income is spent on gasoline and natural gas compared to what you spend on seafood? . .

For virtually the entire 70 year period of drilling in the Gulf, oil rigs and fishermen have coexisted with very few problems. The periods of time during which there have been problems are a tiny fraction of that time span. Should we make choices based on the long-run or the short-run?

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