White Paper on Deepwater


Executive Summary

This research paper explores the inadequacies of the U.S. government’s regulations on the oil industry. Catastrophes such as the Deepwater Horizon oil spill have been clear indicators that reform is necessary due to the inability of oil companies to focus on the best interest of society rather than their shareholders. For years the U.S. government has allowed oil companies to regulate themselves due to the speed of technological development in oil drilling techniques. The government simply could not keep up with the safety standards of these technologies; it expected the oil companies to maintain adequate contingency plans. Due to the nature of free business, companies such as BP cut corners on safety standards to avoid costs and increase company value for shareholders. By putting a higher value on stock price than the trust that society has placed in them, BP has proven that the oil industry cannot operate in an unregulated market.

Oil companies operate in a market with limited regulation because the economic consequences of reducing necessary expenditure are favorable for the company and constituents. In the southern states, especially those bordering the gulf, a large number of people are employed in the offshore oil industry. The negative effect of accidental disasters which occur due to limited safety regulations costs society and the planet much more than the oil is worth. In this modern era, the U.S. government needs to unite to promote renewable energy and put an end to fossil fuel disasters around the globe. The negative consequences of oil drilling greatly outweigh the positive benefits; therefore oil should be considered an outdated resource for use as a last resort. The BP spill exemplifies the inadequacies of public policy regulating the oil industry, the consequences of this spill for Gulf inhabitants is outlined, additional examples are stated, and the benefit of renewable energy is verified. The recommendation in this paper should be acted upon immediately.

Dan Enriquez

 

Table of Contents:

Executive Summary…                                                                                              pg. 1

Table of Contents…                                                                                                 pg. 2

Introduction…                                                                                                           pg. 3

The Deepwater Disaster…                                                                                      pg. 3

Consequences: The Weight of Good and Bad…                                                  pg. 5

Big Oil: Beneficial to Society…                                                                   pg. 6

Big Oil: Societal Beneficiary…                                                                    pg. 7

Inadequacies of Policy…                                                                                         pg. 9

Subsidies…                                                                                                    pg. 9

Worker Safety…                                                                                           pg. 10

Environmental Degradation…                                                                    pg. 11

Recommendation…                                                                                                 pg. 12

Help America Catch Up…                                                                            pg. 13

Reduce Prevalence of Environmental Catastrophes…                         pg. 14

Save Money on Regulations…                                                                   pg. 15

Conclusion…                                                                                                             pg. 15

 

 

 

Address to the Speaker of the House of Representatives, John Boehner,

Introduction

Oil plays a massive role in U.S. economics, but the industry has been given too much influence on politics leading to disastrous consequences such as the Deepwater Horizon oil spill in the Gulf of Mexico. By giving the industry influence on regulation, oil companies have been able to cut costs by reducing safety measures leading to both environment and global catastrophes.[1] Currently, oil companies largely regulate themselves, especially in their international operations, to promote free competition.[2] The societal consequences of this hands-off, laissez-faire economic policy are not positive in the long run and should therefore be altered, the oil industry needs to be regulated, not subsidized. Due to a lack of self-sufficient regulation on the part of oil companies themselves, global environmental and economic catastrophes, and a need for sustainable development, congress should end oil subsidies and instead use the money to promote and inforce industry regulations as well as investment in renewable resources.

 

The DeepWater DiSaster

Drilling for oil in very deep water is a recent innovation that has altered the energy industry over the last 25 years. The president’s report states that “Drilling for oil has always been hard, dirty, dangerous work combining heavy machinery and volatile hydrocarbons extracted at high pressure.”[3] As oil becomes an increasingly rare resource, the value of deposits at extreme depths increases for companies with the capability to extract it. Depth is a major factor in engineering an underwater well, and increasingly companies have moved to deeper waters to maintain production. The move to deeper water has driven innovation in the oil industry over the last 25 years, but government regulating policy failed to keep up with the new technologies.

When the Deepwater Horizon offshore oil drilling platform came to the Maconda well in the Gulf of Mexico, it replaced the drilling rig that was intended for the well, the Marianas. Due to the nature of this particular well, the concrete casing to prevent outside material from entering the pump area failed when the Deepwater Horizon attempted to close it. This caused mud mixed with oil to project upwards through the rig into the air, catching fire in the process and killing 11 crewmembers.3 It continued to spew oil into the gulf of Mexico for 3 days at a rate of 35,000 to 60,000 barrels per day before a plan was advised to close it (there was no preconcieved plan created for a well of this sort).[4] The oil that entered the gulf affected wildlife and small businesses in multiple states and countries. Oil was collected and disintegrated using dissolving agents[5] and claims were settled at any one of 24 offices that BP opened along the gulf coast.[6]

 

Although BP is a British company, they have a corporate headquarters for their North American Division located in Texas. At this location, they manage most of their operations in the Gulf including both drilling and extracting4 which provides over 10% of BP’s total profits.3 It is the role of the government to regulate this business to prevent accidents such as this one, but the influence of economic prosperity often reduces the strictness of these guidelines. For example, regulators employed by government bodies in more environmentally interested states such as California have far fewer rigs to inspect per regulator. In the Gulf of Mexico, however, closer to more economically interested states that wish to limit the power of the government, there is only a single regulator to inspect a huge amount of rigs per year.1 This is allowed to occur because the economic level of states that border the Gulf is much lower than states such as California. Therefore, to increase jobs, increase tax revenue, and decrease the price of energy, legislation that favors deregulation is prevalent. When the disaster occurred that regulating legislation was meant to block, many people realized where BP’s true interests lie, in the shareholders, rather than their customers.

 

Consequences: The Weight of good and Bad

In plain consequentialism, the morally correct action has the best overall consequences for society based on multiple aspects of morality. Moral actions can be gauged on three possible outcomes, the spread of happiness and relief of suffering, the creation of as much freedom as possible for everyone, and the promotion of survival for our species. Interestingly however, “Consequentialism does not itself say what kinds of consequences are good. Hence people can agree on consequentialism while disagreeing about what kind of outcome is good or bad.”[7] This creates a conflict of interest because while an oil company’s corporate managers make decisions that focus on positive outcomes for the company and their shareholders, the outcome for their consumers and the planet can be greatly negative. To fairly judge the corporate ethics, these two values must be weighed against each other to prove that unregulated oil drilling does not produce positive societal consequences.

 

Big Oil: Beneficial to Society

Over time humans have developed different means of creating energy, from wood, to coal, to oil, to nuclear, all in the interest of producing the largest output with limited input. Oil has become humanity’s main source of energy (fig. 1) especially for transportation. Oil companies control the key to human development because the product is consumed at the highest rates in developed countries.  Oil companies operate internationally and represent American business ethics in countries of interest. Alessandro Roncaglia noted in the Journal of Post Keynesian Economics, “The crude oil market is, by its very nature, an international market because of the concentration of oil reserves (especially low-cost ones) in a few areas of the world, above all the Middle East, whereas consumption is connected to the degree of economic development of the different countries.”[8] By operating in foreign countries and transporting the planets nonrenewable energy resources back to consumers in developed countries, oil companies have had an extremely positive progressive influence on society.

The oil extraction industry is also employs nearly 200,000 people in the United States alone (fig. 2), operating internationally, the industry provides living means for families worldwide. The industry as a whole supports 9.2 million jobs and adds more than $1 trillion/year to the economy. BP specifically expects that the next 15 years will require an investment of $25-30 trillion to increase exploration and drilling for limited reserves.[9] The CEO of BP, Tony Hayward has been quoted that the business will require an investment of “more than $1 trillion/year for the next 20 years.” to meet the “explosion in demand for energy” worldwide.[10] American oil companies that operate in foreign countries bring wealth to our nation and facilitate development, there is no doubt oil plays a significant role in American success.

Big Oil: Societal Beneficiary

To assess the negative consequences of unlimited oil exploration and development with limited regulation, this paper cites the aftermath and negative consequences of the Deepwater Horizon oil spill. The repercussions of this spill effected not only marine wildlife, but also thousands of people who survived on the fragile gulf ecosystem.11 All of the occurrences and lack of action associated with the accident was due to an inadequate public policy regulating oil extraction.

Reports on the spill offered recommendations for legislation to restore the gulf as well as compensate those affected. A very minimal amount of these recommendations have passed as legislation even today. In the Gulf Coast Restoration Report, the committee urges the president to enact a significant amount of civil penalties on BP which should use funds to restore the ecosystem, the establishment of a gulf coast recovery council, a portion of the clean water act civil penalties goes towards the gulf states, and the remaining penalty funds should go into the Oil Spill Liability Trust.[11] Unfortunately, however, the only acts that were actually passed involved compensation for small businesses and alterations to requirements for maritime accident compensation.7,[12] Since 2010 BP has paid more than $11 billion to compensate for damages with up to $30 billion still to be collected, and over $1.5 billion in fines, with almost $14 billion still to be collected from the Clean Water Act.[13]

                       

This spill caused the controversy between deregulation to promote economic progress and the protection of the environment to explode for modern environmentalists; with more than 30,000 people flocking to the Gulf Coast to assist with cleanup efforts.8 The spill effected 14 species protected by U.S. law as well as 39 other species which are considered threatened. [14] While immediate law would normally affect the cleanup methods to protect the underwater habitat, a lack of contingency plans approved by the EPA had potentially disastrous consequences. “The EPA would force BP to stop using using the dispersants if they were shown to be creating a hazardous situation – for example, depressing oxygen concentrations enough to harm life”[15] This lack of knowledge regarding accident cleanup and well closing exemplified the lack of regulation for American society and showed the negative consequences of an economic policy focused on eliminating boundaries for oil production.

 

 

Inadequacies of Policy

The current public policy regarding oil exploration by U.S. companies is inadequate for the rate oil is consumed and the limited knowledge of geological formations deep underwater.3 In addition to the safety concerns for workers involved in deep water exploration[16], government subsidies are actually given to oil companies to encourage economic growth.[17] This occurs regardless of the effect that major accidents can have on citizens that rely on ecosystems affected by extraction efforts. For future generations of Americans that are not currently benefiting from jobs that oil companies provide, America appears to be trapped in a cycle of fossil fuel consumption leading to environmental degradation.

Subsidies

The U.S. government gives subsidies to many different industries within the country to maintain a competitive edge in the international economic landscape. The American oil industry receives subsidies to reduce the cost of living for low income Americans through heating expenses, but this is on the sales end. The industry also receives subsidies to increase the speed of technological development for extraction techniques and reduced prices for government land. These subsidies have been increasing in the past years (fig. 3), a policy that does not have good consequences for America’s next generation.

Oil companies receive up to $18 billion in value from the federal government because they are capable of “pouring millions of dollars into Congress every year to protect their subsidies and push for weak safety and environmental regulations.”17 It will soon become apparent to the American public that “for every $1 that fossil fuel companies spent on lobbying and campaign finance contributions to congress, it got over $100 back in subsidies.”17 This is a blatant disregard for American societal interest, giving taxpayer money to promote an already-successful business.

Worker Safety

A major effect of the Deepwater Horizon Spill was a crushing blow to small businesses that existed on the natural resources provided by the gulf outside of oil including 27,000 people employed in Louisiana’s fishing industry.[18] What many of the residents of these states soon realized, however, was that BP is responsible to shareholders rather than the people and the environment in which they operate. After the spill BP’s stock price plummeted due to the barrage of lawsuits. About 90% of these suits were made by local businesses which BP settled quickly for an amount between $2,500 and $5,000. This reduced the negative view of BP in the short run, but these payments were not required to be fulfilled for 90 days, during which BP legally attempted to shift the blame to the companies Transocean and Halliburton and therefore avoid the actual costs occurred.18 Clearly, society has an effect on how BP acts, but this accident made BP’s loyalty to shareholder profits abundantly clear.[19]

Accidents such as the Macondo blowout stress the importance of proper safety training and protocol for unexpected events that could put workers in danger. These safety regulations must comply with the standards in the “Safety and Environmental Management Systems” plan for “identifying, addressing, and managing operational safety hazards and impacts, with the goal of promoting human safety and environmental protection.”16

Environmental Degradation

The effects of the Deepwater Horizon blowout were not limited to the surface; for three days a massive plume of oil jettisoned through more than a mile of water, suffocating underwater life.3 Oil spills have a massive, widespread environmental effect and occur in ecosystems worldwide, creating messes that are particularly devastating and difficult to reconcile. 5 In the Deepwater Horizon Oil Spill, fauna that are extremely important to the ecosystem and exist sedentarily on the seafloor were suffocated by the undersea dispersal.[20] If nature continues to be the externality for economic development through oil, there will be little left for future generations.

While the surface effects of the spill are readily apparent and have been dealt with before in previous incidents such as the Exxon Valdez oil spill, the underwater effect of an oil blowout was certainly not fully appreciated. According to an article on the underwater effect of the blowout:

“The DWH blowout actually presents two incidents: the familiar buoyant oil spill with surface effects of short residence times, and the novel deepwater plume with chronic subsurface effects that suppress population recovery of exposed animals. In addition, there were likely mid-water impacts to plankton and a variety of mid-water species. Oil in the deepwater plume was transported to deepwater sediments via multiple pathways, e.g., direct sinking of oil…  Potential ecosystem service losses are of concern because these fauna serve vital functional roles in the deep-sea ecosystem including biomass production, sediment bioturbation and stabilization, organic matter decomposition and nutrient regeneration, and secondary production and energy flow to higher trophic levels… Given deep-sea conditions, it is possible that recovery of deep-sea soft-bottom habitat and the associated communities in the vicinity of the DWH blowout will take decades or longer.”20

Environmental problems associated with oil drilling are a key concern for America’s future. While oil extraction may be a necessity for the operation of American society, oil companies should not be receiving subsidies if they are not being held to an environmental standard in line with America’s global leadership position.

Recommendation

In the interest of American society and future generations of citizens, all of whom are constituents of representatives in congress; funds subsidizing fossil fuel energy should be diverted to renewable energy resources. This will increase sustainable job growth, help America catch up to comparable countries, reduce the prevalence of environmental catastrophes, and save the government as well as taxpayers money on regulating an outdated technology. There is no reason that the oil companies that operate and sell gasoline in the U.S. should be given tax breaks when they already are reaching record profits. (fig. 4)

U.S. Federal and State governments gave $21.6 billion in subsidies for production and exploration in 2013. This was the return on investment of $329 million that oil, gas, and coal companies spent on campaign finance contributions and lobbying expenditures.17 In return for the taxpayer money, these oil companies have degraded both our air and our water, wasting resources that are in limited supply. To remedy this consistent problem, these subsidies should be diverted to industries that promote renewable energy because they will be market leaders in the future. In particular, solar energy has been one of the fastest growing job markets in the United States as well as the rest of the developed world. The U.S. is lacking, however, compared to other developed countries, meaning that an investment or subsidization of this industry has potential for massive economic growth. (fig. 5)

Help America Catch Up

Unfortunately, due to U.S. dependence on oil for both energy and economics, we have fallen behind the rest of the developed world in the conversion to renewable energy. While the U.S. has been leading the country in R&D expenditure on renewable energy (44% of world contribution), we have failed to implement renewable energy into our electrical grid on a relatively comparable level.[21] This is due to the influence that oil companies have on American economic investment. If oil companies were truly interested in the future and being a sustainable supplier of electricity, they would focus expenditure on reducing climate change, however, American CO2 emissions actually rose by 2% in 2013.17

                        America is a global leader in technology, economics, and military, yet our current path is destructive and not in sync with many other developed countries. Oil has a negative impact on the environment in all stages, yet it continues to be subsidized. In the interest of the American people, stricter regulations should be placed on oil extraction. In an article describing subsidies, it is noted that “The lack of proper regulations to eliminate [the cost of] these impacts allows fossil fuel producers to pass on these costs to the taxpayers and general public”17 The taxpayers, nor the general public, should bear the costs of oil extraction. Subsidies need to be diverted to renewable energy to help the Unites States catch up to other developed countries.

Reduce the Prevalence of Environmental Catastrophes

The Mineral Management Service (MMS) is the sole regulating body for the underwater extraction of oil, which has requirements for containment and recovery plans for subsea wells, but not deepwater wells.3 Since the Exxon Valdez oil spill, private industry was expected to take the lead on R&D for spill cleanup, but spending waned quickly in the 90’s.5 The current regulation system in the U.S. requires oil extraction companies to regulate themselves so that the U.S. government does not need to expend funds to keep up with the rapid development of technology. Spills such as the two mentioned above were expected to promote an alteration in public policy, but to date, few laws have changed.13 In an article on fossil fuel subsidies, it is stated that “it is clear that the potential damage is growing as oil production continues to rise and oil spills due to drilling rig, pipeline, tanker, and train accidents are becoming commonplace – a survey of 12 states with comprehensive available data found that the number of oil spills at well sites increased by 17 percent in just two years from 2010 to 2012”17 If regulations do not become tighter, these catastrophes will continue to occur.

The oil industry can be allowed to regulate its own technological development, but tighter laws need to be placed on environmental disasters caused by accidents so that all possible precautions are considered. Companies with so much wealth spend large amounts of money to assess associated risk with business operations and strategy. If the fines and costs associated with oil spills made the risk an overall negative decision for oil companies, they would put much greater care into contingency plans and cleanup R&D. Even if these costs are passed onto the consumer, it will only promote a reduction in oil usage and climate change.

Save Money on Regulation

By reducing American dependence on oil and simply increasing the costs associated with environmental accidents relating to oil, the U.S. government will save taxpayers a huge amount of money on maintaining up-to-date regulations. As the country moves to renewable energy, these safety regulations will become less costly to enforce. In a world free from fossil fuel extraction, regulations to protect the environment from people who wish to profit on the worlds resources will be unnecessary. Stricter regulations and fines currently will lead to reduced expenditure and necessity in the future.

Conclusion

The societal consequences of continued reliance on oil extraction as a means for economic development and energy are, overall, negative. Therefore, public policy and subsidies should be shifted away from the oil extraction industry and instead diverted towards the promotion of renewable energy. Current expenditure on oil subsidies surpasses $20 billion, taxpayer money that should be used to promote positive societal consequences. Oil spills such as the Deepwater Horizon blowout exemplify the urgent need for regulation reform and reduced oil dependence to protect Earth’s natural resources and ecosystems. Damages caused today will take generations to remedy, public policy needs to be shifted immediately to promote a commitment to renewable resources and help America maintain its position as a global leader.

[1] Hearing 112-1 Final Report of the Presidents National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling U.S.G.P.O. 2011 (1-86)

[2] Frankel, Paul Essentials of Petroleum”Frank Cass, London 2012

[3] Bob Graham et al. Deepwater: The Gulf Oil Disaster and the Future of Offshore Drilling U.S.G.P.O. 2011 (1-380)

[4] Hearing 111-137 The Role of BP in the Deepwater Horizon Explosion and Oil Spill “Committee on Energy and Commerce” U.S.G.P.O. 2010 (1-254)

[5] Staff (7) Response/Clean-up Technology Research and Development and the BP Deepwater Horizon Oil Spill “National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling” U.S.G.P.O. 2010 (1-28)

[6] Hearing 111-1152 Impact of the Deepwater Horizon Oil Spill on Small Business U.S.G.P.O. 2010 (1-34)

[7] Haines, W. (2014). Consequentialism. Internet Encyclopedia of Philosophy, 17.

[8] Roncaglia, Alessandro Energy and Market Power: An Alternative Approach to the Economics of Oil “Journal of Post Keynesian Economics” Vol. 25, No. 4 pg. 641-659, 2003

[9] Snow, Nick White House Overlooking Oil Industry’s Job-Creation Potential “Oil and Gas Journal” 2009

[10] BP PLC Chief Executive Officer Tony Hayward

[11] Mabus, Ray America’s Gulf Coast: A Long Term Recovery Plan after the Deepwater Horizon Oil Spill U. S. G. P. O. 2010 (1-330)

[12] Rockefellar, John Deepwater Horizon Survival Fairness Act  U. S. G. P. O. 2012 (1-8)

[13] BP, Investigation and Legal Proceedings www.bp.com March, 2014

[14] Campagna, Claudio et al. Gulf of Mexico Oil Blowout Increases Risks to Globally Threatened Species “Bioscience” Oxford University Press 2011 (393-397)

[15] Schrope, Mark A Scientist at the Centre of the Spill “Nature” Nature Publishing Group, London 2010 (680-684)

[16] Littler, Tony Looming SEMS Rules Will Require New Strategies “Offshore” 2011

[17] Makhijani, Shakuntala Cashing in on All of the Above: U.S. Fossil Fuel Production Subsidies Under Obama “OilChange International” 2014

[18] Hearing 111-1152 Impact of the Deepwater Horizon Oil Spill on Small Business U.S.G.P.O. 2010 (1-34)

[19] Staff Commission (17) Natural Resource Damage Assessment: Evolution, Current Practice, and Preliminary Findings Related to the Deepwater Horizon Oil Spill, U.S.G.P.O. 2011 (1-14)

 

[20] Montagna, Paul Deep-Sea Benthic Footprint of the Deepwater Horizon Blowout “PLOS” 8(8) 2013

[21] Gan, Jianbang Drivers for Renewable Energy: A comparison among OECD Countries “Elsevier: Biomass and Bioenergy” (2011) pg. 4497-4503

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