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Sunday, September 26, 2010

The Market Failure of Offshore Drilling (a.k.a. the BP Oil Spill)

On April 20, 2010, “destructive explosions and fire at BP…led to the tragic death of eleven workers and caused numerous additional injuries. The Deepwater Horizon rig sank less than tow days later…leaving the well gushing at the sea floor.” Estimates say it may be gushing up to 1.5 million gallons per day (gpd), and worst case scenario could increase to 2.5 million gpd. This leak has contributed to 170 miles of shoreline being contaminated with oil, as well as “the loss of fisheries, impact on marine wildlife, impact on local economies, and reduction in tourism.” It was found by ABC News investigating federal records regarding the oil industry that in the past there have been “chronic safety violations [and] inconsequential fines that often took years to collect,” and even records of incidents causing deaths of workers in which the fines were never paid. (From “National Environmental Health Association Position on Offshore Oil Drilling.”)

In a quote from President Barack Obama, he explains the desire of the government to have laws in place and enforced to prevent as well as respond to disasters such as this. Offshore oil drilling in the Gulf of Mexico accounts for about 30% of our oil production in the United States, which is important for our future energy usage. However, it is not efficient to continue this type of drilling if disasters such as this will result (Baker).

The white house press secretary explained that the company that caused the disaster (BP), and neither taxpayers nor the federal government, is responsible under current law for recovery and cleanup (Baker). However, as he listed the agencies involved in ensuring that BP follows through with their obligations, it hardly seems that there is no cost to outside parties, including taxpayers and the federal government. Some agencies he listed included the Environmental Protection Agency, Coast Guard, Minerals Management Service, Small Business Administration, and the National Oceanic and Atmospheric Administration (Baker). These agencies being responsible for overseeing BP’s actions draws them away from other work they could be doing, an opportunity cost itself. It is also likely that some of the agencies involved are at least partially funded by taxpayers or the federal government. The federal government and the president have also used their own time or resources to inform the public as well as regulate the disaster and assign tasks to these agencies after the oil spill. It seems unlikely that BP would even be able to fund the cleanup responsibilities, as they are required to. There are also unpaid volunteers that will participate in the cleanup process, who are using their volunteer time that could be used in other places.

This situation clearly imposes costs to our society and the environment from offshore oil drilling in the Gulf of Mexico, which is not included in the price of oil. In an earlier oil spill in Alaska’s Prince William Sound, previously “the worst spill in US history,” Exxon Valdez spilled less oil than the BP oil spill has. The effects of that spill are still seen there, as “two bird species show little or no recovery from the oil spill while others are still recovering, [and] human resources linked to the Sound are also in differing states of recovery from the decades old spill” (NEHA). If effects of a smaller spill are still seen this many years later, it is likely that many effects of the recent BP oil spill are not known yet, and will persist long into the future. A recent survey of Americans showed that a majority believe that the damage caused by the BP oil spill was worse than they thought it would be, and that they disapprove of the way BP has handled the oil spill (“Americans Divided”).

The temporary halt on U.S. offshore drilling following the spill also created a cost to our society, with the opportunity cost of alternative sources of oil. The fact that we drill offshore for oil implies that this is the least cost method of attaining that amount of oil. When the drilling was halted, we were forced to find alternate sources of this amount of oil for our consumption needs, which likely did not change significantly. These other sources are likely more costly to our society than the offshore drilling was, causing us to pay a higher price than we normally would have for that amount of oil. The increased demand for oil from other sources also may have created temporary inflation in the price of oil from those sources, unless they anticipated the increase in demand because of the oil spill and increased their supply correspondingly.

The costs to BP for having to pay for the “recovery and cleanup,” as well as any and all cleanup costs incurred by others, and the damage to the environment, are all additional costs in the production oil. These costs should be included in the price of oil to ensure BP or any other oil company that causes an oil spill or damage to the environment would be able to cover the costs associated with cleaning up those disasters. These costs become negative externalities, because they create a cost to society in the form of pollution and pollution repair that was not covered by the producer or purchaser of oil. Even if there are people that do not use oil, they are also forced to live with these externalities that have been created by this disaster.


Americans Divided About Future Gulf Drilling; Nearly even split found on lifting the drilling moratorium and on BP's future in the area.” (2010). Gallup Poll News Service.

Baker, P. (2010). “Obama Gives a Bipartisan Commission Six Months to Revise Drilling Rules.The New York Times, A16(L).

“National Environmental Health Association (NEHA) Position on Offshore Oil Drilling.” (2010) Journal of Environmental Health, 73(2), 5&40.

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