The Risks of Producing Energy

Gary Wolfram
 
Issue CCXLVIII - May 22, 2010
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The massive oil spill resulting from an explosion and fire at the Deepwater Horizon drilling rig in the Gulf of Mexico has once again made it clear that the production of energy is a risky business.  Eleven workers were killed, and a costly environmental cleanup is under way.  In April, 25 miners died in a West Virginia coal mine accident.  Similar accidents in the energy sector have cost the lives of workers in other countries.

Although these accidents were unfortunate and costly, there is no reason to halt energy production.  The energy resources we use create such wealth in our society that we are able to live much healthier and safer lives than those in many undeveloped countries who live without adequate heat and electricity.

Nonetheless, safety measures must be taken to ensure that accidents are held to a bare minimum.  Companies should be held accountable for all of the costs that result from disasters like the Deepwater Horizon explosion.  Requiring firms to pay for environmental restoration and for the economic damage they have caused is essential.

Oil-spill clean-up is costly, and recent history shows it has succeeded in reducing the number of offshore drilling accidents.  The Coast Guard reports that average annual oil spillage declined from 2.5 million gallons between 1980 and 1984 to 12,000 gallons between 2000 and 2004.

What’s more, most of the oil in U.S. waters has come from sources other than offshore production rigs.  According to the National Research Council, offshore drilling accounts for 1% of the oil, oil tankers and pipelines are responsible for 4%, but 33% comes from other shipping and 62% from natural seepage through the ocean floor.

Make no mistake about it, we need to continue drilling for oil. Petroleum accounts for more than one-third of the energy we consume.  And drilling rigs in the Gulf of Mexico account for a sizeable amount of domestic production.   This is not likely to change in the foreseeable future.  Our transportation sector is powered by gasoline, diesel and other oil products.  Although there is a push for biofuels, they come with their own set of problems, and currently supply only a small fraction of the energy we use.
Given the potential environmental damage from the oil spill, it won’t be surprising if some members of Congress mount an effort to restrict drilling.  But that could be counter-productive.  Instead, drilling should be allowed with attendant safeguards.

There is an estimated 41 billion barrels of undiscovered oil that be recovered, of which about 25% lies  in deepwater areas. An additional 18 billion barrels is in coastal waters off the Atlantic and Pacific coasts, with much oil in offshore areas near Alaska.  So unless we’re willing to reduce our standard of living significantly or increase our reliance on imported oil, we will need to continue drilling off  our coasts.

All economic activity entails some risk.  For example, 34,000 Americans are killed annually on our nation’s roads.  This is a major cause of death, and yet we accept this as the cost of mobility and transportation.  Another case in point:  without oil to power tractors and other farm machinery, our food supply would be much smaller and less safe with an attendant decrease in our life expectancy. So the prudent thing to do is to compare the risk with the benefit.

Right now there is a risk of an overreaction to the loss of life and the environmental costs from the Gulf disaster.  But that would have unintended consequences that are more costly than the losses incurred by the oil spill, however large.  While we should not minimize the environmental threat to wetlands that protect the Gulf shores, history has shown that oil spills do not normally lead to lasting environmental damage.

Hastily passed legislation could wind up damaging the U.S. oil industry in ways that harm the economy and affect our standard of living over the long term.  And that’s something we need to take into account.

This originally appeared in The Detroit Free Press on May 18, 2010.

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