Offshore drilling


Despite talk of a moratorium, the Interior Department’s Minerals and Management Service is still granting waivers from environmental review for oil drilling in the Gulf of Mexico, including wells in very deep water. Until last month, most of us never thought about the risk that one of those huge offshore rigs would explode in flames and then sink, causing oil to gush out uncontrollably and befoul the oceans. The odds seemed low, and still do: Aren’t there lots of drilling rigs in use, year after year? Twenty years ago, your elected representatives thought that you’d be happy to have them adopt a very low cap on industry’s liability for oil spill damages.

Nuclear power was never quite free of fears; it was too clearly a spin-off of nuclear weapons to ignore the risk of a very big bang. Yet as its advocates point out, we have had hundreds of reactor-years of experience, with only a few accidents. (And someday when Nevada’s politicians aren’t looking, maybe we can slip all of our nuclear waste into a cave in the desert.) Again, the risks are so low that you’d be happy to learn about a law limiting industry’s liability for accidents, wouldn’t you?

Environmentalists have long warned that the world could run out of energy and resources, from the “limits to growth” theories of the 1970s to the more recently popular notion of “peak oil.” The response from economists has been that prices for energy and raw materials are still moderate, and declined over the course of the 20th century; if we are running out of something, why doesn’t its price skyrocket?

The problem is that what we’re running out of is low-risk conventional energy supplies. Because our economy conceals and socializes energy risks, prices remain deceptively low for an increasingly risky energy supply. (more…)

Why would the Obama administration allow new drilling in U.S. coastal areas, and what will it mean for greenhouse gas reductions? My colleague Frank Ackerman has a posting on the TripleCrisis blog today on off-shore drilling, peak oil, and how they relate to a carbon tax:

Solving our energy problems, without a change in direction, will lead to increasingly costly and environmentally destructive production – either deep offshore, or deep in the rocks below existing communities and watersheds. We need a tax (or a fee resulting from an allowance system) on energy, to keep the cost to consumers high enough to encourage conservation, while holding the price for producers low enough to discourage the pursuit of the worst fossil fuel deposits.

This is another way in which the distributional consequences of carbon permit giveaways (i.e., who gets the revenue – see Alejandro Reuss’ Public Goods posting from earlier this week) differ from those of permit auctions. A cap and trade system will increase the price of oil exploration only if businesses have to pay for their permits; if permits are given to the largest polluters for free, there will be no incentive to limit fossil fuel extraction from areas where underground reserves are not very rich and the environmental consequences of extraction are enormous.