EconoMonitor

The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region

Up until recently, the Louisiana economy was certainly hurt by the nationwide recession, but not debilitated like other states. The reason was that the Louisiana economy was largely built upon energy and domestic tourism, two sectors that have remained robust through the financial crisis and the Great recession. Of course, that all came to an end with the BP oil spill.

Louisiana’s economic problems, however, have not stemmed from the spill, itself. While the fishing industry was certainly hurt by the spill, the second, and potentially bigger, blow came from the Obama Administration’s May 30th, 2010, moratorium on offshore deepwater drilling in its efforts to respond to the spill.

By halting offshore drilling, even for as little as six months, the moratorium has already depressed onshore state and local economies dependent on oil production.

In response to the Administration’s policy, a federal judge in New Orleans blocked enforcement of the moratorium, writing that “[t]he blanket moratorium, with no parameters, seems to assume that because one rig failed, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger,”[1][1] justifying the taking of economic value from private sector jobs and firms. 

Despite those concerns, the Obama administration issued a new moratorium on July 12, 2010 – which in fact expands on the original moratorium to include all floating facilities.[2][2]

Still, while the rhetoric continues to escalate, there has been no consideration by the Administration of the economic implications of the policy.

In the study released yesterday, I estimate the totaleconomic harm associated with the White House moratorium on deepwater drilling.[3][3] Iuse data from theU.S. Department of the Interior, Department of Energy, Census Bureau, and the TreasuryDepartment to estimate the totaldecrease in output,employment, wages, and public revenues to the Gulf States and the nation as a whole.

Unlike other studies, I only estimate the effects of the simple six-month moratorium, assuming (unrealistically) that projects restart and investment returns immediately to the Gulf upon the expiration of the moratorium in November. The purpose of such a conservative approach is not to be realistic – it will most likely take much longer for the industry to recover. Rather, the purpose is to set a baseline estimate of the costs of the policy, avoiding the more confusing debate about the aftereffects.

Even by my conservative estimates, the numbers are large. The six-month moratorium on offshore oil and natural gas drilling alone can be reasonably expected to result in the loss of approximately $2.1 billion in output, 8,169 jobs, over $487 million in wages, and nearly $98 million in forfeited state tax revenues in the Gulf region alone.

Additionally, although a significant portion of oil and natural gas production is localized in the Gulf, the U.S. is a fully integrated economy, so the losses can reasonably be expected to “spill-over” into other states. As a result of this spillover effect, there could be an additional loss of $0.6 billion in output, 3,877 jobs, and $219 million in potential wages nationwide. Moreover, the Federal government stands to lose $219 million in tax revenue.

mason_july_20_2010_image_1_512.jpg 

Note: Production is assumed to be stopped for 6 months. Losses are expected to accrue over 12 months following the start of the moratorium, on May 30th, 2010.   

Moreover, when you take into account the localized concentration of the losses, they become even more dramatic.

It is important to keep the Administration’s response in the context of the history of offshore energy policy. As recently as March 31, 2010, President Obama proposed the opening of new stretches of water along the Atlantic, Gulf of Mexico, and Alaskan coasts to oil and gas drilling.[1][4] That move marked a new era of progressive policy that matched technological and safety improvements over the previous three decades. But less than a month after President Obama unveiled his proposal, the debate was renewed by the explosion on the Deepwater Horizon oil rig 40 miles off the coast of Louisiana on April 20, 2010, Earth Day.

The escalating rhetoric makes it unlikely that current energy policy will stop at the current temporary moratorium. Repeating the analysis with the assumption that all Gulf drilling and production activity is halted can therefore be a useful exercise by providing an idea of the total amount of output, employment, wages, and tax revenue at stake.

Figure 1: OCS Planning Areas and Estimated Resources

According to the U.S. Department of the Interior Office of Offshore Energy & Minerals Management (“MMS”).[2][5], the average monthly OCS offshore production of oil and natural gas in the GOM from January 2001 through November 2009 was over 42 million barrels of oil and 295 million Mcf (Thousand Cubic Feet) of natural gas. According to another recent MMS report, 80 percent of GOM oil production and 45 percent of natural gas production comes from deepwater operations, and is therefore affected by the moratorium.[3][6] Thus the total annual production at risk from the moratorium is around 410 million barrels of oil and 1.6 billion Mcf of natural gas.

The effect of a production moratorium on offshore oil and natural gas production will result in the loss of approximately $73 billion in output, 285 thousand jobs, over $16 billion in wages, and nearly $3 billion in forfeited state tax revenues in the Gulf States alone.

Again, although a significant portion of oil and natural gas production is localized in the Gulf, again, the U.S. is a fully integrated economy, so the losses can reasonably be expected to “spill-over” into other states. As a result of this spillover effect, there could be a total loss of nearly $100 billion in U.S. output, 415 thousand jobs, and $24 billion in potential wages nationwide, while the Federal government stands to lose $8 billion in tax revenue.

mason_july_20_2010_image_2.jpg

Note: Losses are expected to accrue over 12 months following the end of production.

In closing, the present analysis is only meant to be a starting point for discussing the economic effects of myriad Administration policies that fail time and again, to take into account the reality of not only temporary economic adjustment costs, but also the permanent losses resulting from massive changes to the U.S. business environment.

Although there is likely to be a debate on the parameters and estimates put forth in my analysis, the point remains that economic costs need to be considered and investigated when evaluating public policies, including the drilling moratorium.

Failing to weigh the costs of a policy decision against the potential benefits can cause more damage than the original safety concern itself.

__________________________________

† Hermann Moyse, Jr./Louisiana Bankers Association Professor of Finance, Louisiana State University, and Senior Fellow at the Wharton School. Contact information: joseph.r.mason@gmail.com; (202) 683-8909 office. Copyright Joseph R. Mason, 2010. All rights reserved. Past commentaries and testimony are blogged on http://www.rgemonitor.com/financemarkets-monitor/bio/626/joseph_mason.

[1]. Laurel Brubaker Calkins & Margret Cronin Fisk, Deepwater Drilling Ban Lifted by New Orleans Federal Judge, Bloomberg, Jun 23, 2010 [hereinafter Deepwater Ban Lifted by Judge] (available at http://www.bloomberg.com/news/2010-06-22/u-s-deepwater-oil-drilling-ban-lifted-today-by-new-orleans-federal-judge.html).

[2]. Press Release, U.S. Department of the Interior, Interior Issues New Suspensions to Guide Safe Pause on Deepwater Drilling (Jul. 12, 2010).

[3]. My analysis considers the moratorium to be in effect since May 30, 2010, the date of the first moratorium. I do not consider the expanded scope of the new moratorium, which includes all floating facilities. Thus, my results in this respect may be conservative.

[4]. John M. Broder, Obama to Open Offshore Areas to Oil Drilling for First Time, The New York Times, March 30, 2010 (available at http://www.nytimes.com/2010/03/31/science/earth/31energy.html).

[5]. U.S. Department of the Interior, Offshore Energy & Minerals Management OCS Oil and Gas Production (Jan. 22, 2010), (available at http://www.mms.gov/stats/OCSproduction.htm)

[6]. Id.

Full study available at:

http://www.saveusenergyjobs.com/wp-content/uploads/2010/07/The_Economic_Cost_of_a_Moratorium_on_Offshort%20_Oil_and_Gas_Exploration_to_the_Gulf_Region.pdf 


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