Oil and Off Shore Drilling - Research Paper Example

?Oil and Off Shore Drilling While exploring natural resources is at times expected to be a blessing to the economy it might actually turn out to be an environmental and social evil. This is essentially the case with oil. While economics is all about using limited resources to meet unlimited wants, crude oil and petroleum have proved to be crucial to the global economy over the decades. An observant glance around us shall prove why petroleum may be referred as ‘liquid gold’. Modern life may turn completely dysfunctional without the petroleum and crude oil products. Oil serves as the lifeblood of transport, and industries and even assumes a place of strategic importance, as its crisis can be almost fatal during warfare. While drilling of oil is deemed necessary for compensating the deficiency of oil and to reduce its ever-increasing price, the large scale environmental effects of offshore oil drilling cannot be overlooked. According to the law of environmental science mass is always constant and therefore the amount of materials human beings release into the environment must go somewhere and in the course renders its due effect on nature. Hence during oil spills a large area around the rig is affected destroying the habitat both of water and land. The BP and the Exxon Valdez oil spill cases are remarkable in this context and the arctic zone is extremely vulnerable (BP oil spill: Italy drilling ban hits UK-listed explorer, 2011; Fontova, 2008). Although offshore drilling was temporarily banned after the BP incident, the constant demand for oil and petroleum and its high price of $110 per barrel have prompted US to relax regulations and favor offshore drilling. Moreover the economic goals of meeting deficiency and reducing prices are not met by increase in offshore drilling. Despite all expectations from tapping new oil resources, it may be argued that offshore drilling cannot solve the economic concerns of oil deficiency and price hikes apart from being an evil to the environmental conservation. Literature review: The world has been witnessing rapid increases in crude oil prices over the past few years. A report by Evans (2011) shows that while price of $100 per barrel really is painful, a $120 price is the threshold where the consumers and business houses might alter their behaviors. Hence the team participants of the Organization of Petroleum Exporting Countries have been deeming it conducive to boost the production of oil in order to control price rise. The author explains that when the supply increases in order to ensure future availability and reduction in cost, this further creates a boost in demand and hence the normal cases of price fall under increased supply does not take place. However while talking about oil price and the need to reduce the same, one needs to consider the global oil politics and the economy, which will be at stake. For instance, the oil exporting nations reap a major part of their revenues from oil. The sudden rise in oil prices made the oil dependant nations cautious about the supply strains and countries like United States put large-scale efforts to expand foreign reserves for future use. When the demand for oil fell suddenly in 2009, prices began to fall and this led to major problems with respect to decreasing government expenditures and welfare activities in the oil exporting nations. The reserves of “easy oil” were already exhausted and extraction of “tough oil” requires large-scale investment in drilling and exploration, which the companies were not ready to make considering the falling demand. Therefore as the remaining reserves were getting depleted there was an impending rise in oil price, as demand would surge after recovery of the economy (Klare 2009). This shows the dangers involved in attempts to lowering of prices. Brian K. Mignone, director of research on Energy Security Initiative, has projected a similar explanation in his article ‘Offshore Drilling Will Not Significantly Lower Energy Prices’. Mignone (2008) observes that offshore drilling will not lower the price hikes significantly and argues that the only possible outlet to this problem is development of alternative energy resources. The Senate is also bound to face pressure to allow the bans on drilling of oil to expire. However the common argument regarding the price decline does not hold because “neither the size nor anticipated rate of new domestic production will be sufficient to alter the price of oil on the global market by more than a few cents”. However there are some apparent benefits accruing to the activity of drilling which leads to a transfer of oil revenues from the international to domestic suppliers. In a survey carried out by Robert W. Hahn and Peter Passell shows that a comparatively small extent of contribution from the areas which are presently restricted could lead to $1.85 trillion in the from of domestic revenues while the cost to the environment could accrue to $400 million. Hence the drilling activities might be economically viable though the net benefits might not be perceived by most of the people. Mignone also justifies the futility of new offshore drilling by saying that the effect of the contribution of increase in supply is too insignificant on the overall oil price. A policy favoring drilling is not likely to protect the customers from price shocks because the share oil to be consumed in the economy would not come down. Hence there is little chance of such a policy to reduce the transfer of wealth to oil exporting countries because the contribution of US will be insignificant compared to wealth transfer across the world and this will not help in controlling the climate change around the world (Leonard, 2008). Mignone emphasizes on investment in new technology and substitute the oil used in transport and other industries such investments in alternatives in order to move towards a clean energy and sustainable future. Such displacement of oil from its applications in several areas can be the suitable option of reducing price of oil. When one talks of clean energy it is all about conservation of environment and prevention of disasters caused to the Mother Nature owing to anthropocentric activities. An article, ‘Oil Spills and Leaks Cause Environmental Disasters’ published by Greenpeace discusses how oil has caused large-scale harm to the environment in more than one-way. For instance, oil leaks from the pipelines, oil over pour from the ships during transportation and produces pollution in the urban areas apart from increasing the earth’s temperature. This causes great harm to the marine ecosystem, which is already under challenges. Activities like regular ship and car maintenance, offshore drilling operations and spills from ships. The damage caused by oil spill to the environment differs according to the type of the spill, place and other aspects like temperature, wind and the climate. The recent spills have been devastating as oil can have a suffocating effect on aquatic life and it damages the fur and feathers of mammals and birds. Fish absorb the oil through their gills and people in the affected regions face respiratory problems owing to the toxic fumes. Oil spills does not lead to killing but leads to long lasting negative effects, which might even erase generations of a species. It enters the food chain and affects the predators such as human beings who consume the fish having almost fatal levels of oil in their bodies (Greenpeace, 2006). Several mechanical removal processes are carried out as soon as oil touches the shore but frequent cleaning techniques might render even more harm. Booms are often used to restrict the spread of the oil from the already polluted regions and then skimmers are applied to such the oil out and pump it inside a tank. The cases of Exxon Valdez, Cadiz, the Argo Merchant can be mentioned in this context. The escape of royalty payments and the provision granted by the American government for some foreign companies to forgo royalties while drilling from the Gulf of Mexico region have also raised concern about being against the interests of the public (Slocum 2008). This allows them to enjoy leases without due payment and benefit form the public lands. This might therefore affect the general public. Fontova (2008) points out that the real risk lies in transportation while oil production is relatively ‘clean’. A study by scientists shows that urban sewage dump exceeds by 12 times that of petroleum into the Gulf region and the natural seeping of oil towards the ocean floor lead to more damage than oil spilled from the rigs and the pipelines in a certain period of time. As observed by McCormick (2009) oil spills might affect the tourism and fishing industries. The article of Greenpeace ends with the note in favor of renewable energy sources, which can help, in conserving the environment apart from reducing the price rise as also opined by Mignone. Discussions The above review of literatures bring out the common solution which is either implied or clearly suggested by the authors like Mignone and Greenpeace – development and investments in alternative sources of energy. Coming first to the intention of price reduction one may need to consider what the fall in prices might keep in store for the sustainability of the future in terms of fuel requirements. I agree with the viewpoint of Klare that efforts to bring about a reduction in oil price will bring down the incentives for the oil companies to invest in supply related activities which will henceforth put the supply side under constraint if there is a surge in demand in future. It is important for an economy to be prepared for a shock experience. The importance of offshore drilling lies in the fact that it will keep the firms well prepared to face the demand situations of the future. Another analysis by Evans shows it is not necessary that a rise in supply will reduce prices because the demand side will also improve shortly especially in case of this particular commodity, oil. Thus market forces will adjust to set an equilibrium price in the short run and this will be higher than the preceding price. This demand supply interaction can be demonstrated as follows. Price of oil/barrel Quantity of oil In the above diagram, original supply (S) and demand (D) interaction sets the price at P. However an attempt to increase the level of supplies through offshore drilling activities will lead to a temporary fall in price but in the short run demand will be destined to increase and therefore the demand curve shifts to D’ giving a new equilibrium price P’’ which is higher than P’ (the price reached when supply shift occurs). Thus the excess supply is compensated by the surge in demand. One may say that the classical theory of Say’s Law where supply creates its own demand applies here and as investments are made towards increase in oil supplies, there is an impending rise in demand in the market (Sowell, 1972). The above demand-supply framework operates under the assumption of ceteris paribus rule where other factors are constant in the framework. Offshore drilling activity is one of these other factors, which has caused the supply curve to shift to the right. Again on the demand side consumer’s preferences and expectations about the future have prompted them to invest more in oil seeing the reduction in price. However the drilling activities cannot actually reduce prices for long, the lack of drilling activities holds in store a high chance of sudden rise in prices for the recent future. The same case happened in 2008 and after the sudden fall in 2009, the prices rose again in 2010 and 2011 as evidenced by Evans. Again in near future the supply will dwindle as demand increases and hence the price will increase further oil deficiency will arise once again unless further drilling continues. While the authors’ viewpoint clearly shows that the demand supply interactions will not allow prices to remain low or the problem of demand shortfall to get resolved for long, it might be clearly understood that some kind of substitution might help in bringing down the price of oil. In a market of substitutes (say X and Y), the price of one product will depend on that of other. If price of X rises then consumers will be likely to shift towards consumption of Y provided there is enough supply of the same (Wessels, 2006). Therefore the answer to the problem of oil price rise and supply constraints lie in investments of alternate energy resources and bio-fuels such as Jatropha and corn which are relatively easily available (Abbassi, & Abbassi, 2010). However in order to urge the consumers towards use of products which have displaced oil with bio-fuel it is important to make its production cost effective and hence affordable by the buyers. For instance the cost of hybrid cars are more than normal petrol driven cars but it reduces the maintenance cost as well. It is important to analyze the cost benefit frame for the production of alternative energies. The most upcoming issue in this context is the environmental degradation caused by oil spills during offshore drilling activities. Although experts and authors like Fontova have pointed out that other anthropocentric activities and natural occurrences lead to more oil spills than offshore drilling, this can be no justification for the drilling activities to continue exploiting the environment. However on one hand there are reasons against offshore drilling activities and in favor of imposing bans in some cases, while on the other hand there are ample justifications in favor of such activities especially for economic reasons and creating future supplies as well as giving a boost to government expenditure in oil exporting countries. In such circumstances efforts and investments towards renewable energy sources will also be welcomed. Also since oil is a commodity of strategic importance, at times of war, energy dependency might pose a threat to United States (Anderson, Hofmann and Rolfe 1975). Apart from alternative energy sources like coal and uranium, which the States has in plenty, attempts must be made towards conservation of the same apart from looking for other renewable sources. Conclusion Therefore while offshore drilling activities are encouraged in order to bring about reduction in price and resolve the oil deficiency problem, market forces show that this is not the case. In a scenario where there is a rising concern centering on corporate social responsibility and environmental conservation, such activities leading to contamination of the environment and harm to the habitat need to be reconsidered. Shifting to alternative energy sources is a good idea but generation of demand for the same needs to be addressed beside investments in these resources and production of energy from renewable sources. From a long time practice the modern man tends to find the use of petrol and oil more convenient, let alone the oil and natural gas industries. Hence creating awareness about the impact created by the use of oil along with the basic economic logic of making oil more unaffordable (price hikes) despite more offshore drilling activities might be essential. However the best option is to let the market dynamic decide the future since further increases in oil barrel might lead to a break even point and consumers will themselves decide to choose the other substitutes. The question arises as to when this point will arrive and how this switchover would take place and offcourse what could the impact of this switchover be on the price and supplies of oil. References 1. Anderson, R.J. Hofmann, P.L. and S.E. Rolfe (1975), Alternative Energy sources for the United States, Transaction publisher. 2. Abbassi, T. & S.A.Abbassi, (2010), RENEWABLE ENERGY SOURCES : THEIR IMPACT ON GLOBAL WARMING AND POLLUTION, PHI Learning Pvt. Ltd 3. BP oil spill: Italy drilling ban hits UK-listed explorer, (2011). The Telegraph, available at: http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7867504/BP-oil-spill-Italy-drilling-ban-hits-UK-listed-explorer.html (accessed on May 18 2011) 4. Evans, K. (Mar 9, 2011), Crude-Oil Prices Rise Toward a Break Point, The Wall Street Journal, retrieved on May 16, 2011 from: http://online.wsj.com/article/SB10001424052748703662804576188972186640678.html 5. Mignone, B.K. (September 24, 2008) Drilling Our Way to the Future, The Hill. Retrieved on May 16, 2011 from: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010651217&mode=view 6. Slocum, T. (July 30, 2008) Oil Companies Escape Billions in Royalty Payments to Americans, retrieved on May 16, 2011 from: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010651219&mode=view 7. Sowell, T. (1972), Say’s law, Princeton University. 8. Greenpeace, (August 18, 2006). Oil Spills—Philippines, Indian Ocean and Lebanon, retrieved on May 16, 2011 form: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010734213&mode=view 9. Fontova, H. (May 14, 2008).  More Offshore Oil Drilling, FrontPage Magazine. Retrived on May 16, 2011 from: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010651206&mode=view 10. Klare, M.T. (January 8, 2009). Oil 2009: Be Careful What You Wish For, retrieved on May 16, 2011 from: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010734224&mode=view 11. Leonard, A. (June 25, 2008). Slick John McCain and the Offshore Oil Ruse, retrieved on May 16, 2011 from: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010651220&mode=view 12. McCormick, C. (February 11, 2009). Offshore Drilling: Environmental and Commercial Perspectives, retrieved on May 16, 2011 from: http://ic.galegroup.com/ic/ovic/ViewpointsDetailsPage/ViewpointsDetailsWindow?displayGroupName=Viewpoints&disableHighlighting=false&prodId=OVIC&action=e&windowstate=normal&catId=&documentId=GALE|EJ3010651209&mode=view 13. Wessels, W.J. (2006), Economics, Baron Educational series Read More