Posted by: bmeverett | July 3, 2010

Straight talk on the Gulf Spill


Tony Hayward, BP’s embattled CEO, has made some serious PR gaffes. In early May, he famously said, “The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume…” It was an utterly stupid thing to say, and a few words can ruin a distinguished career. Hayward’s statement, however, is true.

Context is everything. If an airplane crashes, killing everyone on board, the CEO of the airline involved should never say, “Hey, no big deal. One crash out of ten million flights every year is a pretty good result.” To the families of the people on the airplane, it’s a very big deal, and the airline CEO would look callous and uncaring. On the other hand, if a Congressman were to demand that the air traffic system be shut down after the crash, the figure of one crash out of ten million safe flights becomes not only appropriate but critical. Without that perspective, we could end up doing the wrong thing.

The Gulf oil spill is hurting a lot of people, and they should be compensated for their loss. BP made a serious blunder and should be humble and contrite. When we make policy, however, we need to give Mr. Hayward his due and put some perspective on the spill. Yesterday, the press reported that the spill has now released about 140,000,000 gallons – eclipsing the 1979 Ixtoc spill on the Mexican side of the Gulf. That’s a lot of oil, and the media loves to offer nightmare scenarios in which this huge mass of oil navigates around Key West and fouls the Atlantic beaches. That seems a bit overblown. According to Wikipedia, the Gulf of Mexico covers roughly 615,000 square miles and contains about 700 quadrillion gallons of water. That’s a 7 followed by 17 zeroes. The oil spill is therefore about 2 parts per billion in the Gulf. That’s the equivalent of less than one half of one drop of oil in a family-sized swimming pool.

The total amount of oil spilled is not really the problem. If you spill a gallon jug of wine on the ground at your 4th of July backyard barbeque, you may not care very much (apart from the loss of the wine). A few drops of cabernet sauvignon on a white cashmere sweater, however, can cause big problems. Most of the oil spilled into the Gulf will evaporate, dissipate or be eaten by microbes. The problem is the oil that washes ashore – particularly in environmentally and economically sensitive areas. Unfortunately, we don’t have a clear idea of how much oil that is or where it is. People on the Gulf Coast are clearly conflicted. On the one hand, they want to get as much money from BP as they can. For this reason, people refer to the spill as “the greatest environmental catastrophe in US history.” That’s understandable, and I would do the same thing. On the other hand, they don’t want to scare away the tourists or seafood customers. In a June 24 interview in Business Week, Mississippi Governor Haley Barbour said “Today, our beaches are still pristine and beautiful. We’ve had no oil reach the Mississippi shoreline.” What’s true here?

In Washington, Democrats see the spill as an opportunity to push for energy and carbon taxes. Congressman Ed Markey (D-MA) recently claimed, “In overwhelming numbers, the American people are ready to start working our way to a clean energy future. They want to wake up from BP’s oil spill nightmare to a future powered by clean, safe energy solutions.” Maybe, but a lot depends on how you ask the question. If you ask people, “Would you prefer clean or dirty energy sources?”, then you can pretty much guess the answer. If you ask people, “Would you prefer a clean vehicle that’s 2-3 times as expensive as your current car with inferior performance?”, you would likely get a very different answer.

Listening to the press, it’s easy to conclude that the cost of this ‘greatest environmental catastrophe in US history must be so large that it overwhelms any possible benefits of using oil. Is that true? Let’s do the arithmetic. The Exxon Valdez spill in 1989 cost roughly $10 billion (in $2010) for clean-up, compensation and punitive damages, all born by Exxon. What if the BP spill ends up costing $50 billion, and we have an incident of that magnitude every 20 years? That would be a cost of $2½ billion per year. Since we currently consume about 300 billion gallons of oil per year, that amounts to a little less than 1¢ per gallon. Today, there is no vehicle/fuel technology remotely comparable to the oil-powered internal combustion engine. Would people really give up the benefits of our low-cost, high-mobility oil economy to avoid a penny a gallon?

We have in fact two quite separate issues. The first is to identify and compensate the people who are really hurt by the oil spill. The second is to decide what, if anything, government should do about our energy supply system. Neither goal is advanced by overdramatizing the spill. The “analysis” done by the media seems to focus not on the real economic and environmental issues involved, but only whether President Obama and Tony Hayward are striking the correct emotional poses.

The rest of us need to act like adults and make sensible decisions. Our elected officials seem incapable of sorting this problem out, so we need to make up our own minds on this. What we need is information – something in desperately short supply in our current political discourse. Don’t hold your breath.

Advertisements

Responses

  1. […] the rest of this great post here Comments (0)    Posted in Oil Spill   […]

  2. In 1989 Exxon told the cleanup workers the same story, that the crude oil is not toxic. Some of us are living proof of the toxic exposure, and many others have died.
    Please view the YouTube video, and help get the message to Gulf residents, BP crude oil cleanup workers, and President Obama. Respirators need to be supplied to oil cleanup crews.
    Thank you,

  3. Professor,

    While I agree that factual analysis should be our key objective, I would suggest a few contentions. First, quantifying the true impact of the spill based on damages/ remediation paid doesnt capture full impact. A. these damages dont include an accurate accounting of the valuable and fragile ecosystem services and habitats lost, B. reports seemingly ubiquitously suggest that damages being paid by BP to those out of work in the multi-billion dollar fishing, tourism and other industries significantly undershoot actual lost profits, C. because ostensibly, seeing as deepwater drilling is a product of fewer easier sources of oil, as scarcity increases, then the potential for such incidents in the future will increase in frequency, not stay constant, and, inter alia, D. Due to the need to quantify the national security threats posed by supporting hostile regimes through oil revenues–possibly through projections of military spending towards allies in the regions, or projections of Iraq/ Afghanistan casualties caused by weapons or training provided by oil revenues—this is an entire dimension worthy of consideration (though not being an economist, I do not have the answer as to how).

    But the argument from an economic damages perspective in of itself misses a large portion of the point–missing the economic benefits of transitioning from oil and fossil fuels to alternative, green energy. If you were to ask consumers whether they would rather stay dependent on fossil fuels, or have homes that were zero net energy, thus providing huge consumer energy cost savings, I’m sure consumers would favor the latter. If you explained to consumers that wind and solar are both more job-intensive energy production sources than coal or oil, and dont have the threat of catastrophic spills, I’m sure consumers would favor their use as well. It is perhaps precisely because of oil industry lobbying and regulatory capture, and an underestimation of the true costs of oil production (which should include environmental and remediation damages of spills and expected climate change damages) that more investment hasnt been placed towards alternate battery technology.

    Finally, in specific regards to transport, while hybrid, hydrogen, or electric cars are certainly still in nascent stages, there are a few points I think should be recognized: A. If you asked consumers the following “would you rather have a car that used more gas, and thus cost you more at the pump, or one that used significantly less, and thus cost you less” consumers would perhaps unanimously favor more efficient cars–transportation efficiency being an element omitted in your dyad between oil and not-oil. B. Public transit. When implemented effectively, it is simply more efficient, can run on clean energy sources, can lower income disparities between those who can and cant afford cars, etc. Granted, many systems are in need of repair, or dont reach all areas, but that should be an imperative for investment and innovation in this sector, rather than a unitary focus on remaining connected to oil.

    While I recognize, and appreciate, your fundamental point that hyperbole and distortion is a fog often cast by all sides, I just would suggest that the penny-per-gallon quantification or representing the potential for transition away from fossil fuels as a simple decision between current oil usage versus cars that are 3 times more expensive should be more nuanced. And that if we are honest with ourselves and our interests, we would recognize that transition away from oil represents both an economic opportunity for recovery, as well as a strategic imperative.

    • Here are my comments on Mr. Ratain’s thoughtful contribution:

      Dear Bruce-
      First of all, thanks for reading my blog and offering some thoughtful comments. My replies are as follows:
      1. The damage to fragile ecosystems is indeed heartbreaking, but those systems will recover, as they have in Prince William Sound in Alaska. An enormous amount of oil was dumped on beaches up and down the East coast during the early days of WWII from German U-Boat sinkings of oil tankers. These systems have recovered as well. While the pictures of oiled birds are terrible to see, human civilization does impinge on other species all the time. We can minimize, but never eliminate it. Would you be willing to pay $100,000 to save a pelican? How about $10,000?
      2. These seemingly ubiquitous reports about BP underpaying are to be expected. Many people have been genuinely hurt (and severely) by this incident, and they should be compensated. The demands for compensation, however, will be infinite, and some will come from people who are being opportunistic. No matter how well BP (or Mr. Feinberg) does in terms of fairness, lots of people are going to be unhappy. If you ask people along the Gulf whether BP has paid out enough, the answer will always be “no”.
      3. We do not have any reason (as yet) to believe that the frequency of these incidents will increase. We drill in very deep water in the Gulf not because we have exhausted opportunities on shore or in shallow water, but because governments, particularly at the state level, have put much of that acreage off limits, believing that drilling over the horizon would be less troublesome. Hundreds of deep-water wells have been drilled safely and without problem. We need to find out from a thorough investigation whether there is some systemic problem with deep-water drilling or whether BP made some serious error in this particular well. In 1983, an Air Florida plane crashed into the Potomac after being improperly de-iced during a snowstorm. The accident led to immediate demands for the closure of National Airport as a “death trap.” De-icing procedures at National have been corrected and we have had no further fatalities despite continuous increases in traffic.
      4. The issue of funding hostile states is important, but complex. A few observations. First, the US cannot eliminate its oil imports since we have no economically viable alternatives for transportation. What we tend to talk about in our policy debates are expensive steps with little if any impact. Second, the national security of the US would be damaged much more severely by shutting down our economy than by continuing to import oil. Think about facing a resurgent China growing rapidly on cheap oil, while we struggle through a permanent recession. Not a happy prospect. Third, the most expensive sources of oil – and the first to be eliminated if we cut oil consumption and global prices – will be domestic production and Canadian tar sands. The Middle Eastern countries produce oil so cheaply that they will always find markets. We can’t fix this problem, so we’re going to have to live with it.
      5. Zero net energy homes do not in fact result in huge cost savings. Fuel costs may be less, but the capital costs of solar, wind and similar technologies are prohibitive. It makes no sense to save $50 a month on your electricity bill if you are paying an additional $100 a month on your mortgage. The economics of these systems are severely distorted by massive subsidies. Remember that subsidies do not reduce costs, but only shift them from the buyer to the taxpayer. For some solar economics, see my post of March 14 entitled “Florida – the Sunshine State.” Cars get continuously more efficient all the time, but there is an economic test. I have high hopes for hybrid technology (I own one myself) but they are not quite economical. Electric cars are hopeless more expensive than gasoline cars, and they perform poorly. They may be good someday, but not today. The costs of vehicles include the capital and maintenance costs, not just the fuel costs. Would you pay $100,000 for a car with a zero fuel cost? If so, let me know. I’ll sell you my car and pay all your gasoline bills for the life of the vehicle.
      6. “Green energy” does not create more jobs than conventional energy. For every job created in the manufacture of solar cells or wind turbines, more than one job is lost because of lost economic activity from higher energy prices, higher taxes or both. A simple economics principle is that you cannot grow the economy by replacing cheap products with more expensive ones.
      7. Regarding battery technology, electric cars were produced as early as 1900. They lost out to gasoline vehicles because battery performance is so poor. We have been working on better batteries for well over 100 years, and we’re still not close. There are some reasons in physics for this that cannot be eliminated just by spending more money. Federal dollars can sometimes solve technical problems, but rarely if ever does such spending create commercially viable technologies.
      8. I have just finished a major study on public transportation. Some quick numbers: automobile travel (including roads) costs about $0.45 per passenger-mile. City buses cost about $0.95 per passenger-mile and use MORE energy. The cost of heavy rail systems varies from about $0.45 per pm in New York to $1.20 in Baltimore and $1.25 in San Juan. Light rail system costs vary from about $1.00 in Denver to $2.75 in Pittsburgh. By my calculations, light rail systems in Denver, Baltimore, Cleveland, Philadelphia and Pittsburgh emit more carbon dioxide than the cars they replace. My conclusion: public transit is economically efficient only in extremely high density areas, like Manhattan, where we already have it. Rail systems run mainly on electricity. If we try to generate that electricity from renewables, the costs will go through the roof.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: