The Costs of Drilling for Oil

As attention has drifted from the oil spill in the Gulf of Mexico the Obama administration has lifted the ban on deep-water drilling. Many oil companies are looking to expand their extraction efforts into drilling in the Arctic Ocean. A recent report by the Pew Environmental Group has been released in an attempt to prevent such drilling. The report notes that the risks of drilling in the Arctic are far greater than those in the Gulf of Mexico, especially the greater difficulty in responding should a spill occur and the more delicate nature of the ecosytem. This report and similar concerns could likely lead to a great deal of additional regulation for Arctic drilling. These facts bring to mind the negative externalities of such a new spill. The expense of cleaning up a spill in the Arctic could be far greater than was seen in the Gulf due to transportation difficulties alone. Oil companies are well aware of the negative PR consequences as well and are actively engaged in advertising campaigns and new research and stricter guidelines to reassure the public and decrease the risk. Despite that additional regulation could very likely be enacted as a safeguard. All of this translates into increased oil costs. An even more worrying fact that is being over looked is the steadily increasing replacement cost for new oil as easily accessible reserves are exhausted. As of yet the cost of these negative externalities haven't translated into higher gasoline prices but in time the consumers will be forced to bear these costs.


DSM said...

Oil prices are going to increase until there are substitutes that are less expensive. It was only a couple of years ago that we saw gasoline prices below $2.00. This came from a dramatic decrease in demand due to the recession. Prices have crept up rather quickly compared to the economic recovery. This indicates that as the economy recovers, oil prices will again reach new highs quickly. Prepare yourself for high future fuel prices.

Baden said...

I have a different view point than Grant on the effects of continuing to search for and open up new drilling sites. Gas prices related to oil prices are going to continue to rise as demand increases not only in America, but especially in economically emerging foreign countries. If the supply of that oil is hindered from expanding and the bulk of the worlds oil needs remain geographically in the hands of “Unstable and Unfriendly Countries” (see link to article below) then this will only exacerbate the problem. With the supply controlled by such countries the prices will not only increase, but also be less stable, fluctuating to political interests instead of economic ones which naturally occurs when there are diverse competitors. If companies such as Royal Dutch Shell, with the backing of their shareholders, want to invest in expanding the supply of oil, and they can do so responsibly, I think it makes economic and political sense for the United States to allow it.

Article: Interactive Map: Where Is Our Oil Coming From?