Drill Deep, Drill Smart

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How did the Gulf oil disaster happen? What does it mean, and what should be our petroleum policy be in the future?

The blame for this fiasco is shared, in my view, by four parties: BP, naturally, but also the governmental regulatory agencies, the environmental movement, and the president of the United States.

BP has already admitted blame and taken responsibility for paying for the whole cleanup — although, to be fair, the corporate responsibility will likely extend beyond BP. The lease for the drilling site was partly owned by Anadarko Petroleum, the rig was owned by Transocean, the blowout protector was built by Cameron International Corporation, and work on the production was performed by Halliburton.

Nevertheless, BP workers missed something like 20 separate “anomalies,” incidents just prior to the explosion that they should have explored, such as the fact that in a test hours before it happened, more fluid left the drill pipe than was expected during a standard test, and later tests showed higher than expected pressure. There appears to have been poor communication between BP employees and Transocean

employees. BP apparently chose a cheaper well design than was prudent. Moreover, a supervisor for BP has testified that a month before the accident BP workers detected a leak in the hydraulic system that controlled the blowout preventer, a crucial collection of valves that is supposed to shut down the well in the case of an emergency, and corporate management failed to transmit that information to the regulators. A BP official overruled the Transocean employees by using seawater instead of protective mud.

Blame also accrues to various regulatory agencies, but most especially the Minerals Management Service (MMS), the agency that is directly responsible for monitoring the safety of the oil and gas industry and collecting revenues from it. At this point, it seems clear that the MMS was a classic case of “regulatory capture,” meaning that it colluded with the industry it was supposed to regulate. (The Obama administration was pretty well tied in with BP, too. BP was one of the biggest contributors to Obama’s $750 million campaign in 2007–2008, and Obama’s evil genius Rahm Emanuel lived rent-free for years in a deluxe D.C. apartment owned by a top BP adviser, Stanley Greenberg.)

A recent report by the Inspector General’s (IG) office on the MMS charged that many MMS employees accepted gifts (such as free meals and tickets to sporting events) from oil and gas company executives. This IG report confirms a similar IG report of two years ago, which found “a culture of ethical failure” including not just accepting gifts from people in the oil industry but in some cases having sex with them. (Talk about being in bed with the industry you are supposed to regulate!) The MMS habitually ignored the warnings given by its own staff biologists and engineers.

It’s not that government regulation is a cure for all problems, but regulation of this kind creates false confidence and a thick fog of ignorance. In a weird synergy of dysfunction, BP formulated its plan for dealing with oil spills on faulty data supplied by — the MMS! Actually, BP and the other oil companies are required to use computer models provided by the MMS. Yet these models were outdated, and they overstated the degree to which oil would evaporate or be dispersed by wave action.

Also worth noting is the role of the Coast Guard in the original sinking of the platform. It appears that in combating the initial fire, the Coast Guard failed to follow its own policies. It did not put a firefighting expert in charge of the half-dozen ships spraying salt-water on the fire. As a result, the water may have overrun the ballast system that kept the drilling platform upright, causing it to sink. It was the rig’s sinking rather than the initial explosion that caused most of the damage that led to the spill.

The EPA deserves mention, too, for holding up the deployment of skimmer ships from other countries, on the ground that those ships removed less oil from the water than the ultra-tight EPA regulations call for. Common sense suggests

The Dutch offered free use of their ships to clean up the Gulf oil spill. Obama said no. He wanted to train union workers to do the job.

 

 

that it is better to have ships removing (say) 85% of the oil spewing into the ocean than to wait three months for ships that can remove 99%. But common sense is scarce in a bureaucratic maze such as the EPA.

Not to be overlooked in the blame department is the role of environmentalist groups. Over a period of three decades, they blocked the building of new nuclear power plants, thus increasing our reliance on petroleum and the need to drill for more of it. They also succeeded in putting most of America’s shallow waters and much of its land — including the safely exploitable ANWR — off-limits for drilling, thus making certain that drilling would be done more and more dangerously, in ever deeper waters.

From day one, the president’s mistakes were legion. He was grotesquely slow in responding, and when he did respond he refused to work with local officials, such as Louisiana Governor Bobby Jindal and Plaquemines Parish president Billy Nungesser, who kept requesting permission to build protective barriers (sand berms) and kept being denied the necessary permits by the Army Corps of Engineers. Having assumed the role of universal regulator and rescuer, the administration refused to act.

It was likely because of political reasons, not just because of the EPA’s obstruction, that Obama waited forever before accepting help from other nations, many of whom offered skimmer ships. Within three days of the spill, the Dutch offered their ships (each of which by itself had more clean- up capacity than all the ships we were then employing in the Gulf to clean up the spill). The Dutch also offered to prepare contingency plans for building berms to protect the Louisiana coastline — all for free. Twelve other nations offered assis- tance within days of the accident. Obama just said no. He wanted to give his supporters, the labor unions, time to train union workers to do the job.

Catering to labor is also the reason he waited so long to waive the Jones Act, which Bush waived within days of the Katrina disaster. (The Jones Act, more correctly called the Merchant Marine Act of 1920, regulates shipping in the U.S. territorial waters and between U.S. ports. It requires that all passengers and cargo carried between U.S. ports be conveyed by American-built and -flagged ships. Also, at least 75% of the crews must be American citizens, and ships must be refurbished almost entirely at domestic shipyards.) This made accepting foreign help impossible.

It should be noted that Obama never ran a business, not even a law firm, never administered a large institution, and never ran a municipal or state government. It is no surprise that in his first major test of emergency leadership, he failed as miserably as the defective blowout protector on that doomed oil well. His education hadn’t prepared him to be of any real use during an engineering failure of this magnitude. After weeks of doing nothing, his first major act was — to appoint a group of attorneys!

Since then, his approach has been to bash BP and facilitate the flood of lawsuits it will inevitably (and deservedly) face. He obviously feels that a crisis of this nature and magnitude will be good for generating public opinion in favor of his environmental agenda, much of which involves replacing petroleum with so-called green sources of energy. During his campaign for president, his green agenda was put aside only when McCain used the spike in oil prices to push the idea of drilling — at which point Obama said that he, too, supported more domestic drilling. Once in office, however, he put all that aside and actually increased restrictions on domestic drilling.

After more than a year of this, rising gas prices again forced his hand, and he started making sweet promises and token concessions; but the Gulf disaster allowed him to promulgate a moratorium on domestic deep-water drilling. His first attempt was to impose a moratorium on all offshore drilling. It was quashed by a federal judge, but it showed the importance he places on taking environmentalism to the most radical extreme possible. (And he later reimposed a ban on drilling.) The moratorium, after all, was passionately resisted by the people living closest to the spill, people who knew how many jobs it would cost. But there are many things more important to the president than the economic health of the people he claims to protect.

It has been noticed, by people who follow the media, that environmentalists have generally withheld criticism of Obama for the Gulf disaster. The reason, I would contend, is that they know he will use it to cut back on drilling.

The oil spill is a fascinating study in this country’s failed energy and environmental politics. It is bad in itself, but it ought to lead us to consider still larger problems of America’s energy policy.

Did you know that China has now overtaken the United States as the world’s largest energy consumer? The International Energy Association announced that fact this summer, to practically no public notice. Yet competition for oil is a major feature of the world economic and political reality.

So let’s talk about reality, in its various forms — physical reality, geopolitical reality, economic reality, and yes, military reality. Even with the most pacific intentions, the United States faces a world in which its security is endangered by its dependence on supplies of foreign fuel that might be suddenly withdrawn. Energy policies — good or bad, well meditated or imposed by hysteria — will be formed to respond to this fact. So the question is, What should an energy policy aim at?

Voices from many quarters, both Right and Left, argue for “energy independence.” To be energy independent is either to import no energy fuels of any kind from abroad, or to export fuel roughly equal to what we import.

This is not the policy that I would urge.

While in theory energy independence is possible, it is both politically and economically unrealistic. It equates buying fuel supplies from enemies with buying them from allies, and it fails to limit costs. To see what I am getting at, consider the fact that Australia and Canada have the biggest known reserves of uranium, and it is highly unlikely that they will become enemies of the United States. Why should we go to the trouble and expense of trying to become uranium-independent of them?

On the other hand, buying crucial supplies of oil from the Russians and Iranians carries serious political costs. As it is, we import 60% of the oil we consume; and 42% of what we import (i.e., 25% of all the oil we consume) comes from OPEC countries — a tightly organized group, dedicated to keeping prices up. In this respect, we are sitting ducks. The fact that an embargo, organized by a cartel of oil exporters, would eventually be broken (all cartels eventually break up) is not reassuring. Under current conditions, an embargo of any significant length could be disastrous. And, under the same conditions, we are already paying immense military and diplomatic prices to keep would-be enemies from ganging up on us and disrupting our oil supplies.

This is simply a fact of life. We do not exist in a stable environment of free trade and are not likely to, so long as the trade in energy is vulnerable to noneconomic (i.e., religious and political) coercion.

As Frédéric Bastiat advised many years ago, when we assess the consequences of a policy or action, we need to look not only at the salient or striking costs and benefits but also at the hidden or “unseen” ones. In getting what you think is cheap oil from the Middle East and Russia, for instance, are you counting in the costs of the treasure and lives spent in keeping those sources open? And if we are embargoed again by OPEC, what will be the general economic and political costs of the resulting recession or depression?

Under these circumstances, the goal that I think is best — that is, realistically achievable, yet beneficial to national security and a functioning economy — is what I would call “energy immunity.” Energy immunity is different from energy independence. Energy immunity means simply that our nation’s

After weeks of doing nothing about the Gulf oil spill, President Obama’s first major act was to appoint a group of attorneys.

 

 

energy supply is secure from major external threats such as oil supply cutoffs and massive wealth transfers to our enemies abroad. A coherent approach to energy would allow for production from many sources — petroleum, natural gas, coal, nuclear reactors, and the sun and wind. A satisfactory energy policy would be economically realistic — not costly in terms of lower national employment, lost economic growth, or high deficits.

But to make any progress in this area, one must recognize certain things. One is that petroleum is not going away any time soon. Right now, 40% of all American energy comes from petroleum products.

The two largest uses for energy are transportation and the generation of electric power. While petroleum is used to some extent in electrical power generation (as in diesel-powered generating stations), it is mainly used (when refined into either diesel or gasoline) as fuel for engines employed in transportation. To some extent, petroleum’s role in transportation can be replaced by electrical energy. Already, a fair number of hybrid vehicles (powered both by electricity and by a gasoline or diesel engine) are being sold; and every time the price of gas jumps up, hybrids get attractive again, despite their higher up-front costs and the inconveniences of charging their batteries.

More potentially game-changing are purely electric vehicles (“EVs”). Nissan is planning to introduce the Leaf, GM the Volt, and Tesla its Roadster. Mitsubishi is working on its own EV, called the i-MiEV. Honda is working on an EV (currently called the EV-N) for production within the next few years (though Honda has been researching EVs for two decades). Carlos Ghosn, Nissan’s CEO, predicts that within the next two years his company will have the capacity to produce 500,000 EVs annually.

The Wall Street Journal recently ran an enthusiastic piece about the potential for EVs, pointing out that cities around the country are building the infrastructure to accommodate them, such as electrical charging stations. Utility companies are working to help ensure that people can charge cars at home, using the 220-volt outlets ordinarily used by washing machines.

All this sounds good, but for the next decade at least, it is unlikely that EVs will take off in a major way, or even that hybrids will come to dominate the motor vehicle market. EVs have short driving ranges — between 40 and 100 miles at best, and much less at high speeds, or if the temperature outside is hot or cold, or if the car is carrying a good deal of weight (such as today’s bulky passengers). The batteries in EVs (and even hybrids) take a long time to charge. Tomohiko Kawanabe,

The government has subsidized ethanol heavily; yet it still plays hardly any role in fueling cars.

chief of research and development at Honda, says that his company isn’t particularly confident about EVs. “I can’t say I wholeheartedly recommend them,” he says, because “it is questionable whether consumers will accept the annoyances of limited driving range and having to spend time charging them.”

Add to that the fact that EVs cost more than conventional cars of the same type. The Tesla roadster, for instance, will cost $100,000, and the Chevy Volt will cost $41,000 — about $24,000 more than the Chevy Cruze, the non-electric compact upon which the Volt is based. Add also the fact that these cars are smaller, hence less comfortable and more dangerous in a crash — and it appears that EVs will be at most only 1–2% of auto sales by 2020. Hybrids will continue to gain market share, but petroleum products will continue to be their primary fuel. All of this assumes the continuation of the substantial federal tax credits now given to people who buy such cars.

The problem lies in battery technology. Even the best available batteries (lithium-ion) face problems in being scaled up to the size needed. Getting a really acceptable battery — meaning safe, reliable, durable, scalable, and cheap enough to sell widely — is still more promise than reality.

There is another fuel touted as a way to replace petroleum for transportation: ethanol (and biofuels more generally). Ethanol (ethyl alcohol) is that potent chemical found in all forms of booze. We get it by fermenting the sugar found in plants. It is combined with gasoline to fuel cars. Ethanol deserves an extended discussion in its own right, but let me be brief.

Suffice it to say that even Brazil — the country that made a large push decades ago to convert cars to partial or full ethanol — is now pushing expansion of its petroleum production past the present 2.8 million barrels a day. It produces about half a million barrels a day of ethanol and biodiesel, and about one-fifth of that is exported abroad. And Brazil is almost uniquely suited for ethanol production, since its tropical climate makes growing sugar cane easy. In the United States, we have mainly tried using corn, a plant with less than half the sugar content of sugar cane. This drives the price up, and as a result, the government has subsidized ethanol heavily; yet it still plays hardly any role in fueling cars. Ethanol is also harder to ship (because it easily combines with water), and it damages the rubber hoses in cars. Its near-term prospects, accordingly, are limited.

Natural gas is another option, and this is another major topic in its own right. For now, let me just note that while gasoline engines can easily be made to run on natural gas, storage is a problem — the gas has to be compressed in large tanks. Natural gas is therefore more of a solution for trucks and buses than for passenger cars.

So, what should be done in the near term — say, the next 15 years or so?

If I had to offer a slogan, it would be: “Still drill, baby, still drill — but do it carefully.” Here are eight major recommendations. Some of them relate more to the issues directly raised by the Gulf disaster; others are larger in scope; all, I believe, would be helpful steps in the formulation of a realistic energy policy.

1. I would encourage the formation of an independent, nonpartisan group of engineers, economists, and physical scientists (not politicians, bureaucrats, or journalists), like the panel appointed to investigate the “Challenger” space shuttle disaster, to conduct a comprehensive investigation of the BP spill. The commission Obama set up to investigate is headed by an ex-governor and an ex-EPA head, precisely the sort of people who should never be on any such panel. This is hopeless. But a different kind of commission could be given the job of discovering what exactly caused the explosion, how it could have been prevented, why the blowout protector failed, how that can be prevented in the future, and what new reliable backup systems can be added.

Already some bright technological minds are working on ideas. An article published in the MIT Technology Review (July 10) reviewed some suggestions, such as requiring a linear design of well casing, in which a short string of casing is installed at the bottom of a well (allowing better monitoring for leaks and giving gas more time to release), instead of the continuous string of threaded casing pipes BP chose (apparently because it is cheaper). The article also suggests that deepwater response tools be created to stop spills, and better blowout protectors be designed. Just recently physicist Michio Kaku suggests that in the future, on deep wells, relief wells should be drilled at the same time the original one is. These seem to be good ideas. An independent panel would have the time and brainpower to examine such ideas, and winnow out the best for implementation.

2. I am not one to respond to cases in which regulators aren’t doing their jobs or are behaving corruptly by passing new regulations and hiring new regulators. Instead, I prefer stiffer penalties for corruption and malfeasance. Additionally, since the government hasn’t been able to police its own, let’s throw open enforcement to private investigators and bounty hunters: any private eye who discovers a regulator engaged in criminal misconduct should be given a reward of, say, $50,000. Public choice theory tells us that regulatory capture is inherently a risk with all regulation, but maybe with Dog the Bounty Hunter on the case, the degree of such capture would be limited.

3. Congress should pass a law making rational cleanup procedures automatic, whenever (or if ever) there is a spill, and making it mandatory for legitimate offers of aid from allies officials from using the prospect of harm to enact their own political and environmental programs, as the Obama administration has done. And actually, if the government were ever to spend money on something . . . while the Europeans have very large and well-equipped fleets of state-of-the-art Oil Spill Response Vessels, we have pathetically few. The Taiwanese have developed a vessel that can collect an amazing 300,000 gallons of oil a day from the ocean. Having a few of those puppies would help.

4. Congress should repeal the archaic Jones Act. We have just seen how this law, meant to protect a few union jobs in shipyards and on the docks, costs the country vastly more jobs elsewhere — in tourism, fishing, and oil production, to name a few. As John McCain noted recently when he introduced legislation to repeal the Act, it “hinders free trade and favors labor unions over consumers”; it “only serves to raise shipping costs.” It hasn’t saved our domestic shipbuilding industry, which now only builds 1% of the world’s ships; indeed, it is a major reason for that industry’s virtual extinction. Relevant to the current issue, it interferes every time we need to get foreign ships to administer aid in a disaster.

5. We must keep offshore wells online. The moratorium on deep-sea wells must be lifted except on BP wells. All other companies have a clean record, so why punish them — especially when it costs the country jobs, raises the price of gasoline, and subjects us to the political and economic costs of dependence on other nations for fuel?

6. Rather than trying to limit private responsibility for oil spills, Congress should set up a mechanism for allowing the private insurance industry to insure against future spills. This could include setting up a special mechanism for rapid adjudication of contested claims — say, “oil courts.” If a spill occurred, insurance companies would have their adjusters try to settle with all harmed parties. Any disputes would first go to a special federal court, where three judges (one lawyer, one engineer, and one economist) would review contested settlements. Appeals from the oil courts could go to the federal appellate courts, but in a strict “loser pay” setup. That would remove the incentive for lawyers to exploit disaster with endless, exorbitant lawsuits, and make it economically feasible for insurance companies to step up to the plate.

7. With private insurance thus able to play its role, the time would be ripe to open rich oil lands (such as ANWR) and the shallow waters off the continental shelf for drilling, subject to a new provision, which I call “All in, help.” Under this provision, all oil and gas companies that get leases anywhere must allow their cleanup resources and technical personnel to help with any oil spill, no matter which company is responsible. This seems like a deal any company would be happy to make for access to easily exploitable resources, and it would make it more attractive for people with environmental interests to support drilling.

8. We should find ways to deal with the NIMBY (“not in my backyard”) sentiment in states where new drilling would be permitted. The solution appears to lie with the Alaskans. Why have these people — even after the famous Exxon Valdez oil spill — supported oil production in their state, including ANWR? It’s because they’re paid. The environmental risks they take to supply the rest of us with oil are compensated by a fund that gives them a yearly share of the state proceeds from oil production. Called the Alaska Permanent Fund, it was set up in 1976, when voters approved a state constitutional amendment that puts 25% of all state proceeds from oil, gas, and other mineral lease and royalty payments, as well as fed- eral revenue sharing payments, into a permanent trust fund. The purpose of the Fund, as clearly understood at the time, was “to stem the tide of state spending.”

The fund’s principal is a permanent resource invested in various financial instruments paying dividends and interest, which are then paid out every year to Alaska’s residents, with each resident who has been in the state for over a year getting an equal share. In other words, the fund dispenses state money to the citizens. The current payout is about $1,300 a year, down from previous years, because the amount of oil from the North Slope is beginning to dwindle. The fund is beautifully trans- parent, with the agency that administers the fund, the Alaska Permanent Fund Corporation, keeping a website that lists all pertinent information about current investments, payouts, and management decisions. This is why Alaska residents strongly favor opening up ANWR as soon as possible.

Such a fund could be set up in every state in which new offshore or land leases are granted. As I put it in a reflection in Liberty a few years back, you fight NIMBY with MIMBP — “money in my back pocket.” Certainly, this is not a completely laissez-faire, free-enterprise proposal. But it’s the endorsement of a program that allows for more enterprise, less money lodg- ing permanently in state government, and less control vested in the crazed environmentalists of the federal government.

It is time to take seriously the energy challenges that the country faces. Whether the Obama administration can do that remains to be seen. Observe how many of the proposals above are designed to get around the federal government’s present mode of operation — a way of proceeding that, if it continues, will result in astronomical political and economic costs to this country, and to each of us.

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