With President Obama’s six-month moratorium on deepwater drilling in the Gulf of Mexico just underway, interesting questions arise as to the future of U.S. offshore drilling, and more broadly about the difficulty of managing low-probability, but potentially major risks.  Increasing evidence shows that BP failed to adequately assess and plan for the worst-case scenario.  To protect our environment, new regulations are likely to be promulgated allowing the government to more tightly manage these risks, and legislation toward this end has already begun to be debated in Congress.

In Live Science, Jody Freeman, director of the Harvard Law School Environmental Law and Policy Program, states, “You could imagine recommendations that…revise the entire system of permitting.  You could imagine requirements for more comprehensive planning on the part of the oil industry and new requirements for redundant safety systems.”  Indeed, with the announcement that the Minerals Management Service will be split into two agencies – one in charge of overseeing the oil industry and its drilling operations, and the other in charge of issuing drilling leases and collecting royalties – major regulatory changes have already taken place.  These heightened regulations may have far-reaching consequences, and thus in drafting new legislation policymakers would be wise to carefully consider not only the level of environmental risk, but also the possible level of economic impact.

Both local and international oil companies are constantly in need of new supply sources, and frequently have relied largely on offshore drilling in the Gulf of Mexico to replace declining reserves elsewhere.  However, heightened environmental regulations will most likely result in a slower, more costly permitting process, as well as higher insurance costs.  Congress removing liability caps for damages will add greater risk to already expensive drilling operations.

These higher domestic offshore drilling costs will be difficult for independent producers to cope with, and will likely lead major oil companies to rely to a greater extent on fossil fuel resources abroad.  In crafting new legislation to protect the environment, Congress must carefully assess the risks of disincentivizing domestic production and forcing oil companies to rely on reserves in foreign nations.

Already, some of these dangers are beginning to come to fruition.  For example, The Financial Times this week reported that it is likely to take two years for producers, rig operators, and service companies in the deepwater Gulf of Mexico to restore production levels to what they were before the spill.  Ultimately, rising costs of domestic production will be reflected both in consumers’ pocketbooks and in job losses in areas like Louisiana, heavily dependent on the oil industry for increasingly scarce jobs.

On the other hand, there have been numerous oil spills in recent history, and heightened regulation has often accompanied them.  “This is something that oil companies and insurance companies have learned to deal with over the last 20 years,” said Doug Kysar, a professor of torts, environmental law and risk regulation at Yale University Law School in Live Science, referring to post-disaster regulations.  Consequently, oil companies have been able to maintain domestic production with such regulations before, and should be able to do so again.  The Wall Street Journal reports that, according to the IEA, U.S. regulatory changes will not “necessarily imply a swansong for offshore expansion.”  Major operational changes in the U.K. North Sea after the Piper Alpha platform tragedy, when a fire killed 167 people in 1988, serve as an example of oil companies’ abilities to thrive in post-disaster regulatory environments.  In the decade following these heightened regulations, offshore fields managed to generate over 300,000 barrels per day of incremental offshore supply.

There is little doubt that greater oversight is necessary.  At the same time, we must remember just how important the industry is to the economies of Mississippi, Louisiana, Alabama and Texas, and just how important oil remains for energy security and to the U.S. economy.  In regulating offshore drilling, policymakers must carefully balance the risks to America’s fragile ecosystems with those to its increasingly fragile energy security and economy.

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