Accounting fruad- Opinion paper

Offshore Drilling

Business Administration Undergraduate Senior

.

for Dr. Steven Palmer

Assistant Professor of Business Law and Management

Offshore Drilling In the midst of the economic decline, Americans are desperately seeking relief from the

high cost of living. Almost every American is feeling the effects of the high cost of gasoline and its contribution to the recession. Americans are looking for answers from their government to find ways to lower the cost of gasoline and make this recession more manageable. As government searches for answers to liberate us from the high cost of gas, the issue of offshore drilling arises. Many are divided on what offshore drilling will accomplish for short-term relief at the pump.

Over recent months, the high cost of gasoline is due primarily from the worldwide high cost of crude oil, which fluctuates with the level of supply relative to expected demand. Although the cost of producing a barrel of oil varies, it does not fluctuate as greatly as the price reflected at the pump because it is supply and demand that drives the pricing. Seasonal demand also greatly affects gasoline prices, with summer months averaging more expensive.

1 With the

combination of a costly summer and the November election quickly approaching, the offshore drilling controversy has been put under a magnifying glass. Political parties are divided on the solution to lower gas prices. Republican presidential nominee, Senator John McCain, endorses offshore drilling “as part of his plan to reduce dependence on foreign oil and help combat rising gas prices.”

2 On the other hand, Democratic nominee, Senator Barack Obama, opposes offshore

drilling unless it is part of a larger strategy with promises of alternative energy. 3

Our nation is energy hungry. More so than ever before, we depend upon many sources of energy in our day to day lifestyles. Petroleum energy, which is synonymous with oil, is by far the most common source of energy used in the United States. Other sources of energy include natural gas, coal, renewable energy, and nuclear electric power.

4 From the Department of

Energy, “In 2007, the United States consumed a total of 7.5 billion barrels of oil.” 5 In the year

previous, we consumed roughly 24% of oil use for the entire globe. 6 Currently, the United States

consumes 20.8 million barrels of oil a day, but that number is expected to swell to nearly 23 million barrels of oil a day by the year 2030.

7 There is no doubt that oil is vital to our economy.

So why is oil so important to the United States? To put it simply, it drives America. Gasoline, used in 99% of our motor vehicles, is the refined product of oil.

8 We rely on gasoline

for both recreational and functional travel. With 191 million vehicles on the road, traveling over 2.2 billion miles in 2001, and consuming more than 113 billion gallons of motor fuel, it is easy to see how gasoline dependent we have become.

9 Many of the current American made vehicles on

the road are inefficient gas-guzzlers who only contribute to the current predicament we find ourselves in, as well as the environmental issues we face as a result of burning fossil fuels.

Background Information

Until about the mid 1990s, the U.S. produced more oil than it imported, and has

increasingly relied on imports in every year since. 10

Currently, the United States imports more foreign oil than it produces domestically. Of the over 20 million barrels of oil we currently consume a day, we produce only 5.1 million barrels per day.

11 Nearly 5 billion barrels of crude

oil were imported to the United States in 2007 alone. Most of this oil comes from Canada, Saudi Arabia, Venezuela, Mexico, and Nigeria. We are the number one importer of crude oil in the world, doubling what Japan, ranked number two, imported for the year 2006.

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2

At the center of the debate on offshore drilling is a federal ruling over 25 years old. In 1982, Congress enforced a moratorium of drilling of oil off the coast of California in response to public concern for the coastal environment. The ban was put in place “on grounds that energy development might put recreational beaches and coastal states' tourist industries at risk.”

13 Then,

former President George H.W. Bush extended the moratorium to expire in 2002, as opposed to continuously renewing the congressional moratorium each year.

14 In addition, the former

President expanded the moratorium to include not only the coast of California, but all coastal areas with the exception of areas off the coast of Texas, Louisiana, Alabama, and parts of Alaska.

15 The ban on drilling offshore in the U.S. has remained intact until just recently, October

1, 2008, when it quietly expired without renewal. 16

Even so, the controversy continues to be a heated topic.

Much of the land that falls under the controversy is known as the U.S. Outer Continental Shelf (OCS). Officially, the OCS “consists of the submerged lands, subsoil, and seabed, lying between the seaward extent of the States' jurisdiction and the seaward extent of Federal jurisdiction.”

17 In simpler terms, the OCS begins around three to nine miles off the coast

(depending on state laws) and extends outward 200 miles. Federal government controls this stretch of ocean.

18

During the same year that the moratorium was put in place, the U.S. Department of the Interior created the Minerals Management Service (MMS) to manage the nation’s precious natural resources in the OCS. This included an abundance of natural gas and oil. The bureau is responsible for leasing the land in the OCS for offshore production as well as supervising those lands after the leases have been issued.

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Controversy

As Americans face a period where they struggle to stretch their every dollar, the issue of

offshore drilling becomes more involved. For the year 2005, roughly one third of the total daily crude oil production in the U.S. was from offshore drilling.

20 Should the government allow more

offshore drilling to help lower the price of gas and provide relief to struggling Americans? That question quickly becomes very complex, and parties become divided. Those that oppose the idea of opening offshore drilling to areas previously off limits are primarily fearful of the effects that drilling would have on the environment. Their concern is that drilling will eventually cause oil spills and harm marine and coastal life. Many remember the Santa Barbara oil spill of 1969. From the Los Angeles Times, an excerpt from the 20

th

anniversary of the tragic oil spill:

Twenty years ago today, on January 28, 1969, a “blowout” erupted below the platform and, before it was plugged, more than 3 million gallons of crude oil spewed from drilling- induced cracks in the channel floor. For weeks national attention was focused on the spill’s disturbing, dramatic images. Oil-soaked birds, unable to fly, slowly dying on the sand. Waves so thick with crude oil that they broke on shore with an eerie silence. Thirty miles of sandy beaches coated with thick sludge. Hundreds of miles of ocean covered with an oily black sheen. But the spills impact went far beyond the fouled beaches. The disaster is considered to be a major factor in the birth of the modern-day environmental movement.

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More than a few alliances of opponents have formed over the much debated topic, such as the Committee against Oil Exploration, and Get Oil Out (GOO). These groups relentlessly oppose offshore drilling and maintain their position that offshore drilling equates to harming the environment. A further argument of those against offshore drilling is that it will negatively affect tourism in coastal states. With an unattractive drilling rig in sight, the interrupted coastline views may potentially deter tourists. The citizens of Florida seem to be the most aggressive in fighting offshore drilling in their waters. Enid Sisskin, Director of Gulf Coast Environmental Defense, stated, “Tourism in Florida is a $90 million to $100 million a day industry and tourism is all about perception, perception of sugary white beaches, emerald waters and a clean environment.”

22 The threat of drilling rigs in Florida waters could likely spoil the perception of

Florida’s well-known beaches and endless waters. Despite deep environmental concerns, adversaries disagree that offshore drilling will bring about reduced prices at the gas pump. By many estimates, the nation will not see a significant decrease in gas prices any time soon. The Energy Information Administration’s analyst Phyllis Martin claims “access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”

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In addition, opponents argue that the proposal to drill more offshore only feeds our addiction to oil. Drilling for more oil only strengthens our reliance on the fuel. If America is attempting to find alternative sources of energy, searching for more and more oil will decrease motivation for engineers to develop alternative energy sources. They worry as more money is diverted to discovering fossil fuels, less money and resources will be used to develop alternative energy sources instead.

On the other side of the controversy are those that support offshore drilling in the Outer Continental Shelf (OCS). The leading argument of these individuals is that America needs to become less dependent on foreign nations for our oil supply and start producing more at home instead. By increasing our production of oil, this will send a worldwide message that America is serious about increasing oil resources and becoming less reliant on foreign supplies. Specifically, they stress that America needs to stop importing from countries that we have ill relations with. Mark Hutcherson of The Hutch Report summarizes this point quite nicely, “…it just makes good sense that Americans not outsource our energy supply to nations that hate us in the first place. The only short term solution to this problem is to allow more oil exploration within the United States.”

24 Instead of funding the enemy through our energy dependence, we should pursue our

own domestic options and the options of our allies. These supporters claim that the amount of crude oil that remains underground in areas

currently off-limits is significant enough to cover several years of U.S. consumption. From a July 2008 press release from the Whitehouse, “Experts believe that these restricted areas could eventually produce about 18 billion barrels of oil. This would match nearly 10 years' worth of our current annual production.”

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In addition to increasing domestic oil production, offshore drilling would help to create more jobs. From the same July 2008 Whitehouse press release:

Lifting the ban would create new opportunities for American workers and businesses. Bringing oil from the OCS online could require dozens of new drilling rigs and tens of thousands of miles of new pipeline, which will create thousands of new construction jobs

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and give American companies new avenues for expansion and the economy a much needed boost.

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Analysis & Opinion

In my research, I have found that some of the arguments, including political, put forth on both sides were not necessarily accurate, and others were simply unrealistic. Generally, the Republicans view the issue from a financial perspective, while the Democrats come from an emotional, environmental viewpoint. I hope to clarify which arguments I feel should be considered as credible. First, I will begin with the arguments against offshore drilling. The case these individuals are attempting to make is that if the nation increases its offshore drilling capacity it increases our risk to oil spills. They argue that another Santa Barbara oil spill of 1969 will occur in due course. Increased offshore oil drilling does not foretell the future. While I agree that an oil spill can potentially occur with more active drilling rigs, I would disagree with the increased probability of it occurring because of tremendous advances of technology and oil regulation since 1969. Furthermore, the Oil Pollution Act of 1990 was enforced to address “the wide range of problems associated with preventing, responding to, and paying for oil pollution incidents in navigable waters of the United States.”

27 With the increase in regulation, oil companies are more

liable for any spill and can incur a hefty fine in the event that there is an oil spill, and/or they fail to report an incident. The Whitehouse asserts that lifting the drilling ban would mean new oil exploration would meet strict environmental standards to protect coral reefs and prevent oil spills from occurring.

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Next, the argument against a decline of coastal tourism due to the unsightly drilling rigs is not necessarily convincing. I feel this is no longer an issue because current governmental proposals specify drilling rigs will be at least 50 miles offshore.

29 The distance of 50 miles would

counteract the arguments that the drilling rigs will be viewable from shore. Calculations conclude that a person standing 1,000 feet above sea level on a clear day would only see 39 miles, due to the curvature of the earth.

30 This proposed compromise should alleviate any

predictions of a decline in tourism. Further, I would argue that oil companies are not insisting on placing a drilling rig directly in the middle of the most pristine ocean views. Oil companies will be searching more for an option where they are discreetly placed to help with the economic development of the community in which they are a part of. The oil rig workforces live in the same community where they work; their goal is not to sabotage an industry that contributes immensely to the overall health of the coastal economy just to exploit the available natural resources.

Conversely, the need to expand offshore drilling is deceitful. The leased areas currently available for drilling should be all that is needed. From a recent USA Today article, “Only about 8 million of 43 million leased acres were producing oil in 2006. Nearly 80% of the oil estimated to be producible is within limits.”

31 Big oil companies are pushing the issue of allowing more

leases for drilling because they want control over more land with more oil than they already currently drill on. Barack Obama believes the oil companies need to drill on the millions of acres they already have access to that still contain oil, or relinquish their leases back to the Mineral Management Service.

32 The oil companies have more leased land than they are currently

drilling on, yet promote the perception that increased offshore drilling leases will alleviate our energy crisis. This is simply not true. The oil company giants are attempting to monopolize the

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drilling leases to enhance their competitive positions in the global market in the future when we have exhausted existing reservoirs abroad. Another misconception is that any oil produced by the companies in U.S. controlled waters is available only to the U.S. consumer. In reality, the major oil companies that would be drilling here would actually be supplying to the global markets, not just the U.S. consumer. Additionally, the United States cannot assert that we could become completely reliant on a nonrenewable energy source. We cannot ever be truly independent. The numbers just do not add up. If the claim that the OCS would supply the nation with 18 billion barrels of oil, we would run out of oil after three years at our current consumption rate of 7.5 billion barrels a year relying on the OCS alone. Although many experts do not agree on how long our current supply will last, it is agreed that we will run out. The supplies are not endless. If we utilize all of our technically recoverable crude oil, all 177.83 billion barrels, we would last only 24 years based on our current crude oil consumption rate.

33 While this seems like a long duration of time, we would

again be dependent once we have depleted our oil supply. As long as we continue to use oil as our primary source of energy, we will have to rely on foreign nations to support our demands, whether it is now or in 24 years. Expansion of offshore drilling is not the answer to our current problems. Although offshore drilling may be perceived as the immediate answer to relief from our nation’s economic downswing, it would not provide a solution for another 20 years or more! By then 20 years of oil consumption will be burnt away, only to find ourselves in the same situation. Instead, we could start researching alternative energy sources immediately, and wean ourselves of this dependency on fossil fuels. While I do agree that we need to become more reliant on our own oil as opposed to importing from countries we are at war with, I do not consider offshore drilling the solution. I am not in opposition to offshore drilling and its potential risks; I just believe that, instead, we need to pursue long-term solutions to our dependency on gasoline and oil. It is only when viable alternatives are discovered that we can expect more reasonable prices at the pump. Once the demand for oil goes down, so too will the price. The solution lies in alternative, renewable sources of energy. We cannot rely on one source of energy alone, and particularly not an energy source that is nonrenewable. We will run of oil, it is just a question of when. Instead, we need to take advantage of many sources of energy at the same time in preparation for an end to oil. The philosophy of diversification should apply equally to the energy industry as it does within the financial industry. I feel that the oil companies and pro-oil lobbyists, who are pursuing the issue to expand offshore drilling, are being greedy and taking advantage of our desperation to pursue their goals. They are using a Band-Aid approach to pacify the masses by treating a symptom instead of addressing the long-term problem. The oil companies have plenty of leases that have not been depleted, but instead are seeking more and more alleging that it will help with the price of gasoline. They are not fully utilizing the resources that they currently have. Instead, they are seeking benefits through our ignorance and shortsightedness. The money that would be invested in additional drilling rigs, which I feel are unneeded, should be put toward the development of renewable sources of energy, such as solar, wind, and geothermal energy. America needs to aggressively pursue alternative energy, begin to suppress our addiction to oil, and dominate the market for green energy. Oil is, and will continue to be, a resource to fuel our economy for many decades. It is our dependence on oil as a primary economic resource that needs to addressed, studied, and resolved

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so we can become better positioned as world leaders. We need to be able to both drill for oil safely without jeopardizing Mother Nature and seek alternative long term solutions. Offshore drilling appears to be a natural progression as discoveries of offshore oil continues to yield promising, although temporary, resolutions to our country’s oil dependency. It is agreed that offshore drilling can surely bridge the gap for a period of time, but will definitely increase our vulnerability to potentially serious accidents. However, cooperation among opposing parties could minimize concerns on both sides.

Offshore drilling is a short-term answer to a long-term problem, which misleads Americans to believe it is a straightforward fix. Our economic stability is threatened now. We need an alternative long-term solution and offshore drilling is not the answer. Newer renewable energy resources are the answer to our energy problems. Alternative energy resources need to be improved and used to replace fossil fuels now.

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1 Primer on Gasoline Prices. EIA. (2008, May 1). Retrieved Oct. 11, 2008, from

http://www.eia.doe.gov/bookshelf/brochures/gasolinepricesprimer/. 2 Hornick, E., Mcfadden, K., & Silverleib, A. (2008, August 6). Obama, McCain energy plans.

CNN.com. Retrieved Oct. 11, 2008, from http://www.cnn.com/2008/POLITICS/08/05/energy.plans/.

3 Ibid.

4 Energy Basics 101. EIA. (2008, September 1). Retrieved Oct. 11, 2008, from

http://www.eia.doe.gov/basics/energybasics101.html. 5 Crude Oil FAQs. EIA. (2008, June 12). Retrieved Oct. 8, 2008, from

http://tonto.eia.doe.gov/ask/crudeoil_faqs.asp#barrels_consume_year. 6 Energy in Brief: How dependent are we on foreign oil? EIA. (2008, August 22). Retrieved Oct. 9,

2008, from http://tonto.eia.doe.gov/energy_in_brief/foreign_oil_dependence.cfm. 7 Gertz, E. (2008, September 12). Can Offshore Drilling Really Make the U.S. Oil Independent?.

Scientific American. Retrieved September 27, 2008, from

http://www.sciam.com/article.cfm?id=can-offshore-drilling-make-us-independent. 8 Oil. Department of Energy. (n.d.). Retrieved Oct. 8, 2008, from

http://www.energy.gov/energysources/oil.htm. 9 Household Vehicle Energy Use: Latest and Trends. EIA. 1 (2001). Retrieved Oct. 10, 2008, from

http://www.eia.doe.gov/emeu/rtecs/nhts_survey/2001/tablefiles/t0464(2005).pdf. 10

Annual Energy Review 2007. EIA. 162 (2008, June 1). Retrieved Oct. 10, 2008, from

www.eia.doe.gov/emeu/aer/pdf/aer.pdf. 11

Energy in Brief: How dependent are we on foreign oil? EIA. (2008, August 22). Retrieved Oct. 9, 2008, from http://tonto.eia.doe.gov/energy_in_brief/foreign_oil_dependence.cfm.

12 Country Energy Profiles. EIA. (n.d.). Retrieved Oct. 9, 2008, from

http://tonto.eia.doe.gov/country/index.cfm. 13

Kamalick, J. (August 25-31 2008). Offshore showdown. ICIS Chemical Business. 274(7), 14-15. 14

Auther, J. (1998, June 12). Clinton extends moratorium on offshore oil drilling. CNN.com Retrieved

Oct. 2, 2008, from http://www.cnn.com/TECH/science/9806/12/offshore.drilling.pm/. 15

Moratorium on Offshore Drilling (1990). EIA. (2005, Jan. 7). Retrieved Oct. 3, 2008, from

http://www.eia.doe.gov/oil_gas/natural_gas/analysis_publications/ngmajorleg/moratorium.html. 16

Kovner, G. (2008, October 1) Offshore Drilling Ban Lapses Today. PressDemocrat.com. Retrieved

Oct. 6, 2008, from

http://www.pressdemocrat.com/article/20081001/NEWS/810010333/0/NEWS07. 17

What is the Outer Continental Shelf? Mineral Management Service. (n.d.). Retrieved Oct. 6, 2008,

from http://www.gomr.mms.gov/homepg/whoismms/whatsocs.html. 18

The Outer Continental Shelf. OCS Alternative Energy and Alternate Use Progmatic EIS. (n.d.).

Retrieved Oct. 6, 2008, from http://ocsenergy.anl.gov/guide/ocs/index.cfm. 19

About the MMS National Program. Offshore Energy & Minerals Management. (2008, July 11).

Retrieved Oct. 12, 2008, from http://www.mms.gov/aboutmms/. 20

Annual Energy Review 2007. EIA. 165 (2008, June 1). Retrieved Oct. 10, 2008, from

www.eia.doe.gov/emeu/aer/pdf/aer.pdf.

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21

Corwin, M. (1989, January 28). The Oil Spill Heard ’Round The Country! 1969 Santa Barbara Oil

Spill. Retrieved Oct. 4, 2008, from

http://www2.bren.ucsb.edu/~dhardy/1969_Santa_Barbara_Oil_Spill/Home.html. 22

Nelson, M. (2008, Oct. 2). Florida's dilemma: Can offshore drilling and tourism coexist? USA Today.

Retrieved Oct. 4, 2008, from http://www.usatoday.com/travel/news/2008-10-02-florida-

drilling_N.htm. 23

Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer

Continental Shelf. EIA. (2008). Retrieved Oct. 12, 2008, from

http://www.eia.doe.gov/oiaf/aeo/otheranalysis/ongr.html. 24

Hutcherson, M. (2008, June 23). Pros/Cons Of Offshore Oil Drilling. The Hutch Report. Retrieved

Oct. 4, 2008, from http://mhutch.blogspot.com/2008/06/proscons-of-offshore-oil-drilling.html. 25

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House. Retrieved Oct. 12, 2008, from

http://www.whitehouse.gov/news/releases/2008/07/20080729-6.html. 26

Ibid. 27

Oil Pollution Act of 1990. United States Coast Guard. (2008, Oct. 1). Retrieved Oct. 4, 2008, from

http://www.uscg.mil/npfc/About_NPFC/opa.asp. 28

Fact Sheet: Committed to Cleaner, More Abundant Domestic Energy. (2008, July 29). The White

House. Retrieved Oct. 12, 2008, from

http://www.whitehouse.gov/news/releases/2008/07/20080729-6.html. 29

Comprehensive American Energy Security & Consumer Protection Act. Speaker Nancy Pelosi. (n.d.).

Retrieved Oct. 6, 2008, from http://www.speaker.gov/legislation?id=0252. 30

How Far Can You See? TIME. (1943, June 21). Retrieved Oct. 6, 2008, from

http://www.time.com/time/magazine/article/0,9171,766761,00.html. 31

Jervis, R., Welch , W., & Wolf, R. (2008, July 14). Worth the risk? Debate on offshore drilling heats

up. USA Today. Retrieved Oct. 5, 2008, from

http://www.usatoday.com/money/industries/energy/2008-07-13-offshore-drilling_N.htm. 32

Hornick, E., Mcfadden, K., & Silverleib, A. (2008, August 6). Obama, McCain energy plans.

CNN.com. Retrieved Oct. 11, 2008, from

http://www.cnn.com/2008/POLITICS/08/05/energy.plans/. 33

Annual Energy Review 2007. EIA. 165 (2008, June 1). Retrieved Oct. 10, 2008, from

www.eia.doe.gov/emeu/aer/pdf/aer.pdf.