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Why the Quest for Oil is So Risky

by Shawn Regan

Why are we drilling for oil 40 miles offshore and thousands of feet underwater? This AP article claims that the answer is simply the world’s unquenchable demand for oil:

The world’s thirst for crude is leading oil exploration companies into ever deeper waters and ventures fraught with environmental and political peril. The days when the industry could merely drill on land and wait for the oil — and the profits — to flow are coming to an end.

But is it merely the demand for oil that is causing us to drill risky deep-water wells? Hardly. What the AP fails to mention are the various policies in place that encourage oil companies to drill in such dangerous locations.

As Terry Anderson pointed out this summer, part of answer lies in NIMBY— “not in my backyard”—policies. Drilling can be done much safer onshore, but policies forbidding energy development on land drive it to areas where the effects of spills are more deleterious. Nearly 80% of potentially oil-rich offshore lands and 60% of onshore lands are off limits to oil and gas development.

Another missing piece in the AP’s story is the 1990 Oil Pollution Act (OPA), which caps the liability of drillers at a paltry $75 million in the event of a spill. This undoubtedly encourages drilling in more risky deep-water locations. And, as Michael Greenstone of the Brookings Institute put it, “The cap effectively subsidizes drilling and substandard safety investments in the very locations where the damages from spills would be greatest.” Congress has failed to raise this liability cap (BP, however, has waived its right to this cap and is vowing to pay all legitimate claims).

In short, we are not running out of oil. The unintended consequences of energy policies are causing us to look for it in all the wrong places.

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