Drilling in the Gulf of Mexico: Regulation and its Discontents

Posted July 3, 2012 | folder icon Print this page

In the wake of the Deepwater Horizon spill of 2010 there has been a proliferation of onerous regulation on drilling in the Gulf of Mexico. These policies have caused production in the Gulf to slow down dramatically. The result, not surprisingly, is higher gasoline prices according to a new study from the Maguire Energy Institute.

Bernard Weinstein, the author of the study, explains that with greater regulatory certainty, oil and gasoline prices would be lower. It would seem that the government has mired the industry in ineffectual bureaucracy. These policies have created a cloud of uncertainty over energy production in the Gulf of Mexico and continue to discourage investment in off-shore projects in the Gulf. And the cost of this lack of production will be ultimately paid by all Americans who use gasoline.  According to the Maguire report, the EIA predicated that production in the Gulf of Mexico this year would be 30% higher than is currently the case.  This loss is due to a “de facto ‘permitorium’ in which the number of deep- and shallow-water drilling permits issued dropped dramatically” (Weinstein, 5).

Oil rigs are mobile devices, and rigs in U.S. waters can go to other countries where they will be able to drill more profitably. Because of the federal government’s bureaucracy and delay, rigs left the Gulf of Mexico for countries were oil production is welcomed. This exodus will continue if the federal government does not improve its policies. Luckily “more rigs have been spotted in the Gulf than has been the case for the past few years” (Ibid. 7). But these rigs are not producing at pre-moratorium levels.  After subtracting rigs engaged in non-drilling work, only 18 active rigs are currently in the Gulf (as opposed to 27 before the  moratorium), according to the report.  And many ‘new’ permits issued are merely “plans companies were required to submit to meet new regulatory requirements” (Ibid. 8).  Oil exploration in the Gulf is stagnating under the current regulatory regime—despite superficial signs to the contrary.

The capital-intensive nature of oil production means that even a moderate level of uncertainty results in great hesitation to invest in drilling activities. Weinstein notes that “[p]rospects come to life as the result of a lengthy, technologically sophisticated process in which potential oil and gas reservoirs are identified and then subjected to a gradually intensifying battery of tests to gauge the likelihood and potential size of a new discovery”(Ibid.). Such roadblocks to production are massive enough without the additional restrictions of a lethargic bureaucracy.  But the report says that regulators have been moving more slowly since Deepwater Horizon, sometimes ‘resetting’ the clock by asking for additional information from permit applicants.  In essence, regulators can decide when they have to start their job of approval and to extend the time-frame of that approval whenever they wish.  Such uncertainty is not conducive to energy production.  Oil rigs therefore have no predictable backlog of permits to drill, meaning that production in the Gulf is reduced to a precarious status.  Lease sales, the very first steps to beginning oil production, have also declined under the Obama Administration.  Not only does this rob the U.S. government of revenues, it places serious limitations on long-term production in the Gulf of Mexico.

All of these policies ultimately mean that less oil will be produced and that it will therefore become more expensive.  Regulations should focus on ensuring safety rather than limiting production for ideological reasons.  After all, Americans will continue to use gasoline. And someone will produce it as long as there is demand. We can grow our economy by producing more oil domestically or import more oil from abroad.  Presented on those terms, the choice is clear.  Regulators therefore need to work with more effectiveness and predictability to ensure continued oil production in the Gulf.

(This blog was written by IER Summer Associate Spencer Flohr.) 

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IER