The risks and rewards of offshore drilling

offshore_drilling.gi.top.jpg By Steve Hargreaves, Senior writer


NEW YORK (CNNMoney.com) -- The spilled oil lapping at Gulf Coast beaches and wetlands is one tragic result of offshore drilling.

As the administration's plans to expand drilling proceed, what do we get in exchange for putting more of our coastal environment, and the fishing and tourism economies that depend on it, at risk?

First, what we won't get

It won't make the United States energy independent: We simply use too much oil.

The Energy Information Administration estimates the country could eventually produce another 1.3 million barrels of oil a day if all areas off the East and West coasts, The Gulf of Mexico, and Alaska's Arctic National Wildlife refuge were opened for drilling. The American Petroleum Institute says it could be as high as 2 million barrels a day.

But the country burns through some 20 million barrels of oil a day - two thirds of which is imported.

"It's not about freeing us from foreign sources," said Melanie Kenderdine, executive director at Massachusetts Institute of Technology's Energy Initiative. "It's just not that much oil."

It won't guarantee lower prices: Again, it's partly a numbers game.

Because oil can be easily shipped by tanker it is a global commodity, and prices reflect global supply and demand.

Last month, the world produced 73 million barrels of crude oil a day. An extra 1 or 2 million barrels isn't going to move the needle that much.

But there are also just too many uncertainties here to forecast what effect this would have on prices. The time frame is too long - these extra production numbers are for 2030 - and who knows what the global supply and demand picture will look like by then.

Also, who knows what other countries would do if the United States produced an extra 2 million barrels a day - OPEC might simply decide to take 2 million barrels a day off the table.

Bottom line: Not even API - staunch proponents of more drilling - will make a prediction on what effect it could have on prices.

Now, what we do get: A gusher of cash

More drilling would likely have some major benefits.

It will diversify our energy sources: In an age of rogue states and terrorist threats, diversifying our energy mix is something nearly everyone agrees is a good thing.

And more drilling would diversify it in a big way. An extra 2 million barrels a day would increase U.S. domestic oil production - currently running over 5 million barrels day - by nearly 40%.

It would create jobs: Some 160,000 new jobs for everyone from wrench turners to geophysicists, according to API.

And they are good paying jobs. API says the average oil industry job pays two and half times the national average wage.

It would reduce the trade deficit, lower interest rates and boost the dollar: Every barrel of oil we produce here is one we don't have to import.

At today's prices, an extra 2 million barrels a day would shave off nearly $5 billion a month, or 10%, from the trade deficit.

"That's significant," said Mark Vitner, a senior economist at Wells Fargo. "And it would have a multiplier effect. That's money being spent here, not someplace else."

That should lead to a slightly stronger dollar and slightly lower interest rates, said Vitner, although it's impossible to say by how much.

It would generate tax revenue: The $60 billion or so in value from an extra two million barrels a day, at today's prices, might generate $30 billion a year for the federal government, once royalties and corporate taxes are paid.

That money could be used to ramp up drilling safety research or protect ecologically sensitive areas, said Kenderdine, who, like the Obama administration, supports limited increases in drilling.

Is it worth the risk?

API certainly thinks so.

"We're going to use oil for decades, you're going to have to get it somewhere," said John Felmy, chief economist at API. "And this is a lot of money."

Others say no way.

Just tourism in coastal areas generates at least $60 billion a year in revenue, said Athan Manuel, director of lands protection for the Sierra Club. Why put that at increased risk?

Better to focus on conservation in the short run, gradually shifting to cleaner, renewable sources of energy like electric cars charged by wind or solar power.

"We've tried to drill our way out of this problem for the last 30 years," said Manuel. "It's never worked."  To top of page

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