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Drilling Ban May Collide With Reality


JUNE 14, 2010

By James Herron

The Obama administration’s decision to ban new offshore drilling for six months in response to the BP oil spill was understandable given the scale of the Deepwater Horizon disaster, but was always destined for a head-on collision with economic reality.

Sure enough, there has been a rising clamor from oil industry workers, their families and Gulf State politicians chasing their votes, all of whom say the drilling moratorium could result in thousands of job cuts and huge losses for businesses in the area.

This is a major dilemma for the White House. The moratorium on drilling has a lot of support, but the oil industry is huge and shutting it down for six months could end up being even more economically damaging than the effect of the spill on other industries like fishing or tourism. [Read our latest coverage here.]

Luckily, the administration has come up with a handy solution to this problem–let BP pay the wages of any worker laid off because of the drilling ban.

This move–which played a big part in the temporary collapse in BP shares last week–may seem like a politicial win-win. BP is the most hated company in America, why not make it suffer more?

But it seems unlikely to succeed. BP is in a very weak position and has so far been more than willing to meet every cost of its oil spill, but it would have to be suicidal to set the precedent that it should bankroll policy decisions of this administration. What would be demanded of it next, especially in an election year? Legislation forcing BP to cover these costs may pass Congress, but could ultimately be declared unconstitutional.

If BP draws the line over this, what then is the fate of the offshore drilling moratorium? Six months is a long time to shut down one of the most important industries in the U.S. Especially one that produces such a strategically important commodity.

Credit ratings agency Moody’s says the impact of the moratorium could be felt far longer than anticipated.

Steven Wood, a Managing Director at Moody’s, said:

“We believe it could take up to two years before producers, rig operators, and service firms in the deepwater Gulf can resume activity to pre-spill levels.”

The International Energy Agency said last week that U.S. oil output could be up to 300,000 barrels a day lower in 2015 than it would be without the moratorium. With many analysts forecasting that oil will be pushing back towards $100 a barrel by that time, that lost output will make a major difference to the U.S. economy .

The Obama administration’s “safety first” approach to offshore drilling  may be laudable.

However, just as Europe’s total flight ban during the volcanic ash cloud crumbled once it became apparent that many airlines could be bankrupted, economic necessity may start the drill bits whirring sooner than we think.


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