The True Cost of Deepwater Horizon

The DeepWater Horizon disaster in the Gulf of Mexico provides a telling example of how to calculate the true cost of “progress.” As economists join with scientists, we are moving from observation and study to predictable measurement and advance calculation of the true value of natural resources -- the cost of their development, of their loss, of the mitigation and adaptation required by their consequence, and of their implementation without first taking into consideration the broader and deeper financial implications for the community, immediately and downstream.

Historically, the conventional corporate argument, typically made to local communities, regulators, and state and federal legislators, has been that the presence of an offshore drilling industry be valued in terms of jobs created, taxes and royalties paid, and value added to the overall financial health of the local, national, and indeed global economy. Given the quarterly financial reports of the oil companies, this evaluation adds up to substantial profit. But much is left out of the calculation.

For example, we tend to forget that the natural resources within any national 200-mile limit are owned by the public and that, as such, government is obliged to exploit that capacity for the national good. In many cases, the legislation enabling the licensing of these resources requires royalty payment frequently designated to restricted funds for specific purposes: scientific research, education, environmental protection or historic preservation. While that may be true on paper, those royalties most often end up not in support of those designated purposes, but in the general fund.

Moreover, it is evident that the royalties collected are only a fraction of the market value of those resources, and the profits generated, even after all the substantial costs of administration, exploration, drilling, transportation, refining, distribution, and conversion into innumerable oil-based products, when distributed to the shareholders represent a not so visible but very real transfer of value from owners to investors, from public sector to private sector, from the many to the few, in not necessarily equitable percentage.

In addition, government provides enormous public subsidy to the oil industry in the form of incentives and tax credits for exploration and research, technology development, depreciation, and many, many other legislative amendments, regulatory adjustments, and management decisions along the way made for the benefit of the industry. And, of course, there is the continuing presence of politicians and government officials, chosen for their influence, sitting on the boards of these companies and expected to avoid direct and indirect conflicts of interest.

What, then, is the true value of an oil well drilled a mile down offshore in a unique ecological zone subject to multiple uses? Is it simply the cost of the well or the price of the product? The real calculation must include all the ancillary expense and revenue, and the cost of their loss. When you begin to add up what the public has paid for DeepWater Horizon versus what has been gained – and when you add the hidden subsidy – and when you add the cost of dealing with the consequence of the disaster – and when you add the value of loss to the environmental refugees and communities affected – and when you add the value of damage to the productive ecology and the future revenues lost – you have a dramatically different equation. From a balance sheet perspective, what in the near term seems profit is in the long term a financial disaster, visualized today in the photos of oil slicks, wide and deep, fouled beaches, dead wildlife, destroyed wetlands, unemployed fishermen, bankrupt tourism businesses, depressed local economies, ruined communities.

And, if you add collapsed shareholder value and a wounded international company to this calculation, why would anyone invest in this strategy for the future?