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The Economic Costs of an Offshore Drilling Moratorium: A Summary of the Mason Study

In his highly relevant study, Dr. Joseph R. Mason, chair of banking at the Ourso School of Business at Louisiana State University, offers a sophisticated estimate of the economic impacts of a federal moratorium on exploratory offshore oil drilling. The new moratorium, issued by the Obama administration after federal judge Martin Feldman issued an injunction banning the government from enforcing the original moratorium, freezes some 33 current exploratory drilling operations and places a six-month ban on the issuance of exploration permits by the MMS (now the Bureau of Ocean Energy Management, Regulation, and Enforcement).

Dr. Mason begins by identifying the “phases” of drilling that support local economies. Exploratory drilling and the development of offshore facilities, the extraction process, and the refining of the crude oil are all identified as impacting Gulf of Mexico economies. Additionally, those services and industries that support the offshore oil drilling sector provide jobs and economic investment in the area. Some of the service industries that Dr. Mason identifies are the chemical, platform construction, drilling services, transportation, gas processing, helicopter construction, and consumer goods industries. Also, the refining phase is likely to create an economic “spillover,” as refining capacity exists in many states outside the Gulf region.

As expected, all of these industries comprise a large section of the overall Gulf economies. In the state of Louisiana, 2005 figures estimate 15.4 percent of total household earnings could be traced back to these earnings, amounting to some $12.7 billion dollars. The moratorium will lead to a cessation of worker training, as well as job losses among those already employed in these industries. One estimate by a consulting firm places total job losses by 2014 at 120,000. Many of these job losses would be outside the “big” oil companies that have become synonymous with the area, as Gulf oil exploration was essentially pioneered by smaller energy companies.

Dr. Mason uses the RIMS-II model, created by Nobel Prize–winner Wassily Leontif and refined by the U.S. Department of Commerce, to estimate the economic impact of a 6-month moratorium. RIMS-II, which utilizes an “input-output” analysis to estimate the direct and indirect economic effects of a moratorium, has been used by a variety of federal agencies to evaluate the benefits associated with many different economic development projects, as well as by state and local governments to perform economic analyses.

The moratorium is expected to effect 33 offshore rigs, preventing a total of roughly 80,000 barrels per day of oil from reaching the energy market.

Conducting a state-by-state analysis of lost oil production and its impact on the local economy yields an estimated total of economic activity loss of $2.1 billion dollars for the Gulf economies, and $2.7 billion nationwide.

In the Gulf economies, upwards of 8,169 jobs are expected to be lost, with an upwards total of 12,046 nationwide. These economic activity–loss and job-loss figures are conservative estimates, as Dr. Mason’s study assumes the moratorium will last only 6 months at maximum and does not account for several spillover multipliers (such as lost oil and gas production being used as an input in oil and gas production elsewhere, or job losses in other states associated with decreased jobs due to the moratorium).

In an attempt to analyze potential wage decreases amongst distressed economic sectors, Dr. Mason arrives at a figure of between $65 to $135 million dollars in wage losses per month among those who are employed. That amounts to some $487 million dollars in lost wages in the Gulf region, and $707 million dollars nationwide.

Obviously, decreased output, fewer jobs and lost wages mean less federal, state and local government revenue. Dr. Mason estimates $219 million dollars in lost federal tax receipts. He also estimates $97 million dollars in lost state and local tax revenue in Louisiana alone.

Health care, education, and social services will also suffer, as the economic and tax-related impacts of the moratorium will lead to losses in health care provider and teacher positions, as well as desperately needed tax revenue.

As mentioned before, these figures are conservative estimates, assuming that the ban will last only 6-months (figures for a theorized anticipated 18-month ban are significantly larger), while not taking into account several spillover multipliers or the value of the economic investment associated with exploratory drilling. The analysis also does not account for any drilling rigs that simply up and leave the region due to political uncertainty.

Underscoring the importance of this study, Dr. Mason has testified about his findings before Congress.

But is the Obama Administration and the party in power listening? This is not a Democratic or Republican or Independent issue. It is an American issue.

3 comments

1 Jan Arps { 08.16.10 at 2:00 pm }

This drilling ban is an economically destructive knee-jerk reaction on the part of the politicians to be seen to “do something” to punish the major oil companies drilling in deep offshore waters for the accident on the BP Macondo well.

This ban will have a much longer-term negative effect on the local economy, particularly with the likelihood of many of the deepwater rigs moving out of the GOM to foreign waters, thereby leading to the loss of thousands more jobs of local support workers and businesses dependent on those drilling operations. And this against a backdrop of an already-weak economy and high unemployment.

We already have a pretty good idea of the reasons for the blowout, and you can rest assured that all of the oil companies operating in the deep waters of the Gulf have taken note and will implement procedures to avoid in the future the kind of mistakes BP made in this situation. Let the offshore oil industry get back to drilling immediately, before even more serious economic damage is done to the Gulf Coast economy.

2 Ed Reid { 08.16.10 at 5:11 pm }

The Administration has apparently decided to bury the deep water drilling issue under a mountain of new paperwork. http://www.wwltv.com/news/New-regulations-for-deepwater-drilling-100780884.html

The question of whether any new application will ever be approved is yet to be answered.

3 Cooler Heads Digest 20 August 2010 | GlobalWarming.org { 09.13.10 at 2:20 pm }

[...] The Economic Costs of the Off-Shore Oil Moratorium Eric Lowe, MasterResource.org, 16 August 2010 [...]

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