Real Story of Offshore Drilling
By Staff News & Analysis - May 01, 2010

U.S. President Barack Obama (left) has approved a move to ban any new offshore oil drilling until an investigation into what caused the recent oil spill in the Gulf of Mexico that threatens to destroy U.S. coastal areas and wildlife. Florida, Louisiana, Mississippi, Alabama and Texas are all facing potentially devastating effects from last week's explosion on the Deepwater Horizon rig. That explosion eventually sank the rig and has led to as many as 5,000 barrels of oil a day spilling into the Gulf waters and heading to the shores. Environmental experts have already said the oil spill will eclipse the 1989 Exxon Valdez disaster off the Alaska coast. That spilt 11 million gallons into the water and destroyed a large portion of the wildlife in the area. At its current pace the Deepwater Horizon oil spill will eclipse the damage of the Exxon Valdez in 50 days. There has been no official word on what caused the explosion on the Deepwater Horizon and White House officials have demanded that answer be provided. Until a full report on the cause is known the White House will back a drill ban in any new areas offshore. – WooEB

Dominant Social Theme: Oil is a dirty business.

Free-Market Analysis: We blame American oil companies for this most recent oil spill, but not for the predictable reasons. American oil companies, in our opinion, have helped set up a situation where there is a substantial amount of oil production offshore, even though there doesn't need to be. It's been our opinion all along that US oil companies especially, have been funding Green movements in the US and abroad to help ensure that regulatory issues prevent drilling in the lower 48. This forces drilling offshore and inevitably there will be oil spills – maybe massive ones that are hard to clean up.

How convenient! This in turn, creates more legislative activity to further regulate drilling. And the largest oil companies are not averse to increased regulation that helps drive out smaller players. The largest companies in any industry will always welcome increased regulation because they tend to control the tempo and kinds of regulations being inflicted on a given industry, and therefore on their rivals.

Of course we're aware that American president Barack Obama is sending SWAT teams to the Gulf to inspect oil rigs. This has been seen – by elements of the anti-Obama, conservative press – as precursor to some sort of nationalization. But we would be surprised if the Obama administration messed with Big Oil in a serious way. Big Oil's allies and owners are an elite bunch and tend to be in our estimation the same people that supported Obama's bid for power. Currents and countercurrents swirl deeply around all these issues, to be sure.

In this article, we shall restrict ourselves to an analysis of how Big Oil has used environmental regulation to generate a competitive advantage – and no doubt will try to take advantage of British Petroleum's Deepwater spill in much the same fashion. This sort of mercantilism is endemic to the industry, in fact, and we're not the only ones to have noticed it. Here's an excerpt we found on the Internet – adapted from Chapter 10 of the Holes in the Ozone Scare: The Scientific Evidence That the Sky Isn't Falling, published in June 1992 by 21st Century by Rogelio A. Maduro and Ralf Schauerhammer:

Who Owns the Environmentalist Movement? … Far from a grass roots movement, environmentalism is a big business, funded and directed by the leading families of the U.S. and European establishments … Twenty-five years ago, those who believed that Mother Nature comes first and humankind second were part of an insignificant fringe, considered radical by most Americans. … Official lore from the environmental movement's publications asserts that the movement emerged from the grass roots. The truth, however, is that funding and policy lines comes from the most prestigious institutions of the Eastern Liberal Establishment, centered around the New York Council on Foreign Relations, and including the Trilateral commission, the Aspen Institute, and a host of private family foundations. …

The vast wealth of the environmentalist groups may come as a shock to most readers who believe that these groups are made up of "public interest", "nonprofit" organizations that are making great sacrifices to save the Earth from a looming doomsday caused by man's activities. In fact, the environmental movement is one of the most powerful and lucrative businesses in the world today. …

Where do the environmental groups get their money? Dues from members represent an average of 50 percent of the income of most groups; most of the rest of the income comes from foundation grants, corporate contributions, and U.S. government funds. Almost every one of today's land-trust, environmental, animal-rights, and population-control groups was created with grants from one of the elite foundations, like the Ford foundation and the Rockefeller Foundation. These "seed grants" enable the radical groups to become established and start their own fundraising operations. These grants are also a seal-of-approval for the other foundations. …

Another huge source of contributions to the environmental movement is private corporations. Unlike tax-exempt foundations, however, corporations are not required by law to report what they do with their money, so it is difficult for an independent researcher to estimate the level of funding for the environmentalist movement from business and industry. There are watchdog groups, however, that have investigated these money flows and come up with startlingly large figures.

For example, the April 1991 newsletter of the Capital Research Center in Washington, D.C., which monitors trends in corporate giving, scathingly denounces those corporations it has discovered financing the environmentalists. The newsletter states that oil companies "are heavy financial supporters of the very advocacy groups which oppose activities essential to their ability to meet consumer needs". Further, it reports, "The Nature Conservancy's 1990 report reflects contributions of over $1,000,000 from Amoco, over $135,000 from Arco, over 4100,000 from BP Exploration and BP Oil, more than $3,200,000 (in real estate) from Chevron, over $10,000 from Conoco and Phillips Petroleum and over $260,000 from Exxon".

From the scant information publicly available (largely annual reports from the major environmental groups), one can conservatively estimate that corporations contribute more than $200 million a year to the environmentalist movement. This should come as no surprise. Over the past 20 years, giant corporations have discovered that by using environmental regulations they can bankrupt their competition, the small- and medium-sized firms that are the most active and technologically innovative part of the U.S. economy.

Yes, indeed … America's largest oil companies and those who own them have been busy pushing discoveries out into the sea or overseas for decades, and the environmental movement has provided a lever. It certainly makes sense. In the case of deep-sea drilling, the effort tends to be prohibitive unless you are the size of Exxon – and thus the barriers to entry are tremendous. In the case of Middle Eastern and other foreign drilling, the supply chain is long enough to tolerate considerable pricing shenanigans that oil companies could never get away with were they drilling at home.

The Deepwater spill is sure to put pressure on deep-water drilling, which in turn will make the price of oil even more expensive. US oil companies are, at the least, facing the prospect of more regulation as regards deep-drilling, off-shore efforts. Is this something US big oil conglomerates fear? Hardly. More regulation merely raises the barriers to entry once again. Worst case, exploration moves to Africa and central Europe and prices rise once more for American consumers. (However, it is also possible that the Deepwater spill may be used by the powers-that-be to renew arguments that oil is simply too unpredictable an energy source and that wind power, solar, etc. are preferable.)

There are so many large discoveries of oil in the Americas that we have all-but-lost track. There have been huge discoveries of oil in the Gulf of Mexico and the Bakken Formation in the Dakotas promises additional billions, if not hundreds of billions of barrels. There are the oil-rich tar sands in Canada and of course manifold discoveries in Alaska, some of which are being exploited, others not. The Sahara is rich with oil, much of which has not yet even been drilled, and one assumes that there are other as yet undiscovered deposits throughout Africa.

Then there is the idea that oil is abiotic, or caused by naturally occurring geological processes deep in the earth – which would explain why some wells seem to refill, at least partially. This theory is not opposed to the idea that oil is also composed of dead plants and animals, but one can certainly speculate that there is more to the creation of oil than has thus far been explained. The nomenclature "fossil fuels" makes us suspicious to begin with. When the elite labels something so forthrightly, it's usually for a reason. In this case, the name defines the process, something which is either extraordinarily convenient or in a sense propagandistic.

Oil companies generally hope to keep the price of oil aloft by preventing supply from coming online. Domestic production in North America has definitely been slowed by the environmental movement, even though as we just pointed out, above, there is likely plenty of oil were it to be actually tapped. We won't go so far as to say that there is rejoicing in the corporate boardrooms of the American oil giants tonight as they face the prospect of a widely publicized Deepwater spill. But in fact additional regulations put in place as a result of Deepwater will actually only further cement the competitive advantages that American oil giants already enjoy. The barriers to entry are vast. The amounts of money necessary to compete these days, given the regulatory blockages, continue to rise.

After Thoughts

To visualize the oil industry as fighting like mad to stave off environmental attacks is to utilize a paradigm that is from our point of view a bit naïve. Environmentalism, to date, has been one of the power elite's most successful promotions, a dominant social theme worthy of an Oscar nomination. But in the 21st century, we shall see if the elite is able to maintain the momentum. That's not just a sociopolitical question, but an important issue from an investment standpoint as well.