Politics and Offshore Drilling (BP, CVX, XOM, RDS-A)

At President Obama’s news conference yesterday, he admitted that he and his administration’s response to the blow-out of the BP plc (NYSE:BP) Macondo well in the Gulf was wrong. At the same time, he announced that he was suspending exploratory drilling on 33 Gulf projects and canceling or suspending new lease sales and proposed drilling offshore of Virginia and Alaska.

A spokesman for Chevron Corp. (NYSE:CVX) told The Wall Street Journal that the moratorium on deepwater drilling would have a “lasting” economic impact on the US and that “responsible drilling should be allowed to continue.” Chevron’s comment probably also reflects the views held by major oil companies like Exxon Mobil Corp. (NYSE:XOM) and Royal Dutch Shell plc (NYSE:RDS-A), which have substantial operations in the Gulf.

But what, exactly, is “responsible” drilling? Is it responsible to drill in the ultra-deepwaters of the Gulf without a plan to manage an incident like the blow-out of BP’s well? We now know that no such plan either is required by the federal government or has been given a moment’s thought by the drillers themselves.

The government’s role, which it has neglected for years, is to guarantee as far as possible that the extraction of oil and other minerals is conducted with as much safety to workers as can be provided and as little environmental damage as can be achieved. Further, if something goes wrong, then the government needs to be prepared to lead the response.

As long as the US demand for oil remains high, and it will for at least 20-30 years, and as long as there is a desire for the US to cut its dependence on imported oil, then the US will have to drill offshore. And those wells will be in ever deeper water and at ever deeper depths below the sea floor. There’s nowhere else to go.

The current disaster will lead to more regulation and more government oversight of the oil industry. Contrary to what many believe, that could be a good thing. For one thing, stricter regulation will add to the cost of oil which will lower demand for it and drive the development of alternative fuels. This development will occur anyway, but stricter regulation on drilling will speed it up and lower the cost to taxpayers of developing alt energy.

The president has only slowed the pace of offshore drilling, he hasn’t killed it altogether because he knows he can’t. But the Gulf disaster has opened the country’s eyes to the real costs of the US thirst for oil. Perhaps the disaster will also slake that thirst.

Paul Ausick