e21 Contributor Joseph Mason Testifies Before the Senate
Testimony of Joseph R. Mason
Hermann Moyse, Jr. /Louisiana Bankers Association Professor of Finance,
Louisiana State University and Senior Fellow, the Wharton School
Before the Senate Committee on Small Business and Entrepreneurship
July 27, 2010
“The Deepwater Drilling Moratorium: A Second Economic Disaster for Small Businesses?”
My testimony first describes some of the job loss numbers from my study, “The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region,” released last week. I then discuss some of the responses from Congress, beyond the moratorium. I conclude with some observations about regulation and policy that can help craft meaningful approach to regulation, whether in energy or financial services sectors.
I. My Analysis of the Economic Cost of the Moratorium is a Conservative Estimate of Loss
My study, “The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region,” released last week and included here for the record presents a conservative estimate of economic loss caused by the moratorium. Several scenarios could cause actual losses to substantially exceed those offered there.
First, the analysis considers the loss to continue only for six months, followed by an immediate return to normal operations. It is possible, however, that the moratorium and/or its effects could last up to a year and half.1Until a final decision is made by the administration and the courts, it is hard to predict the scope of the losses for the Gulf region. Thus, the losses could easily, in fact, increase by a factor of 2 or 3.
Second, the initial investment stage in oil and natural gas extraction produces many economic benefits. It is conceivable that some of these benefits will be deferred or simply lost as projects are delayed or moved. As discussed in the study, the effects could be particularly detrimental for smaller oil companies.3 ATP Oil and Gas Corp., for example, “expected to see its 2010 production double to at least 12 million barrels of oil and gas but has now dropped its guidance to between 9 million and 10 million.”4It is challenging, however, to quantify this effect accurately across the whole industry. Thus do not include investment loss in my analysis. This means that I under-report the economic losses for communities in the Gulf and nationwide.
Third, if the end result of the moratorium is to place severe restrictions on offshore drilling and production in the long-term, costs could increase to operators significantly. That could lead to decreased operations, increased oil and natural gas prices, and the movement of operations to cheaper locations. That would again impose significant economic hardship on communities throughout the Gulf region and the nation.
Last, refining also has significant benefits to the economies of the Gulf and the nation. Again, it is difficult to determine the effect of the moratorium on refining capacity. It is reasonable to assume that some capacity will be reduced as a result of stagnant oil and gas extraction, which would further add to the economic hardship caused by the moratorium.
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