Public policy towards offshore oil projects: Confronting potential deepwater oil spills

There has been a recent surge in global interest in drilling offshore wells in pursuit of new reserves of crude oil, with much of this activity focused on deepwater. One concern related to this uptick in activity is the potential for very large damages that could obtain were a major oil spill to occur. For example, when the Macondo well in the Gulf of Mexico suffered a blowout in 2010 a very large amount of oil flowed from the well into the Gulf causing enormous harm. In response, the United States Government proposed significant regulatory changes related to offshore oil and gas exploration and production. This paper proposes a framework for thinking about the risks associated with deepwater exploration and production, and uses this framework to construct an estimate of society's necessary willingness to pay to protect ecosystems. Applying this framework to the BP oil spill case study, benefits resulting from a reduction in the risk of a major spill exceeds these costs under a range of potential reductions in risk.