The Risk of Over-regulating the Energy Industry

Policymakers are guilty of their own biases when dealing with risk in the energy industry.

By + More

Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.

The energy industry experienced a variety of accidents and disasters last year, from the Macondo rig explosion and oil spill in the Gulf of Mexico, to the earthquake and tsunami that nearly destroyed the Fukushima nuclear reactors in Japan. Not surprisingly, this has increased scrutiny of other energy operations, and in particular has bolstered opposition to projects like the proposed Keystone oil pipeline expansion from Canada as well as the practice of hydraulic fracturing to produce oil and gas from shale deposits.

Policymakers often find themselves conflicted, however, between the desire to expand employment and protect the public from possible dangers. And in cases where, as with drilling for shale oil and gas, the impacts are spread broadly, the debate is often more heated than illuminated.

[Read the U.S. News debate: Is Fracking a Good Idea?]

Environmentalists often propose relying on the 'precautionary principle' which states that it is best to act in response to fears, even lacking strong evidence of harm to health or environment. Given the difficulty of establishing precise or even vague cancer risks for substances that are not strong carcinogens, this approach has some appeal.

And it is hardly new. During the 14th century plague known as the Black Death, many theories were formulated to explain the causes of the calamity, from divine retribution to accusations of Jewish conspiracy. Pope Clement VI, perhaps the first policy wonk, disputed this, noting that the Jews seemed to be equally afflicted, and the plague was present even where there were no Jews. Sadly, the public often applied the precautionary principle and killed or drove out the Jews anyway.

Has the public's judgment improved since then? Arguably, the current scare about vaccines and autism represents one end of the spectrum, where the overwhelming evidence proves there is no connection, but many parents continue to skip vaccines anyway, putting other members of the public at risk from a variety of easily preventable diseases. The other end of the spectrum would be the recent World Health Organization report that listed cell phones as a possible cause of brain cancers which does not seem to have spurred one person to put down his or her cell phone.

[See a collection of political cartoons on energy policy.]

This might be less evidence of risk perceptions than of people giving priority to convenience: some might welcome an excuse not to take a toddler in for shots in the first case, and no one is willing to give up  his or her cell phone.

But it also helps inform us as to a more reasoned approach. First, any activity that is widespread, such as cell phone use, cannot be very high risk (at least as a carcinogen) if the effects are so obscure. For another, people have little trouble doing at least a minimal a cost-benefit analysis in many cases. A chemical which is rarely used, or can be easily substituted for, might not require as much evidence as something which provides major health improvements or cost savings.

Obviously, industry will naturally resist anything which imposes additional costs on them, particularly when the risks are not obvious. Most recognize this bias, and factor it into their judgments of risk. But government officials and nongovernment organizations have their own biases, and in particular, tend to ignore the impact of the costs they are imposing on people, industry, and the economy. Given the importance of factoring in costs on any such decision, this is a serious shortcomings. The catchphrase "People not profits" could just as easily be, "Lower emissions, less jobs."

  • Read Mort Zuckerman on America's energy future.
  • Read the U.S. News debate: Is It Time to Drill in the Arctic Refuge?
  • Follow the U.S. News Energy Intelligence blog on Twitter