This document summarizes two reports on the potential economic benefits of offshore drilling in the South Atlantic. It finds that the estimates in the API report are likely overestimates because they are based on outdated high oil price assumptions. The Walden report provides sensitivity analysis showing that estimates of economic impacts and jobs could vary widely depending on uncertain factors like oil prices and estimated oil resources. Compared to the large uncertainty of drilling, the established tourism and fishing industries in the region already provide significant economic value. Overall, the document questions the reliability of optimistic drilling estimates due to uncertainty and changing market conditions.

1. The Economics of & Uncertainty of Offshore Drilling:
A Look at the Data
Douglas J. Wakeman, PhD
Professor of Economics
Meredith College School of Business

2. Two reports produced in 2013 have served as the basis for discussion
of the possible economic benefits of offshore drilling in the South
Atlantic:
Offshore Oil and Natural Gas Resources in the Atlantic, produced by
Quest Offshore Resources, on behalf of the American Petroleum
Institute (API) and National Ocean Industries Association (NOIA)
http://questoffshore.com/wp-content/uploads/Economic-Benefits-Full-Dec.13.pdf
This document is hereinafter referred to as the "API Report.“
And,
The Economic Potential from Developing North Carolina's On-Shore
and Off-Shore Energy Resources, by Professor Michael Walden,
Deptartment of Agricultural and Resource Economics, NCSU.
http://ag-econ.ncsu.edu/sites/ag-econ.ncsu.edu/files/faculty/walden/drillingnc.pdf
This document is hereinafter referred to as the "Walden Report."

3. Much attention has been given to the very large estimates of
economic benefit in the API report. Some estimates adapted
from Table 1 from that report, which shows estimated impact in
all of the affected states, are reproduced below:
2020 2025 2035
Employment 11,400 78,100 280,000
Contribution to GDP
($millions) 1,010 6,410 23,430
Source: Adapted from API Report, page 3, Table 1

4. Close to home, the API report summarizes the likely effect in the Carolinas
and Virginia. Rounded values for the annual impacts in NC in 2035 will be
used for comparison to other estimates:
$4 billion in additions to the NC Economy & 55,000 jobs
2035 Employment
2035 Contribution to State
Economies ($millions)
North Carolina 55,400 4,080
South Carolina 35,600 2,730
Virginia 25,000 2,180
Source: Adapted from API Report, page 11, Table 3

5. Estimates of the value of offshore resources depend crucially upon
the assumed path of future oil prices, for two reasons.
First, higher prices will create larger benefits for any given quantity of
oil and gas that is produced.
Second, the amount of petroleum products that can be extracted at a
profit is much larger when prices are higher.
When oil sells for $120 per barrel, as it did a few years ago, many
economically-marginal deposits become profitable.
When the price of a barrel of oil is less than $50, as it has been
recently, a large amount of production in high-cost areas ceases to be
profitable, and does not occur.

6. The estimates of future petroleum prices used in the API
Report are taken from the Annual Energy Outlook for 2013,
a publication of the US Department of Energy.
http://www.eia.gov/forecasts/aeo/pdf/0383%282013%29.pdf
However, it is not immediately clear which specific
estimates from this report are used.
This is important, because as seen in the table from that
report that is reproduced in the next slide, there is
substantial uncertainty in the future path of oil prices.

7. Oil markets have changed dramatically since 2013: recent values for
the price of oil have often been below the “Low Oil Price” line in the
chart above. This calls into question any forecast based on values
presumed to be substantially higher. All economic estimates in the
API report may be regarded as likely overestimates.

8. An essential element of a useful forecast is Sensitivity Analysis. This
is the process of determining the extent to which predicted values
depend upon the assumed values of the parameters of the
forecasting model.
We must ask: to what extent do those estimates of $4 billion in
economic value, and 55 K jobs, depend upon the assumed values of
future oil prices?
Not only is the API report silent regarding which specific estimates
of future prices are used, it makes no attempt to enlighten the
reader regarding the way that the important estimates will change
if different price estimates are used.
We know that there is great uncertainty, but we do not know its
impact on the estimates. For that we must turn to the Walden
Report.

9. The data in the Walden Report are not completely comparable
to those in the API Report. However, some approximate
comparisons can be made for certain annual values.
Estimates adapted from Table 3 in the Walden Report are
shown in the next slide. Although the API report used peak
annual values for 2035, and Walden reports annual averages
for the entire production period, the same phenomenon is
being estimated.

10. Employment
Contribution to
State Economy
North Carolina: Annual
Averages for 30-year
production period 16,910 $1.9 billion
Source: Adapted from Walden Report, p. 24, Table 3

11. This table summarizes the key estimated outcomes, in their most
comparable form. Walden’s “Spending” variable is comparable to the
API economic contribution variable.
Again, note the discrepancy between API’s peak annual values for
2035, versus Walden’s annual averages for the entire production
period. The two reports are closer than these summary data make it
appear: peak production values from the Walden estimates are
fairly close to the 2035 estimates in the API report. The methods
and outcomes are similar.

12. This table adapts Walden’s estimates of the sensitivity of the estimates of spending impact.
Across any row, we see the effect of changing the estimate of the amount of petroleum resource to
be recovered; high estimates of economic impact are 40 to 50 times as large as the low estimates.
Going down each column, we see the effect of varying the assumptions about future oil and
natural gas prices; the high estimates of economic impact are 10 to 20 times the low estimates.
Combining these effects, going from the top left to the bottom right, the high estimate is 800
times as large as the low estimate.
Source: adapted from Walden Report, page 29, Table 5.
Sensitivity Analysis: variation in estimated Annual Economic Spending Impact ($billions)
Discoverable Quantity of Oil & Gas: Low Mean High
Assumed Prices for Oil & Gas:
Low 0.01 0.4 0.6
Medium 0.09 2 3.9
High 0.19 4 8.1

13. This table adapts Walden’s estimates of similar data for the employment estimates.
Across any row, he examines impact of changing the estimate of the amount of petroleum
resource to be recovered; high estimates of employment impact are 40 to 50 times as large as
the low estimates.
Going down each column, he shows the effect of varying the assumptions about future oil and
natural gas prices; the high estimates of economic impact are 12 to 14 times the low estimates.
Combining these effects, going from the top left to the bottom right, the high estimate is 610
times as large as the low estimate.
Source: adapted from the Walden Report, page 29, Table 5.
Sensitivity Analysis: variation in estimated Annual Employment
Discoverable Quantity of Oil & Gas: Low Mean High
Assumed Prices for Oil & Gas:
Low 118 2900 5902
Medium 809 17,437 34,400
High 1686 35,918 72,005

14. In contrast to the huge uncertainty in the value of drilling, recent
(2011) values of tourism and fisheries in the seven coastal counties
most likely to be affected by drilling are known.
Absent a disaster, the upward growth path of these values over the
next 40 years is much easier to anticipate.
2011 Annual Value of Tourism & Fishing in Seven Coastal NC Counties
Spending Employment
$3.1 Billion 37,872
Source: adapted from Walden Report, p. 33, Table 7.

15. This table compares the known economic value in 2011 of Tourism & Fisheries with
the exceedingly speculative impacts of offshore drilling in North Carolina.

16. Lagniappe:
How much has really changed in terms of technology and regulatory enforcement in the last decade?
The photo below is of a lesser-known spill in the Gulf known as the Taylor Well. It has been leaking oil
since Hurricane Ivan destroyed equipment on the sea floor in 2004.
Reasonable estimates are that it continues to leak between 100 and 400 gallons per day, even after
being “capped.”
The resulting slick is between 10 and 30 miles long, depending on the day and the person doing the
observation and estimation. Seemingly-endless litigation has attempted to force the stopping of the
leak, and the release of all pertinent information to the public, with no real success.