Friday, May 07, 2010

The BP oil spill

Commenter "Atticus" asks: "speaking of regulation, I'd love to hear a Libertarian's perspective on the BP oil spill." Fair enough. Here are a few thoughts:

1. Accidents happen. No matter what the industry, how regulated it is or how long it has been around, things go wrong. Trains will derail, airplanes will crash, and oil spills will occur. The likelihood of something going wrong is greater when dealing with something that is new, and which one has less experience with. This would certainly seem to apply to the Deepwater Horizon rig, which was quite literally going where no man had gone before:
On September 2, 2009, Deepwater Horizon drilled on the Tiber oilfield the deepest oil and gas well ever drilled with a vertical depth of 35,050 feet (10,680 m) and measured depth of 35,055 feet (10,685 m), of which 4,132 feet (1,259 m) was water.
In his book, Normal Accidents: Living with High Risk Technologies (1984), Yale University sociologist Charles Perrow noted that when a technology fails, it often does so because “the problem is just something that never occurred to the designers.” Assuming no malfeasance, whatever went wrong with the Deepwater Horizon drill rig will likely uncover just such a problem and future designers will fix it. Progress is a trial and error process, and increasing safety results from learning how to make better trade-offs over time between risks.
An accident happened, lessons will be learned and we will move on. Such is the price of progress.

2. More regulation does not strike me as the appropriate solution. Let's remember that, even beyond its ham-fisted response to the oil spill, the government has not exactly covered itself in glory regarding this incident:
While the [Minerals Management Service] assessed the environmental impact of drilling in the central and western Gulf of Mexico on three occasions in 2007 — including a specific evaluation of BP's Lease 206 at Deepwater Horizon — in each case it played down the prospect of a major blowout.

In one assessment, the agency estimated that "a large oil spill" from a platform would not exceed a total of 1,500 barrels and that a "deepwater spill," occurring "offshore of the inner Continental shelf," would not reach the coast. In another assessment, it defined the most likely large spill as totaling 4,600 barrels and forecast that it would largely dissipate within 10 days and would be unlikely to make landfall.
Today's Wall Street Journal features a lengthy article on further regulatory failures, including this nugget:
The MMS has received unwelcome attention for the behavior of employees assigned to a royalty-collection office in Denver, Colo. The Interior Department's inspector general concluded in 2008 that MMS employees there broke government rules and created a "culture of ethical failure" by accepting gifts from, and having sex with, industry representatives. Following the inspector general's report, the Interior Department took disciplinary action against more than a half dozen MMS workers, with punishments that ranged from a warning letter to termination.

Ethical problems also hit the offshore oil program. In 2009, Donald C. Howard, the former regional supervisor of the Gulf of Mexico region for MMS, pled guilty and was sentenced to a year's probation in federal court in New Orleans for lying about receiving gifts from an offshore drilling contractor. Mr. Howard declined to comment.
It's hard to imagine why granting more power to the people who conducted themselves so poorly is the correct response. Let's further recall just how silly regulation is, with its implicit assumption that regulators have better information and are better positioned to make decisions than the oil companies who actually have capital and personnel on the line.

3. Expanding on this last point, let's remember just how much BP stands to suffer from this spill. It resulted in a loss of something like 5-10,00 barrels of oil per day, which at $70 per barrel is $350,000-$500,000 per day. Expensive repairs will have to be undertaken to the $350 million rig. At least eleven workers are dead (even if you think all greedy corporations despise their workers, if nothing else BP will have to retrain workers to replace them, which is typically not cheap). Tens of millions of dollars will be spent on clean-up (which is proper, as those who cause the harm should bear the costs). Its stock price has been dropping.

Given these costs, what reason is there to think that some government action, be it regulations or fines, would have changed its calculus about the operation of this drill? An accident already stood the cost the company plenty.

In sum, accidents happen, the company is already being punished through severe monetary losses, and the performance of regulators in place leaves something to be desired.


Atticus said...

Colin, thanks for this. It's helpful to hear your point of view.

I guess my initial question is in response to your statement,"More regulation does not strike me as the appropriate solution."

What is? And, how would you frame it to someone who's business is at risk because of the spill?

We all know more regulation is coming down the pike because of this, and I'd love to understand the alternative.

Colin said...

What is the appropriate response to the oil spill? Well, frankly from a public policy perspective I'm not sure there is one. We are not going to live in a world with zero accidents, and we must discard any notion that if we just keep piling on the rules that somehow 100% safety can be attained. Further, even if we could, I'm not sure it would make sense. Let's say for example that airline safety could be 100% guaranteed if a series of safety measures were put in place, but their cost would drive up the cost of a seat to $5,000 -- would that be worthwhile? I don't think the cost-benefit really holds.

That's not to say that a response isn't taking place. I can guarantee you that not only BP but every other major oil company out there is reviewing their internal rules and regulations, as well as safety features, to ensure this type of disaster doesn't strike them. And if watching this mess unfold, and the hundreds of million it will cost BP, isn't enough to spur a company into action, nothing is. Companies are absolutely going to try to learn and apply lessons from what has transpired. Risk management, especially for these types of firms, is a big deal.

Your question about those whose businesses are placed at risk is a good one. I think it is reasonable to demand that BP compensate those who have suffered a loss such as fishermen. Of course, calculating who has suffered and exactly how much is tough. It's worth noting that Exxon paid out over $1 billion to settle civil and criminal charges from the Valdez spill, and I wouldn't be surprised if BP ends up shelling out a similar amount.