20 Jun 2010

Oil Spill in Context?

Many criticize BP and the government for the oil spill. In this case, I am not convinced the government deserves criticism. I have read that environmentalists (and government) are partly to blame in pushing drilling to deeper and deeper areas in the Gulf, therefore making drilling more risky and dangerous. But in looking at this map, it seems like there are plenty of rigs both close and far from shore. See here for the current spill's location.

I also read a friend's paper recently criticizing BP's ethics, claiming that they failed in their duty to shareholders. Why can't this just be an accident? Yes, perhaps if BP installed a blowout device, this may not have happened. But trying to find something to blame, and then trying to fix it may not be productive. There may not be much we can do to prevent another spill, and if that is true, then we ought to debate how much ocean-transported oil we are comfortable buying.

I am OK with the current oil spill risks. I don't like them, but I don't think I am willing to give up ocean-transported oil to eliminate this risk, especially when the overall spill trend has been improving. I also don't live on the Gulf coast...

Bottom Line: It's useful to know why this spill happened, but knowing who's at fault may not prevent another one.


  1. If BP violated recognized procedures in an attempt to save money, then it wasn't just an accident,it might even be criminal.

    If MMS was, as is now obvious, corrupt and not doing their job, then government shares responsibility too.

    And they drill further out because that's where the oil is.

    Folks who live on the Gulf might take exception with you being ok with spills. But then you don't live there, I'm guessing.

  2. Dr. Zetland:

    It would be extremely difficult and extremely expensive to substitute for ocean-transported oil.

    One point of that anti-fossil fuel proponents like to put forward is the idea that we merely need to “substitute” subsidized semi-clean renewable energy for fossil fuel energy.

    In the realm of economics, substitution is rarely full substitution. The concept of substitution in practice is generally "incremental substitution". With incremental substitution you have dynamics that swing back and forth from the originally substituted item to the substitutes. Moreover, incremental substitution is distorted when subsidies (clean energy subsidies) and distorted prices (carbon tax) are present.

    Furthermore, how in the world do you substitute for 60 million years of Coal Swamp Forests? Coal Swamp Forests likely yield less expensive energy, including externalities, than non competitive, subsidized, semi-clean energy sources and their respective externalities.

    If incremental substitution, in a free market, is allowed to function between substitutes such as ethanol, solar, nuclear, oil, natural gas, and coal, then you end up with the most efficient allocation of scarce resources. If you intervene with subsidies and coercive behavior pricing (carbon tax) you merely create a scarcity scheme that misallocates scarce resources.

  3. Zetland didn't write this by the way...

    polizeros - "MMS is corrupt and not doing its job" - that may be true, but name a single governmental oversight group (SEC, MMS, EPA, FDA, FTC, etc.) that performs efficiently and fairly w/o corruption. I don't think its possible given the principle-agent problem that exists (MMS has no incentive to be the bad cop) and the knowledge problem that Hayek speaks about (they lack the detailed information needed to really understand and "manage" a massive system from the top down).

    Therefore I don't blame them here because they couldn't do much.

    As I mentioned, its true I don't live there. But pre-spill, are residents there willing to shut all their offshore rigs down to prevent something like this, given the previous lull in spills and the money it brings in?

    Heasley - I know it's be tremendously expensive. That's why I am guessing most people are ok given the current tradeoffs we face.

  4. Mr. Heasley, having no cost for carbon emissions is also a market distortion.

  5. JR emails: "The Deepwater Horizon catastrophe is unquestionably BP's fault. The company's reckless behavior and even intentional misconduct -- both occuring chronically and in this particular situation -- clearly warrant criminal prosecution.

    The government did play a role in the situation by indirectly enabling corporate criminal misconduct to occur on an ongoing basis through lack of proper oversight and regulation. The regulators in the Interior Dept. (and worst of all in the MMS) become utterly co-opted and corrupted by the industry they were supposed to be regulating during the GW Bush years, and Salazar has done nothing substantial to clean house and enforce the law vis-a-vis oil drilling safety issues during the past 2 years.

    But to blame the government for the catastrophe in the Gulf is like blaming the police for the second murder committed by a criminal because the cops were too incompetent to catch and imprison the criminal after his first murder. Regardless of government failures (which absolutely must be remedied), BP is still the criminal responsible for the Gulf catastrophe.

    If you want to read an outstanding and nuanced analysis of the whole situation, see the article below.


    Rolling Stone, June 8, 2010

    The Spill, The Scandal and the President
    The inside story of how Obama failed to crack down on the corruption of the Bush years – and let the world's most dangerous oil company get away with murder"

  6. Golly, I just KNEW this must be George Bush's fault, somehow! Thank God we have Rolling Stone to expose the secret the Vast Right-Wing Conspiracy would kill to keep. I feel an Oliver Stone movie coming on.

  7. Very shrewd observation... Bush and Cheney wouldn't have any interest in furthering the oil industry or making it easier to get around regulations. They don't have any connections to the oil industry whatsoever!

    We should stick to Fox news for real reporting accuracy and intellectual insights. The rest of the media is just left wing propaganda...

  8. JWT emails: "Yes, when I firsrt saw the map of off shore drilling plaftorms and wells in the Gulf, I was amazed. It is something like 500. Which makes your point about just being an accident less pertinent. Hundreds can do it safely so why can't BP? Here are a couple of reasons. After the well is finished, it is neccesary to place a "drain pipe" exactly in the center of the well hole to extract the crude. Everyone use 21 points to make this precision job. BP elected to use just six, to save money, and missed the
    exact center. Everyone use a double pipe to extract the crude, i.e., one pipe inside an outer pipe. BP negelected to use the second pipe to save money. That decision led directly to the methane gas explosing that killed
    11 guys and destroyed the platform.

    The fact is that there simply are some bad companys. Astra Seneca in another one that comes to mind.

    At their Texas City refinery, 25 guys died and hundreds were injured because BP refused to follow industry safety procedures. They paid a huge fine, those guys are still dead.

    Even the last Chairman got fired because he charged all of his girl friends expenses to the company.

    And all these people are damn arrogant, they put all of these decisions in writing.

    Sorry, these are bad folks and they deserve what they get. However, that should not let the government off the hook. The lead MMS inspector for the BP platform was negotiating for a job with BP even as he was inspecting the platform!!! Keeeriissssss................."

  9. So they elect to use less metal piping, and cut some corners, to save money. Is that direct testimony from BP officials? What is your source for this info?
    I would be surprised if they didn't have a different take on the situation.

  10. David, how do you know it was a bad risk? Maybe the odds of this happening even with the corners BP allegedly cut were one in a trillion. Maybe they -- and we -- are just unlucky. I'm not saying that's the case, I'm just pointing out that that's the right question to ask.

    You can always spend another dollar and make things safer. At some point, we all quit spending on safety. That includes those who are railing against BP (mostly their competitors, I assume). If you're going to say BP was reckless, then you've got to do more than point to the things they could have done but didn't do. You've got to provide some kind of evidence (some kind!) that the cost of doing those things at every single well is lower than the avoided risk. Furthermore, you've got to do that calculation from the perspective of BP prior to the accident.

    It's not fair to expect high precision, but some recognition of this seems in order. Is anybody interested in thinking about this in a grown-up way, or is it just a political issue for everybody?

    I'm not wanting to defend BP. I have no particular knowledge of oil drilling or this accident specifically. But I do know about benefit/cost and risk management, and it's not as simple as identifying something that could have been done but wasn't.

    Four Mound Farm, that's asinine. Obama was a professor - should we attribute every good thing that happens to academics to his "connections"? Ronald Regan was an actor - can Hollywood's profits since the 1980s be attributed to favors he handed them? Of course, he was also a union leader, so SEIU and AFL-CIO were eating at that same trough, I suppose. Of course, he also worked for GE, so it's complicated. Bill Clinton was from Arkansas, and I'm sure I don't have to tell you how rich and prosperous that state became during his administration. (I could be wrong about this, but I think I read that Arkansas is second only to Connecticut in per-capital income.) Can you imagine if Dennis Kucinich's campaign had succeeded? Jupiter -- that's where he's from, did you know? - Jupiter would rule the entire solar system! Kennedy was killed by the Norwegian mob. JR was shot by Lance Cumson from Falcon Crest. Jimmy Hoffa is selling corndogs at Six Flags. We never went to the moon - it came here.

  11. Outsider - those are good points and essentially the aim of my post.

    I wish people would stop putting so much faith in government regulation and instead think of creative ways of enforcing good practices.

    When something like this happens, I want to know if a company didn't do all they could given the serious financial penalties they would face if a spill happens. Its clearly in their best interest to prevent a spill like this. What strikes me about this incident is the magnitude, which makes me think that BP didn't consider such an event possible. The Black Swan comes to mind here...

    Because if they had assigned a positive probability to this event, clearly they want to spend a few bucks preventing it.

    If instead it can be shown that they knew the risks yet made idiotic decisions ex-ante, which seems difficult to prove given that MMS signed off on all of their plans, then they deserve what likely is coming to them (bankruptcy or worse). Let the market punish them. Reform/abolish the MMS.

  12. I think I disagree with your last paragraph -- and in so doing agree with your main point even more. If BP disregard risks, the most likely culprit is moral hazard created by regulation.

    In fact, I would suggest that the $20 billion shakedown/escrow (depending on your perspective) smells a lot like BP buying off their federal regulators. It seems very likely that this is a negotiated settlement, whether it's actually in the public interest or not isn't clear. Or all that important, frankly. So I'm with you: let the market and tort law settle it.

  13. Outsider, though I disagree with your general take, I want to add an "amen" to your point about the $20 billion. That number happens to be very near the annual net profits of the company. Coincidence?

    The problem with just letting tort law/market settle this is in the market type. We've few substitute products right now, and BP has a stranglehold on both the product and the information on the product, so we are at its mercy in the marketplace. We need better ex-market rules in place to enforce the opportunity for people to make honest economic decisions with all available information.

    Damian, BP totally expected this event at one time or another. They just knew that they could get out of it should it happen, again because of their size and market control.

    As for regulations and safety, shear rams have failed 45% of the time when tested in the real world, and none had ever been tested in mile-deep water. Most of the offshore rigs in the Gulf now have two of them. Deepwater Horizon only had one.

  14. Josh, well, one substitute is oil from Exxon. How can you imply BP has a monopoly?

  15. Outsider, I do not imply BP has a monopoly. BP is the third largest oil company in an oligopoly with HUGE hurdles to entrance and gigantic economies of scale.

    One small example to show my point: If you purchase gasoline at an Exxon station, are you buying gasoline refined at an Exxon plant from oil pumped by Exxon rigs? At the very least, you don't know.

    Brand marketing in the gasoline market is not the same as knowing where, how, and who pumped it.

  16. Josh, you're making my point for me. The fungibility of oil is one of the things that makes monopoly so unlikely. BP can do nothing to affect the price of oil. Nothing. Therefore, they are not a monopolist, oligopolist, or any of those other ones.

    There are plenty of reasons to be, uh, disappointed with BP. Monopoly is not one of them.

  17. Outsider, we agree that, in general, BP, alone, can have little or no impact on the price of oil in the market at any one time. That was never my point, and you seem to be simplifying market power in assuming it is only price.

    As there are no current real alternatives to gasoline, and as the entry into the gasoline market is very difficult, and as the economies of scale of the few companies who provide gasoline to billions of people, BP (as one of those few) has tremendous market control. This control extends into political economy (e.g., influencing tort law), and it extends out into consumer impacts (e.g., knowledge problems). And this is only the gasoline part of the oil market.

    Oligopoly creates tremendous pressures (or, opportunities, depending on where you work) for collusion, effecting monopolistic impacts on price. Also, the nature of most oligopolies, and definitely of the oil market, makes prices less elastic.

    We simply cannot pretend that the oil market is like the wheat market from farmers to traders. There are far different market forces at work in each one.

  18. You say they have market control. I say, no, they have control of the regulators. That's not the same thing. Who are they colluding with -- other than the regulators, I mean?

    I wonder if you're confusing BP with OPEC, who does have some, limited monopoly power over the oil market.

  19. There is a revolving door between corporate interests and government. That is how government is to blame. Responsibility for this oil fiasco in the Gulf lies squarely at the feet of BP. They want the money, they want the power, but they cry like small children when the game falls apart in a big way. Suck it up. Bear your responsibilities. Fix what you broke and destroyed...and quit crying.


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