The BP Event

I had to delay my reading of The Empire of Liberty in order to do a little research on the decisions surrounding catastrophes such as the BP well blowout to prepare for a panel I am on in a couple of weeks. The title of the Panel is “The Drama that Drives Decisions” and is sponsored by the Executive MBA Program at ASU.
I first looked at the top ten industrial disasters. These included Bhopal, Three Mile Island, Love Canal, Ecuador, Papua New Guinea, Exxon Valdez, Niger, and BP. Notice how all of these occurred to companies headquartered in non-dictatorial countries or on these non-dictatorial nations. Does this mean that no such disasters occur in the dictatorial nations? Moreover, notice that no one was killed in the Valdez, Three Mile Island, and Love Canal cases. (Three Mile Island was a nuclear meltdown where no radiation leaked. But it led to “No more nukes! No more nukes! Love Canal was a municipal dumping site and the city gave Hooker permission to dump wastes there. The canal was covered up and houses built on it. It appears no one was injured by it. ) But the publicity surrounding the Valdez, the Love Canal, Three Mile Island, and BP was far more extensive than the others noted. Also note that in these cases, either there was no government (a war such as in Niger was going on), no or very weak private property rights existed such as in Ecuador, Guinea, and Bhopal, or an accident occurred due to a drunken pilot – the Valdez – or some other cause --BP.

It seems that to understand how decisions are made we need to understand the environment that leads to and arises around disasters such as the oil spill . There are at least two factors that create the environment of drama or hysteria. The first is government intervention in market transactions. The second is media coverage of the stories. If we look at oil spills and other industrial environmental disasters over the past fifty years, there is a very consistent pattern. Disasters occur primarily in areas where the government is broken down, the government controls everything, and/or the companies causing the problems are government entities. Major oil spills occur in Niger, Sudan, China, Saudi Arabia, Russia, Ecuador, and Mexico regularly. But the most well known disasters occur in the Gulf of Mexico or on the U.S. or Canadian property, or much less so in Finland and the North Sea. Why are these well known and the disasters in the dictatorial countries not publicized? If you consider that people want news on disasters and Armageddon like events, and that the cost of obtaining information about such disasters and events is so much easier in free nations than in the dictatorial ones, it is obvious why the media and environmental groups tend to focus on the events occurring in free nations. (For a great read on this idea using the Canadian oil sands and comparing it to oil collected from dictatorial regimes, see Ethical Oil by Ezra Levant. )
When governments seek oil sales to acquire weapons to use against others, such as in Sudan, clearly there is no concern over environmental disasters. The genocide in Darfur is far more important to the Sudanese than oil spills. When dictators control oil there is little concern with environmental issues. Saudi Arabia does not care about oil spills – in fact they have become experts in clean ups. Venezuela, Russia, China , Kuwait, Iran, and Burma don’t report spills or accidents.

So now turn to BP. Why would BP decide to drill in waters five miles deep fifty miles off shore, drilling that is path breaking? Because that is the only place the U.S. would allow companies to drill. In the figure, notice that the “no” areas for drilling include the U.S. interior and the U.S. coastline except in a narrow region of the gulf.

In addition to forcing drilling outside the U.S., the government placed a cap on liability of $75 million for companies if they experience a spill in the deep waters. As it did in banking, the government’s liability limits created moral hazard problems. Finally, as in all cases where an industry or business is regulated, we find regulatory capture – where the regulators are responding to the desires of the industry. The regulatory body of deep water drilling, the Minerals Management Service, raked in $13 million a year from oil companies; MMS employees accepted gifts, had sex with oil personnel, and did drugs while inspecting oil rigs. It should not have been a surprise that the MMS waived requirements for environmental impact studies and allowed oil companies to write their own inspection reports.