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Source link: http://archive.mises.org/13062/bashing-bp-for-doing-exactly-what-government-led-them-to-do/

Bashing BP (For Doing Exactly What Government Led Them to Do)

June 23, 2010 by

In a free market, there might not be such a mess to deal with in the gulf. With companies bearing all the risk — and not being rewarded for taking economically unsound actions — there would have been far less activity in deep waters. FULL ARTICLE by Matthew J. Novak

{ 95 comments }

J. Murray June 23, 2010 at 7:39 am

Isn’t there also a restriction of putting those same drilling stations on the shoreline? I was talking to people who work in the industry and informed me that the directional drilling used on those platforms is incredibly advanced. Many different wells, many dozens of miles away, are being drilled concurrently on a single platform. It’s more than feasible, and even cheaper, to drill hundreds of miles under the ocean floor than it is to construct a new platform and drill from there.

If oil companies can more easily, more safely, and more cheaply drill oil under the Gulf from the shoreline of Florida or Texas, why aren’t they? There must be some kind of restriction that effectively bans oil companies from setting up operations along the coastline and drilling out to the reserves.

jon June 23, 2010 at 8:24 am

perhaps state corporatism is just a grand social project for the generation of straw men of epic proportions — corporations themselves, at times huge and industry-leading — to carry out the poor government that the voters asked for, but then be blamed for the problems that voters themselves caused. the smaller the state a man wants, then, the more liable he is to disassociate the intrinsic flaws in the state with his own behavior.

“what a piece of work is man, how noble in creation…”

truly schizophrenic.

Aubrey Herbert June 23, 2010 at 9:00 am

Win.

The_Orlonater June 23, 2010 at 9:13 am

The responses of people to this oil spill are truly mind blowing.

tfr June 23, 2010 at 9:14 am

What are these royalties which they’re avoiding by drilling in deep water?

tfr June 23, 2010 at 11:38 am

Answering my own question, this is the best I could find:
http://www.consumerenergyreport.com/2010/04/13/us-re-evaluates-its-drilling-royalty-rates/

Perry Mason June 23, 2010 at 1:39 pm

Royalties are paid by the lessee of an oil and gas lease to the lessor, as a % of production, in this case the MMS/Federal Government. There are other kinds of royalties (called overriding royalities), but the reference in the article is to the lessor’s royalty.

Lemmywinks June 23, 2010 at 9:16 am

I thought I would disagree with this article at first, but it’s pretty good. I just wish it was a bit longer though, as I’m getting pretty interested in oil industry regulations.

Shay June 23, 2010 at 9:35 am

I wonder whether some companies would benefit more from incentives to drill farther out, perhaps because they had better technology. Even though it would be harder for them, it wouldn’t as much harder as it would be for the competition, so they would suffer less. Sort of like chemotherapy, where you administer a poison, but rely on it hurting the healthy cells less than the unhealthy ones.

So let’s say these oil companies wanted these government regulations. This still wouldn’t excuse the government for actually granting them. A fundamental part of the free market is that all actors are trying to take advantage of anything that can give them an edge. If you leave it alone, you limit actors’ control to just their own property. If you interfere, you give these same actors control over far more. It doesn’t matter what your interference is intended to do; there will be ways of influencing how you interfere, which actors will figure out.

Dave Albin June 23, 2010 at 10:13 am

I wonder if it is the other way around – the incentives drove the technological advances?

Dave Albin June 23, 2010 at 10:16 am

Maybe you were leading to that…..

Ohhh Henry June 23, 2010 at 9:57 am

The government intervention may be even worse than you think.

” … According to the Wayne Madsen Report (WMR) sources within the U.S. Army Corps of Engineers and the Federal Emergency Management Agency (FEMA), the Pentagon and Interior and Energy Departments told the Obama Administration that the newly-discovered estimated 3-4 billion barrels of oil in the Gulf of Mexico would cover America’s oil needs for up to eight months if there was a military attack on Iran that resulted in the bottling up of the Strait of Hormuz to oil tanker traffic, resulting in a cut-off of oil to the United States from the Persian Gulf …

… BP was able to have several safety checks waved because of the high-level interest by the White House and Pentagon in tapping the Gulf of Mexico bonanza find in order to plan a military attack on Iran without having to be concerned about an oil and natural gas shortage from the Persian Gulf after an outbreak of hostilities with Iran … ”

Link

Just the usual M.O. – lying, theft, murder.

Matt Novak June 23, 2010 at 11:15 am

I read about this in a few places….I wasn’t sure of the validity but I have seen it in a few places now. Sadly, I suppose it is at least plausible. As you say, the usual modus operandi…

SailDog June 24, 2010 at 7:55 am

This is garbage. Just because you find a 3-4 bn barrel oil deposit doesn’t mean you can produce the whole lot in less than a year. In fact there are normally several years between exploration wells and the time when you can produce complex fields. Then it takes several years, maybe even a few decades to produce the whole field.

This is the biggest fallacy that faces economic theory. Most economists seem to think that there is a direct connection between price and supply and the fact that oil has been found means it can be instantly produced at any rate, which of course is garbage.

Matt Novak June 24, 2010 at 11:10 pm

Points are well taken. I wasn’t implying that the whole lot would be produced in a year. I simply stated it would be plausible to be thought of as an emergency reserve, sometime in the future. As for the validity of attacks on Iran, etc., only time will tell.

Inquisitor June 25, 2010 at 2:58 am

“This is garbage. Just because you find a 3-4 bn barrel oil deposit doesn’t mean you can produce the whole lot in less than a year.”
Who said that?

“This is the biggest fallacy that faces economic theory.”

According to whom?

“Most economists seem to think that there is a direct connection between price and supply ”

There is.

“and the fact that oil has been found means it can be instantly produced at any rate, which of course is garbage.”

Again, who says this?

SailDog June 25, 2010 at 8:44 am

“Most economists seem to think that there is a direct connection between price and supply ”

Not in oil. It takes up to a decade and in rare cases even longer to bring fields into production. Oil execs by definition cannot take price into account when deciding to invest in exploration (increase supply). They do so in the hope the investment will be profitable, but there is no fancy PV analysis to support it.

Prime June 25, 2010 at 10:58 am

I’m pretty sure that has been addressed.

http://mises.org/daily/3047

I think it’s called oil speculation.

Stephan Kinsella June 23, 2010 at 10:46 am

Just as a bit of legal background (before switching to the dark side of IP law, I used to practice Texas and Louisiana oil & gas law in Houston): on private land in the US, oil drilling is private: the oil company takes out a private lease from the private owner of the surface. To my knowledge, this situation is fairly unique in the world: in most other countries, the state claims the ownership rights to subsurface resources and thus private oil companies take out leases from an agency of the state. For example, in Iraq, Saudi Arabia, etc.

In the US the central state has assumed de facto ownership of the minerals under the US’s territorial waters, in the outer continental shelf (OCS) (and also, I believe, on the millions of acres of federal lands in the US that is administered by the Bureau of Land Management–incredibly, about one-eighth of the territory of the US). Thus, private companies seeking to drill for oil have to negotiate and take out a lease from the Minerals Management Service (MMS).

As far as I know, it’s up to the MMS to grant these drilling rights. It’s strange that BP is the only one being blamed here. If my neighbor hired a contractor to drill for oil and there was a huge problem that caused pollution of my land, I would not blame only his contractor. I would put the primary blame on him. All the environmentalists should be raging at the federal government–the landlord and lease grantor, it seems to me.

Stephan Kinsella June 23, 2010 at 11:13 am

BTW I should have said, “before switching to the dark side–IP law–”. I didn’t mean to imply there is a good side, and bad side, of IP law, and that i switched to the latter. I meant I switched to an area of practice that is based on unjust law. That said, you could argue that procuring patents has a good aspect since they are often used defensively; but it’s so murky and messy and interrelated that it’s hard to be pure.

Stephan Kinsella June 23, 2010 at 11:33 am

BTW the BLM administers 1/8 of the US territory, but in total, http://strangemaps.wordpress.com/2008/06/17/291-federal-lands-in-the-us/, the US “owns” about 30% of US land.

Perry Mason June 23, 2010 at 1:21 pm

Stephan,

I’m a currently practicing upstream oil and gas attorney in Houston, and your descriptions are accurate. Most if not all nations outside the United States claim sovereign ownership of all minerals by fiat.

What amazes me is that when western academics advise other countries on their minerals laws and constitutions, they always advise this model, often called the “concession model”, i.e. the government grants concessions to produce minerals. This is in spite of the fact of the great economic growth caused by a private property model. But the rulers love to hear that they own everything! This was model was recently adopted by Afghanistan’s “government.” Surprise surprise.

As you described, the concession model is how offshore operates in the OCS, as overseen by the MMS. Although in the U.S. the process is more transparent, most concession bidding is wrought with corruption and side-dealing.

I also second your blame on the government as landowner. Frankly, had there not been a cap on liability, BP would have been better informed by the market insurance costs (or even the unavailability of insurance!), despite that BP self-insured the Deepwater Horizon, thinking that the insurance companies were ripping them off. This was likely a result of BP including the cap in its liability models.

Stephan Kinsella June 23, 2010 at 11:46 pm

Thanks Perry. I last practiced oil -gas law intensively in 1994 at Jackson Walker in Houston so it’s been a while. BTW one benefit of doing a *real* “concession” model is the concession can be internationalized so that the state can’t change the terms unilaterally later, but I don’t think the US engages in those types of concessions (I discuss this in Reducing Political Risk in Developing Countries: Bilateral Investment Treaties, Stabilization Clauses, and MIGA & OPIC Investment Insurance, 15 New York Law School Journal of International and Comparative Law 1 (1994) and
International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide, Co-Author (Oxford University Press, 2005) (2nd ed. forthcoming 2010)

Michael June 23, 2010 at 6:33 pm

If my neighbor hired a contractor to drill for oil and there was a huge problem that caused pollution of my land, I would not blame only his contractor. I would put the primary blame on him

Yes, I raised this same point on another discussion board. However, I think the primary blame should be on the contractor, with secondary blame going to the lessor. In other words, exhaust all avenues against the contractor first, if there isn’t enough to satisfy all parties, then go after the land owner.

Gil June 23, 2010 at 9:23 pm

I agree with you Michael. Namely the contractor was the one doing the actual work and caused the pollution threfore they are primarily liable. Then again, if it was a risky endeavour anyway then the owner probably should be liable too.

Stephan Kinsella June 23, 2010 at 10:07 pm

But why? What’s the reason for this? Normally they would be jointly and severally liable. In fact, who has deeper pockets–BP, or the feds?

Michael June 24, 2010 at 5:46 am

Yeah, that’s usually the way it ends up working out. Whoever has deeper pockets, or better “coverage” is the party the lawyers usually go after. I’m not an attorney, I’m a contractor, so I am arguing against my interests. I guess the question also, is which party is “easier” to sue. But I would say, generally, the contractor is directly responsible for the damage, and usually, the contractor has sufficient coverage to handle claims. This generally relieves the landowner from possible lawsuits. That’s why it is important for a landowner to require proof of insurance from a contractor, any contractor, before work starts. Not just liability, but also worker’s comp for their employees. If a worker gets hurt, and the contractor doesn’t have worker’s comp, the worker can sue you, the landowner. Do not be afraid to ask. In fact, demand it.

In the case of BP, there are two problems. First, BP chose to self insure. Second, there’s a government imposed liability for torts cap. Since the government imposed the cap, I would be inclined to go after the government just for that reason. Whether or not the cap holds, remains to be seen. I imagine there will be a huge class action lawsuit, eliminating most individual claims, and the government and BP will agree, or should I say, the government will tell BP how much they are actually liable for, and pick up the rest. It’s going to be messy, and nobody will be happy. I have a feeling we are going to run into the same counterparty excuse that we had with AIG. The top 25 shareholders of BP are asset management companies, with BlackRock being the first with 1.1 billion shares. That’s a lot of ETFs. Vanguard, BoA, RBS and JPM are also in there, and, “like a good neighbor, State Farm is there”.

http://www.zerohedge.com/article/here-are-todays-very-unhappy-campers

Peter June 24, 2010 at 7:58 am

I don’t understand this talk about a liability cap. BP have already paid out billions (hundreds of times more than the supposed cap), and will pay many many billions more. Where does this cap come into play?

Michael June 24, 2010 at 11:01 am

Quick answer:

The act sates that company that owns the oil in any spill must pay for all clean-up costs, as BP, the owner of the Gulf oil well that exploded last month, is currently doing.

But the act also says the amount companies may be responsible for in damages – things like lost days for fishermen or money to rehabilitate wetlands after the oil is removed – may be capped at $75 million, providing the company didn’t violate any regulations in the lead up to a spill. Damages in excess of $75 million would be paid for by the government with money from a tax on oil designed for just such a purpose.

Oil Pollution Act of 1990

http://frwebgate.access.gpo.gov/cgi-bin/usc.cgi?ACTION=BROWSE&TITLE=33USCC40

Patrick Barron June 23, 2010 at 11:16 am

Our government has pushed oil companies into riskier ventures not only by its explicit higher royalties, but by prohibiting drilling on land. Private ownership of all lands and the seas would greatly reduce any future problems. As I have written elsewhere, the shrimpers, etc. have no property rights in what they harvest. Their position is similar to that of the Native Americans, who had no property rights on buffalo herds or beavers. They simply harvested them. We should sell the oceans to the highest bidders. Then capitalists would invest in the oceans’ bounties and take care not to damage their neighbors. Sure, it would be tough, but otherwise we will either suffer more disaster like this one or the government will prohibit oil exploration.

Prime June 23, 2010 at 12:11 pm

We should sell the oceans to the highest bidders.

They shouldn’t be sold until they are acquired morally via homesteading.

Gil June 23, 2010 at 9:24 pm

Agreed. However the last time I looked government only claim ownership of around 12 miles around the coast. The open oceans are unowned and are free game.

coturnix19 July 11, 2011 at 4:55 am

How can one homestead ocean? One can indeed homestead ocean floor, which is no different from homesteading land, but homesteading ocean is pretty senseless.

Perry Mason June 23, 2010 at 1:24 pm

Are you saying they have no property rights today, or are you saying they morally have no property rights. If the latter, I dispute that point and argue that they have made first use of the area and are thus entitled to a use right, meaning they may continue using the area and may enjoin another person from taking actions that directly interfere with the exercise of that right.

Rothbard made similar arguments in a famous article of his.

Peter June 23, 2010 at 7:32 pm

“We should sell the oceans to the highest bidders” implies that “We” (who is “we”? The government, presumably) own the oceans, but if “we” own them, “we” don’t need to sell them: they already are property: “ours”. But of course they’re not.

Yes, the shrimpers and fishers … and the oil drillers … are the legitimate owners.

SailDog June 24, 2010 at 7:59 am

BP would drill on land if there was oil to be found on land. They are in deep water precisely because there is no more oil on land. When will economists learn? Oil is finite. All the easy stuff on land has been pumped.

Inquisitor June 25, 2010 at 2:59 am

Prove. It.

SailDog June 25, 2010 at 8:48 am

I don’t need to. They are in deep water, in the arctic and stuffing around with tar sands, ethanol and biodiesel. That is sufficient proof. There is no more oil on land.

Dave Albin June 25, 2010 at 9:03 am

That’s absurd – they have incentives to go in the Gulf, so they do (and any small start-up oil company could not afford to go out there). Saying that we have no more oil on land is laughable. Small private land owners put up small wells and find oil all the time.

SailDog June 25, 2010 at 9:53 am

There are lots of small pockets of oil on land still to be found. But almost all the big fields have been found and are being produced. No doubt a few more exist, still to be discovered, but production exceeds discoveries by a factor of six (including deep water etc). Maintaining oil production is a race between bringing on new supply to match or exceed existing field depletion which is normally around 5% pa, but can be 30% (eg Canterell in the Mexican GOM). So, no its not absurd. It is exactly why they are in deep water, the arctic etc. Find out for yourself how many oilfields produce 2/3 of global oil production, how old they are and what their depletion rate is. The results may surprise you.

SailDog June 25, 2010 at 9:56 am

Oh; and by the way, the incentives to drill in deep water in no way compensate for the extra cost compared with drilling on land. A single well can cost $100m in deep water.

Inquisitor June 25, 2010 at 4:06 pm

Prove it then.

SailDog June 25, 2010 at 7:25 pm

What? You are a stuck record. You prove your point of view. I at least have the weight of evidence and history to back up what I say.

Michael June 23, 2010 at 11:57 am

Perhaps, if we had an “honest” financial system, BP wouldn’t have been able to raise all of the capital that it needed to fund all of its operations, therefore, would not have been stretched so thin as to allow an accident like this to happen, in the first place. Instead of leveraging future profits and assets, they would have had to save and reinvest profits. That is, if one considers their rate of expansion of growth to have contributed to the accident. Just asking.

Jonathan Finegold Catalán June 23, 2010 at 12:21 pm

(Cross-posted with more detail here.)

While the fact that the probability of an accident occurring closer to shore would have been much lower, I don’t think one can assume that over the long-run British Petroleum would have chosen to stick to “close-shore drilling”. Neither can one assume that BP wouldn’t have made the same mistake on a rig closer to shore. So yes, while government did perhaps heighten the risk of such a spill occurring in the short-run, BP should not be rid of the fault.

BP made a decision on the margin. They believed that the savings afforded by not installing certain safety mechanisms outweighed the risk of such an oil spill happening. Just to clarify, this is not an issue of corruption. It is an issue of rational action. Whoever was responsible for building, or designing, the part of the rig which failed made a poor decision. These happen all the time. Entrepreneurial mistakes go hand-in-hand with uncertainty.

The libertarian argument should not focus as much on the role of government in the recent Deepwater Horizon spill. Rather, it should focus on the advantages of self-regulation through financial incentive (i.e. the risk of losing billions of dollars in lost product and property damage) over government regulation. People need to accept that mistakes happen. But, government regulation would not necessarily effectively decrease the probability of an entrepreneurial mistake occurring, without first disallowing that entrepreneurial action from taking place and thus squashing economic growth.

Beefcake the Mighty June 23, 2010 at 12:41 pm

This is a superb comment, one of the few intelligent things I’ve seen said on
either side of this debate. It highlights the crucial point: state regulation
can only change the conditions under which entrepreneurial action takes place,
it CANNOT reduce the probability of entrepreneurial error as such. Even if
such regulation can reduce the probability of certain errors, it remains the
case that there will always be some kind of error, regardless of whether the
regime is market-oriented or interventionist. Necessarily, someone will have
to pay the cost of error, so the question under any property regime is, who?

Michael June 23, 2010 at 3:17 pm

An insurance company, perhaps? It’s been my experience that they make pretty good regulators. Yeah, they are a pain in the ass, but they have vested interest, as opposed to some underpaid and overworked government employee who can’t be held criminally liable, that belongs to a monopolistic union. I don’t know what the libertarian view on insurance is, but I can’t imagine operating my business without it, and I would never hire, or patronize a business that didn’t have insurance. Let’s face it, most responsible businesses do carry insurance, and these insurance companies rely on the government to do their work for them.

Inquisitor June 23, 2010 at 4:56 pm

We’re not against insurance, no.

mr taco June 23, 2010 at 12:48 pm

bp is just a another example of a car trying to make it before the light turns red

Walt D. June 23, 2010 at 3:33 pm

“They believed that the savings afforded by not installing certain safety mechanisms outweighed the risk of such an oil spill happening. ”
MMS is responsible for the safety certification and inspection. They stipulate what has to be in place. In this case, what was deemed to industry standard proved to be inadequate. However, what is deemed to be adequate changes over time, usually in response to situations and accidents that have not been previously seen. (The Concorde crash comes to mind – the fleet had operated without incident for 25 years before the Paris crash). What the problem here is not that the well blew out – this happens all the time, even on land, but that they did not have, and still don’t have, a standard procedure in place to cap the well. Also, the Federal Agencies have been flat-footed in their response to the clean up – not really much different than after Katrina.
Don’t forget, BP is losing $75 a barrel on the oil that is being leaked – at least 20,000 barrels a day. They have lost way more than the $75 million liability cap already.

DD5 June 23, 2010 at 4:13 pm

What do you mean it should not focus on the roll of government? The government systematically creates perverse incentives that would not exist in the free market.

Obviously, there is nothing to debate or discuss this with people who condemn BP, the oil industry, or the free enterprise (which we do not have) by pointing out the fallibility, imperfection, that is inherent in all human action. There is no such thing as a flawless system, for the amount of resources required to achieve such perfection is infinite.

There is only a system that allows for rational economic calculations, where success is rewarded and failure is penalized, or the irrational system that introduces the perverse incentives, some of which have been talked about in this article.

I understand your concern about libertarians applying the same Nirvana fallacy used by statists to promote their preferred system, however, I don’t see how the government involvement cannot be the focus of this issue.

Jonathan Finegold Catalán June 23, 2010 at 4:27 pm

DD5,

You misinterpret my argument. I am not suggesting we shouldn’t focus on government. I say we shouldn’t focus on the government’s involvement in Deepwater Horizon. Instead, we should focus on why uncertainty and entrepreneurial mistakes are normal and should be welcomed (at least, as ways of making sure these errors do not reoccur in the future), and why government cannot effectively regulate industry and iron out these wrinkles without destroying the industry first.

Thus, I wrote,

The libertarian argument should not focus as much on the role of government in the recent Deepwater Horizon spill. Rather, it should focus on the advantages of self-regulation through financial incentive (i.e. the risk of losing billions of dollars in lost product and property damage) over government regulation.

DD5 June 23, 2010 at 5:09 pm

Very well. I think you’re right, but the problem is that most of the anti-government rhetoric reaching the public is of the Hannity/Limbaugh type, for which the public conflates with free market advocacy.

Peter June 23, 2010 at 7:35 pm

FWIW, the company is called “BP”, not “British Petroleum”; they haven’t been called “British Petroleum” for many years (“BP” does not stand for “British Petroleum”; it stands for “BP” — that is the name of the company).

Stephan Kinsella June 23, 2010 at 10:11 pm

Good point. And this leads me to my question: why do individual members of The Beatles get called “Beatle”? As in “Beatle John Lennon” or “The Fifth Beatle”. Beatles is not plural for Beatle since there is no such thing. “Beatles” is just a made up word, like “The Shushhhh” or “The Wowz”. If they were called The Wowz would each individual one be a “Wow”? Why? If it was The Wise, would each one be a Why? Why do we assume Beatles is a plural? Or even a noun? Is every member of the band 10,000 Maniacs a Maniac, or 2,000 Maniacs, perhaps? See what I mean?

Beefcake the Mighty June 23, 2010 at 10:17 pm

The Beatles suck. They will never be as good as GWAR.

J. Murray June 24, 2010 at 6:13 am

The Beetles started the horrible concept of the boy band. For that, they shall forever remain a paraiah.

Stephen Grossman June 24, 2010 at 11:37 am

>BP …. believed that the savings afforded by not installing certain safety mechanisms outweighed the risk of such an oil spill happening.

All economic action requires choosing a specific risk/profit ratio. Markets reward the most productive ratios. Even in a free market BP’s safety measures could have too costly for investors. Should lawnmowers come with a warning to not use them with bare feet, while drunk and after a nasty argument with one spouse? I could cross a street inside a steel cage filled with tires to avoid injury from being hit by a car. The cost of extreme inconvenience and impracticality must be measured relative to potential benefits. Govt influenced BP’s safety cost/risk ratio. Thats the problem.

Jonathan Finegold Catalán June 24, 2010 at 3:51 pm

Stephen,

All economic action requires choosing a specific risk/profit ratio. Markets reward the most productive ratios.

Err, that was my point.

SailDog June 25, 2010 at 9:24 am

Agreed. An intelligent comment. I think it was actually a breakdown in management control. BP has market best knowledge, procedures and processes. They were not being applied (proof – the CEO, in front of a congressional committee claimed he had no direct knowledge of decisions taken. Fair enough, but he should have had direct knowledge and confidence of the soundness of decision making and monitoring procedures, all the way down the line. He didn’t, by his own admission.)

And this is the point of regulation, especially in high risk operations. The government should set minimum standards and then ensure they are being applied, because companies, despite the risks, will cut corners under pressure. Just as BP did. If the MMS had had the power to monitor drilling and had they personnel on board the Deepwater Horizon most likely the operation would have been shut down weeks before the blow out.

Ben June 23, 2010 at 3:14 pm

I have to say that I am not suprised at all with what is going on in the whitehouse in reaction to a problem they created! If it is not obvious that the oil companies would not be out there drilling without government intervention, then we just need to quit trying. I think most people don’t even understand that the reason we are drilling in 5000 feet of water is that the “greenies” have made us all believe that drilling near the shore is “dangerous, deadly, but worst of all UGLY!” Think of the animals! Well look at what is happening now, a huge disaster that we may never be able to turn off! I know that the mainstream media will never bring up any of the information discussed in this article, so I am educating everyone I run into about the REAL cause of this disaster!

false paradigm June 23, 2010 at 4:55 pm

I don’t understand the BP vs Government blame debate. Wasn’t the last administration made up of oil company men? Hasn’t Obama received tons of BP cash for his campaigns? Someone please explain to me how the Federal Government is not simply an extension of BP and all the other large interests who finance the elections. This is like a debate about whether the hand or the fingers were responsible for dropping the ball.

Stephen Grossman June 24, 2010 at 11:39 am

Govt has guns. BP has money. Govt wins. Marx was wrong.

mikey June 23, 2010 at 5:19 pm
Bastiat79 June 23, 2010 at 10:38 pm

The decision do drill there is determined by its own rate of return. In a “free market”, it could have happened earlier or later, but happened anyway. So I’m not sure I get some of your arguments.

I agree with Jonathan we should focus on the destructive nature of people’s blind faith in regulation… as if the emergence of bad regulations were not inherently part of the regulatory process. I think a good way to explain this to the layperson is with a simple example like a wood stove. If you let the insurers decide about the safety of your chimney, there is a good chance competition between insurers will result in a proper amount of pertinent intervention about safety. But if you substitute the role of insurers with chimney “norms” or “regulations”, you will most likely get: 1. norms that favor some expensive manufacturer; 2. lots of fires from “compliant” chimneys that were inappropriate in context; 3. calls for ever more regulations; 4. socialization of chimney fire risk.

I’d also like to hear more about free markets in emergency response. It seems to me that if BP had simply offered a $4000 reward for each barrel captured by any means, they would have saved themselves a lot of trouble. Were they prevented from doing this?

Matt Novak June 23, 2010 at 11:31 pm

I guess I really didn’t make clear arguments this time, for the purist libertarian perspective (with which I agree, by the way!).

I never intended to imply that the spill couldn’t happen in a free market. I have a pretty good mathematics background, and I realize the probability of spills occurring, anywhere, are always greater than zero.

I was only trying to lay bare the perverse incentives set up in the system as we currently see it working. Ideally, BP would simply pay for property damages caused by its own activities. Private insurance would as you say in your chimney example ultimately create the proper safety protocol via competition.

I guess I really simply wanted to show that such a competition is stymied by the state from the outset.

Minarchael June 23, 2010 at 10:50 pm

Stephen, easily solved. With their original beetle-shaped haircuts, each of them looked like a beetle who was also a beatnik, hence the shorter term ‘Beatle’, plural ‘Beatles’ and all together ‘The Beatles’. I realise that English is hard for you foreign Americans, but do try to keep up!

Dave June 24, 2010 at 12:17 am

I wonder what the price of oil would be in a free market where the companies have full responsibility for damages caused by its operations?

Peter June 24, 2010 at 1:00 am

$12.73

Vanmind June 26, 2010 at 6:09 pm

Guaranteed to be cheaper because of the increase in competition among would-be producers.

Dave June 24, 2010 at 12:23 pm

Per Gallon.

Tim G. June 24, 2010 at 8:18 pm
Baten June 25, 2010 at 6:03 am

BP drilled there, at 35000 feet deep, in search for abiotic oil, not because of government incentives.
And they found it. But they could not keep up with the imense pressure from below. No matter what safety precautions they might have put in place, I dont think they could have been able to contain that pressure. Consider that the water pressure at 5000 feet below water, where the well actually begins, is 160 atm, and still the oil gushes out furiousley.
And now the hole is getting bigger and bigger, since with the oil comes a lot of sand and small rock that is very abrasive. And even though it is getting bigger, the presure is not going down.
We are talking about 3000-4000 atm. No present technology can contain this.
This hole will prove imposible to plug. The only thing they can do is try to harvest the oil as it flows out.
But the good news is that there is abiotic oil, plenty of it, it will never run out, and the only thing we have to do is find a way to get it out.

Michael June 25, 2010 at 8:20 am

It’s the Mother Lode!- Silas McGee

SailDog June 25, 2010 at 9:25 am

Abiotic oil? Are you on crack?

Inquisitor June 25, 2010 at 4:07 pm

Probably less so than you. ;)

mr taco June 25, 2010 at 5:55 pm

you havent heard of the new research data of oil being abiotic ?

Frank June 25, 2010 at 9:46 am

The author relies on electricity generated by oil? Interesting, considering there are less than 20 electrical generating power plants fired by oil in the U.S. Perhaps more if combustion turbine facilities are considered primary generating facilities, but CT sites are generally used for peak power needs.

Smells like an oil industry apologist to me.

Matt Novak June 25, 2010 at 5:11 pm

Where did I state that I rely on electricity generated by oil?
According to the company website, BP’s business is about half natural gas. Natural gas is used in about 25% of electricity generation in America.

The point of the article was not to ‘apologize’ for anything. I had hoped it would give a little glimmer of the twisted nature of the corporatist State.

Dave Albin June 25, 2010 at 3:00 pm

To Saildog above (can’t reply above for some reason) – you have made the classical technical case against oil. The fact is all of the technical estimates are only that – estimates. Many technical estimates about the end of oil in the 1970′s were wildly inaccurate. We keep having these scares, and probably will continue to do so. If oil ever does become scarce while people are Earth, supply and demand with price feedback mechanisms will cause even more alternatives to be developed than we have now.

As for your cost point – if BP is drilling in the Gulf just for fun, then they will go broke. There must be some other reason (like the points in this article).

SailDog June 25, 2010 at 7:36 pm

I am not for or “against” oil. I merely point out what I observe as the facts on the ground, right now. There is very little verifiable hard data about reserves, especially in OPEC. There is much more hard data about production, but even that data is not perfect. What is certain is that oil production has not increased since Q3 2004. And that is despite the highest prices ever. I also wish there was unending oil (ie it is abiotic as someone else above points out), but that isn’t the case. We will learn to live with this fact, either intelligently (that is why I post here) or not. I suspect the latter; and one of the main reasons is much of humanity’s inability to see the patently obvious. Just connect the dots.

Dave Albin June 25, 2010 at 10:02 pm

Agree – I think the lack of an increase in oil production since Q3 2004 could be due to current alternatives (E85) and the “Great Recession” that began around early 2007.

Jim Davidson June 27, 2010 at 3:40 pm

Oh, wow. BP did what government led them to do. How very sad that they were completely at the mercy of government this whole time and therefore unable to control their actions.

BP pays millions of dollars a month in lobbying fees and in campaign contributions to distort the political system, corrupt the politicians, buy off the bureau-rats, and we are supposed to cry for the poor corporation? BP is as much a creature of the state as a corporation can be, and corporatist, that is to say, fascist, economic policies have been their main goal from government since day one.

Remember they started life as the Anglo-Iranian Oil Company, bilking the Iranians out of the bulk of the oil wealth of Iran. They pushed the CIA into overthrowing the democratically elected government of Iran back in the 1950s, for crying out loud. These people have been evil scum from the start.

Of course BP should be not only punished, but destroyed. It should have all of its leases taken away and those should be sold off to the bidders in the rest of the industry. All its assets should be taken away and sold off to the rest of the industry, and used to pay compensation to its victims. These things won’t ever happen, so don’t worry about them, just consider them as principled ideas against a monstrosity of corporate-government policy.

The management of BP committed mass murder on 20 April 2010. They knew about problems with the rig going back to 13 February 2010, they studied the situation. Tony Hayward couldn’t see a good outcome, so he sold off a large percentage of his shares (at least a third that has been reported so far, presumably in first quarter) and paid of his family estate’s mortgage. His estate in Kent should be seized and Hayward should spend the rest of his life paying compensation to his victims. But he won’t. He’ll get off scot free because the government shields him from responsibility for his actions.

Goldman Sachs was informed enough to sell off about $200 million in BP shares in the first quarter, too. So, you know, the corporate masters and the banking gangsters all get along fine. Only the people who are in the way of the blast when the rig explodes, only the people along the Gulf coast, get to do the suffering. Tony Hayward and his rich cronies go off and spend their weekend yachting. You know, so he can have his life back.

I have no sympathy for BP. I have no sympathy for the government. The von Mises institute would do better to publish more thoughtful pieces than this load of tripe.

TokyoTom June 28, 2010 at 10:09 am

Thanks for this comment, Jim; I’m with you 100%.

Of course BP (its executives, decision-makers and shareholders) deserve our strong disapprobation. This is a gamble that BP recklessly played with the livelihoods of hundreds of thousands, lulled by a sweet, collusive regulatory environment that BP had assiduously cultivated. That our government leaders/bureaucrats also deserve blame for their poor oversight and cupidity does not reduce one iota the blame that so richly BP deserves.

One part of the answer, of course, lies in completely eliminating liability limits, including the state-granted limited liability of shareholders, which turns corporations into risk-shifting vehicles that shift risks to innocent third parties, while creaming profits to shareholders that cannot be clawed back when the risks materialize.

This dynamic is precisely the reason that citizens call for increased government regulation; libertarians would do well to start paying attention to this driver of growing government and growing moral hazard.

Another part of the answer lies in insisting that other marine resource users have a veto over oil and gas development; this would enable bargaining, and end the tragedy of the government-managed commons, which produces Avatar-like situations.

TT

Matt Novak June 28, 2010 at 10:36 am

There is no disagreement that BP has done a terrible thing here (at least not from me, the purveyor of the tripe you took the time to read and rail against).

I may not have eloquently painted the picture of “a monstrosity of corporate-government policy”, but that was what I hoped to do. I simply did not spend energy bashing them for their malfeasance because so many others are doing it (just like you).

In an ideal world, all companies would work for a profit by their own energies without the help of the corporatist state. All that was meant to be shown here was the fact that we have just that (pretty much a global corporatist state). I realize this is a concept with which you are already intimately familiar, so therefore too simple a discussion (and not thoughtful enough, or damning enough of BP).

Cheers.

Jim Davidson June 28, 2010 at 2:09 pm

I think you should share a valuable insight from my friend Travis Eby. He notes that a giant mega-corporation is not a business.

A business is like Paul’s Barber Shop, or Lew’s Deli. These are businesses in the sense that you and I would mean business. There are of course hundreds of millions of examples around the globe. There is nothing wrong with being in business, wanting to have greater prosperity, and working with the knowledge you gain in the industry of your preference.

A corporation is a creature of the state which at the very least is created to minimise the liabilities of those forming the corporation. At worst, it is a creature which crawls up onto the lap of the state and opens its big mouth into which the state vomits wealth, privileges, and power. These are then used to do all manner of evil. Almost every major corporation is functioning right now to restrain trade.

Beefcake the Mighty June 28, 2010 at 2:29 pm

Although I share many of your sentiments re. BP, it’s pretty clear you don’t understand what limited liability means.

Matthew Swaringen June 28, 2010 at 11:08 am

If they knew this was going to happen in February did they underestimate the difficulty of cleaning up the oil?

I find it very difficult to believe your scenario Jim. I don’t like the government or BP at all, but your statement seems to take some incredible claims for granted.

Geir June 30, 2010 at 4:54 am

“This antiquated and protectionist law has been predominantly featured in the news as of late due to the Gulf Coast oil spill. Within a week of the explosion, 13 countries, including several European nations, offered assistance from vessels and crews with experience in removing oil spill debris, and as of June 21st, the State Department has acknowledged that overall ‘it has had 21 aid offers from 17 countries.’ However, due to the Jones Act, these vessels are not permitted in U.S. waters.

Source: Source

Eugenie July 1, 2010 at 12:04 am

Like many Americans, I am stunned by what has happened in the Gulf. I am glad to have blundered onto your site–it throws some light on the subject, as might be expected from an optics professor.

tungsten watches July 24, 2010 at 4:25 am

I also want to ask Isn’t there also a restriction of putting those same drilling stations on the shoreline?A corporation is a creature of the state which at the very least is created to minimise the liabilities of those forming the corporation. There is no disagreement that BP has done a terrible thing here !Thank you for sharing this blog, the feeling is very helpful to me!

Mike at TentPak July 29, 2010 at 1:42 am

I read with great interest this discussion. My bro-in-law is in the oil business and his discussions of this BP incident and BP’s inability to take care of the situation because of government meddling and intervention are quite tense. As a small businessman, I find, as I suspect many of you do, that this interventionist tendency from the fed has escalated to the point that almost all small businesses wonder what is going to hit next. Anyway that’s a bit off topic. Of interest to this discussion I think is that I read today of lawsuits being filed as a result of the BP spill. However, the suits are not directed at BP but at the government because the coast guard failed to follow their own procedure and may have actually caused the sinking of the rig which caused the line to snap spewing all of the oil into the Gulf. The chickens may be coming home to roost. I’m interested in seeing if there is validity to the suit. Thanks for letting me chime in.

Jay August 17, 2010 at 7:10 am

At least BP has been open about everything they were doing. People could watch live video of the work in progress at the frontier of technology. They are there for the long haul and have done a lot to help clear/reduce the problems which is more than can be said for Occidental with the ‘Piper Alpha’ disaster or Union Carbide at Bhopal.

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