by Bill O'Connell on October 7, 2010
As they say, when it rains it pours. The Obama administration famously boasted about having its boot on the neck of BP and extorting $20 billion from the company without the benefit of due process, but now a different assessment emerges.
According to a report in the Wall Street Journal, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, faulted the administration on several fronts. “A White House spokesman didn’t immediately respond to a request for comment.”
It is quite clear that this administration stumbled and bumbled along at the start of the disaster, once again fully displaying its inexperience in executive matters. Here are some of the salient points from the commission.
- “A sense of over optimism” about the disaster “may have affected the scale and speed with which national resources were brought to bear.”
- In addition, the government’s underestimate of how much oil was flowing into the Gulf of Mexico gave the impression that the government “was either not fully competent to handle the spill or not fully candid.”
- The administration took “an overly casual approach” in calculating that between 1,000 and 5,000 barrels per day were flowing when the real number was around 35,000 to 60,000 barrels per day
- Their initial low estimate remained the official estimate for a full month
- The administration was initially slow to respond and then misdirected resources when the public grew increasingly frustrated with the lack of progress.
[click to continue…]
by Bill O'Connell on July 8, 2010
I received an e-mail from my Congressman telling me how he was on top of the situation in the Gulf:
“I am a member of the Committee on Transportation and Infrastructure, which is at the forefront of an aggressive (sic) Congressional response to BP’s oil spill. Last week, I voted in Committee to approve a comprehensive legislative response to environmental and economic liability issues raised by the spill.”
As I had written about previously (The Regulators are Dead, Long Live the Regulators), this was just one more case of government failing us but then rushing out more legislation and control so it won’t happen again. If government was doing its job, it shouldn’t have happened in the first place. So I wrote back to the Congressman.
Dear Congressman Bishop,
I read with interest your e-mail to me about the Committee on Transportation and Infrastructure, which you say is at the forefront of an aggressive Congressional response to BP’s oil spill. Excuse my skepticism but this sounds like one more “we’re really gonna fix it this time,” response to the failure of government to do what they are already empowered to do.
You say the Oil Spill Accountability and Environmental Protection Act of 2010 “will ensure that responsible parties will be responsible for 100% of the oil pollution cleanup costs.” If I am not mistaken it was the Congress that passed a law limiting the damages from an oil spill to $75 million, which created a moral hazard that perhaps encouraged BP to cut corners. But wasn’t it BP who voluntarily waived the $75 million limit and has promised from the start that they would pay the full costs, thereby helping Congress remove the egg from their collective faces for including the limit in the first place? Don’t get me wrong, BP has a lot to answer for but at the same time BP applied to the government regulators for several waivers of safety tests and requirements that the government granted. If government had been doing their job, perhaps this would never have happened in the first place.
Aside from closing the barn door after the horse has escaped, I see no mention in your e-mail about holding Congressional hearings to ask the Obama Administration why they have not yet suspended the Jones Act and accepted the offer of help from twelve countries in the cleanup effort. When asked, Thad Allen and Carol Browner offered the weak excuse that no one asked them for a waiver. Why did the administration stand in the way of Louisiana building sand berms to stop the oil from reaching the coast because of environmental reasons? From an environmental disaster standpoint, doesn’t the oil gushing in the Gulf trump other concerns? We seem to have multiple agencies operating in the Gulf and each one is getting in the way of each other and no one in the administration is taking the lead to clear the red tape. Why is that Congressman?
Instead of talking about preventing avoidable disasters in the future, why don’t you find out why this avoidable disaster was not prevented by the regulations we have on the books and by the agencies in charge of doing so? For once, perhaps you can wait until those facts are known before you rush out to craft more legislation to fix a problem like you did with the financial services industries when it will be months before the Angelides Financial Crisis Inquiry Commission has finished its investigation.
Government that works is more important than signing ceremonies for ill considered legislation that is rushed and voted upon but unread by our representatives.
Sincerely yours,
William R. O’Connell
I am sure there will be a signing ceremony and tough talk about how we’re really putting an end to this wild unfettered market, but if you trace it back this disaster had government leading the way. It forced the oil companies to drill in deeper water; it created a moral hazard by capping their liability for any spills to $75 million (which BP waived and accepted responsibility for the full costs); the regulatory agency in charge both collects royalty payments from the oil companies and assesses penalties for failure to comply with regulations; and that same agency granted BP several waivers to take shortcuts before the well failed. But don’t worry Congress is really going to get tough now.
by Bill O'Connell on June 16, 2010
As President Obama used his first Oval Office address to push for another massive government takeover of our economy in the energy sector, it is time to debunk the myth regarding regulation versus free markets. The Statists like to claim that the financial crisis, the lack of health care, and the disaster in the Gulf are all proof that free markets are evil and we need the benevolent care of our federal government to keep us safe and warm.
Regulation
Let’s focus on the current crisis, the oil spill in the Gulf of Mexico. Here is the government’s role in this mess:
- Government has banned drilling on land (ANWR) and in shallow water of the coasts of California, Florida, the East Coast, while not only forcing oil companies to go into deeper water, but providing incentives to do so.
- The same agency of the federal government (MMS) is charged with both collecting royalties from the oil companies and for levying fines on them for violations of regulations.
- While drilling the Deepwater Horizon well, BP asked the government for several waivers of regulations, and the waivers were granted.
- After the spill started, Governor Bobby Jindal of Louisiana wanted to build sand berms to block the oil from reaching the cost, but the federal government wanted to study the problem and would not allow him to proceed.
- Foreign nations such as Norway, Holland, Belgium and Japan offered to provide ships to help clean up the oil in the Gulf, but U.S. law, the Jones Act of 1920, does not allow them to operate in U.S. waters. When asked why the government didn’t just suspend the Jones Act for this emergency, the government’s lead agent on the ground, Thad Allen, said, “Nobody’s come to me to ask for a waiver.” When Carol Browner, Obama’s energy advisor was asked why the administration did not lift the Jones Act said, “Nobody has asked us for a waiver.” Who are they waiting for to ask them?
- The government placed a cap on the amount of damages that a company would be responsible to pay at $75 million, which creates a moral hazard. That is, if I can make billions extracting oil and my out of pocket cost if I screw it up is $75 million, I’ll take shortcuts all the way.
- BP has said they are responsible for the oil spill, they will pay to clean it up, they will pay all legitimate claims resulting from it, even waiving the $75 million cap that the law allows. So why do our leaders use language like, keeping their boot on the neck of BP and knowing whose ass to kick? This is starting to cause a backlash in the U.K. which has resulted in comments such as, “The rest of the world is fed up with the parasitic attitude of the U.S.”
- The government starts making statements that they want BP not to pay a dividend to its shareholders or to put $20 billion into an escrow fund that the government will oversee and spend as they see fit and even to the point of putting BP into receivership. Who is our President, Hugo Chavez?
Free Markets
Let’s look at what would happen in a truly free market:
- Anyone wishing to drill for oil would be able to reap the profits from the well, but would also have full responsibility for the costs of any and all damages or cleanup. This may lead to less drilling if the venture is too risky, but that’s how markets work; it is a balance of risk and return.
- To help offset some of the risk, insurance companies could make a market in providing insurance for a disaster, but rest assured the insurance company would have their personnel inspecting the rigs to make sure all necessary risks were minimized and if not, jacking up the premiums or cancelling the insurance.
- Government regulation would be simpler in terms of setting standards of what quality of materials could be used, what redundancy must be in place to provide for any failures of primary systems, what levels of emergency equipment must be in place and what contingency plans must be prepared and tested to make sure they work. If an oil company doesn’t not have adequate insurance, drilling must stop until they do. If the oil company is out of compliance with a major safety issue, drilling must stop until it is corrected.
- When going into new areas such as deep water, the technologies to be used should be tested and independently verified to make sure they work as designed under the new conditions, and the insurance industry would be very much interested in participating in such testing, to minimize their risk.
- In the event of an accident, the government should lend all possible assistance to the oil company to stop the leak and clear the red tape for a cleanup effort and discuss responsibilities after the disaster is under control.
The end result would be more cautious companies because they could be wiped out if they cut corners. Insurance companies would have a second set of eyes making sure that things were done properly, because they make money when nothing goes wrong and are indifferent to whether any oil is recovered or not as long as the premiums are paid. The government would be out of the business of micromanaging the industry; providing incentives and penalties under the same agency; having key personal asking “mother, may I” before taking any steps, and we wouldn’t need a dozen agencies with overlapping responsibility trying to take control.
Free markets have incentives that do work. What is often complained about is the myth of a free market where the government has placed perverse incentives on companies and then act surprised when said companies follow the incentives. Their response is always more regulation with more perverse incentives and the cycle repeats. More government is not the answer, it is the problem.
