The BP Oil Disaster

We are told that the disaster in the Gulf of Mexico may represent the end of the free market system: from now on there will be regulation to govern every significant commercial activity that might hold some potentially hazardous consequence for the planet. This assessment is almost certainly correct, but is it right?

I start with three questions to which each answer is in the affirmative: is disaster an inevitable consequence of human endeavour? Is the potential disaster proportionate to the risk involved? And, is it impossible to foresee the mechanism of every possible disaster? To these questions one must add another, specifically relevant to the BP oil spill: was BP, and are oil companies generally, lax in the precautionary measures put in place to prevent disasters of this kind? Once again, the answer, on the available information is yes.

President Obama, who described this event as the equivalent of 9/11, has determined that he should “kick ass”. In a condescending reference to Tony Hayward, the unfortunate front man for BP in these troubled times, Obama has proclaimed that Hayward would not work for him. The politicians, goaded into action by what is unquestionably a major national disaster, have been quick to ensure that the chief executives of the major oil companies be compelled to run the gauntlet of public outrage before nationwide television on Capitol Hill. Obama’s intemperate language, as well as the Capitol Hill circus, may do wonders for political ratings, but will it help to serve the American people in the most beneficial way possible?

Are the inviolable rules for deep-sea oil drilling, at depths of up to 10,000 feet, now to be drawn up by a committee of experts, including an assortment of lawyerly senators and congressmen? It must be borne in mind that the miracle of this technology, fallible as it has proven to be, was conceived and developed by oilmen and engineers, without any assistance from lawyers and political activists. Is America about to replace the genius of the free market with a form of democratic central planning?

No other disaster that one can think of can compare in its scale and human misery with the disaster of World War 1, which was undertaken by vainglorious princes and politicians, for no reason at all. Disasters happen. The wonder of the free human spirit is that lessons are learned and that when one’s reputation, enterprise and, yes, profits are at stake, there is a great incentive to voluntarily ensure that a repetition is avoided.

It is said that BP spent but a miniscule fraction of its annual profits to engineer systems that could have avoided the disaster. That is probably true. On the assumption that BP survives the monumental damages claims to which it will be subjected, in accordance with the established common law, and that Tony Hayward still has a job by the time the gusher is plugged, as it surely will be with no assistance from the politicians, is it not inevitable that they, and all other oil drilling companies, will devise systems that will effectively address the risk of a repetition?

Will there be other ecological oil disasters? That is almost certain; the deeper and more hazardous the terrain, the greater the risk. This is the issue: is the risk best addressed by a central planning committee with a political agenda, or by the experts who have the skill to have been able to undertake this astonishing adventure in the first place?

The BP experience will surely stand as a salutary and compelling lesson to all oil companies intent upon the extraction of oil from the seabed. This accords with a rule of human behaviour as immutable as the law of supply and demand: the principle of risk and reward. The greater the potential reward, the greater the risk that will be assumed. The converse postulates that there are certain risks for which no reward is great enough. One suspects that the BP experience has now put deep sea oil drilling at the high end of the negative variable.

The indignation of the American public; of green lobby groups with the image of the struggling, oil soaked pelican ingrained upon the mind’s eye; of the media, the politicians and the president, is surely justified. Their impulse to “do something” is likewise justified. So the question is: what should be done? The answer is to ensure that BP is given the opportunity to look after its own interest; to cap the well, to clean up the mess and to make appropriate recompense.

But, what will happen is largely the opposite. BP and its chief executive will continue to be vilified; given unrealistic and theatrically contrived deadlines by the president, Congress and the coastguard, and when it is all over, the legislative programme will begin. Despite President Obama’s assurances, the disputed moratorium, in place by executive decree, is likely to become permanent, in some variation of its present form.

An applicant for an oil drilling permit will likely have an onus to prove the need and security of its proposed system and will be required, before approval, to comply with a laundry list of engineering and bureaucratic criteria. The result will be that the process will become so onerous that few, if any, will be prepared to subject themselves to this form of political harassment. Bear in mind that very few congressmen actually read the full text of the laws that they pass with such alacrity.

Many of the citizens of the coast of Mississippi and Louisiana are actually dependent upon the oil companies for a living. Despite the popular image of these companies as a predatory menace, the relationship between the fishermen and the oilmen is harmonious and affable. There are many reports of fishermen in distress who have been rescued by the crew of the oilrigs. And what of the massive dividends routinely paid by BP from the oil bonanza to its shareholders? Well, it turns out that 40% of the shareholders are Americans, and that many of those shareholders are US pension funds, which rely upon the generous dividends from this and other companies to meet their commitment to their members.

The ruination of BP is not in the interest of America and the emasculation of the oil companies by the politicians will come at a very high cost to an already crippled American economy.

Author: Rex van Schalkwyk is a former judge of the Supreme Court of South Africa and author of numerous articles and three books. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 22 June 2010
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