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Brooks Wilson's Economics Blog: The Oil Spill and the Government

Monday, May 17, 2010

The Oil Spill and the Government

Information about the BP's response to the damage caused by the Deepwater Horizon oil rig and the government's regulation of rig inspections cast serious questions about the value of government regulation of leasing and inspection of offshore drilling.  To know why firms don't need regulation, just follow the money; cleaning up an oil spill is bad for business.  BP has acknowledged responsibility for all legitimate costs of the cleanup.  The costs are estimated at between a few hundred million to $12.7 billion.  BP's stock value has fallen 15%, lowering the firm's market value by about $30 billion (Reuters, "BP says oil spill costs $350 million so far, shares hit").  Although part of the market decline could be due to the Greek financial crisis, certainly much of the decline is due to the costs of the spill.  If oil companies pay the cost of cleanup, why do we need to regulate leasing and drilling?  It is an unnecessary cost to taxpayers, oil producers, and consumers. 

Drilling for oil is a complex business as seen by responses of BP, Transocean and Hilliburton before congressional hearings.  President Obama remarked on the confused testimony (Real Clear Politics Videos, "Obama: Finger Pointing By Oil Companies Is "Ridiculous Spectacle"").   
I did not appreciate what I considered to be a ridiculous spectacle during the congressional hearings into this matter. You had executives of BP and Transocean and Halliburton falling over each other to point the finger of blame at somebody else. The American people could not have been impressed with that display, and I certainly wasn't.
He missed the major point: while nobody is sure what happened, BP said it will pay for the cleanup.  He also missed the most likely explanation for the confused testimony; the representatives of these firms don't know what happened.  Those who rely on government regulation to reduce oil spills miss a point as well; the government relies on the firms to explain events to them.  Regulators do not have independent insights. 

Minerals and Management Services (MMS), the federal agency in charge of oversight, has 55 inspectors in the gulf who are required to inspect 90 drilling rigs once per month and the approximately 3,500 oil production platforms once per year (Justin Pritchard, AP, "IMPACT: Fed'l inspections on rig not as claimed").  Assuming that only one inspector is need at each site, and that no time is lost in the office or traveling, each production unit gets something less than 3.5 inspector workdays annually.  Perhaps the MMS, which collects revenues from oil companies, is doing a bad job of allocating resources to inspection because, as President Obama believes, there is too cozy a relationship between the agency and the oil companies, but I don't think so.  My guess is that someone else in the federal bureaucracy determines how many inspectors to hire and how to spend oil revenues.  A possible cozy relationship does not explain why the MMS presented the Deepwater Horizon operation with a safety award.

If the Obama administration believes its job and that of MMS inspectors is to stop all possible oil spills, and that they have the ability to accomplish it, they deserved to be tagged with the insult delivered by the Klingons to Captain Kirk.  They are a bunch of "tin plated over bearing swaggering dictator(s) with delusion(s) of godhood."  If American voters believe that the government can regulate oil production and stop all spills, they are simply delusional. 

1 comment:

  1. Should BP we fully responsible for the oil spill or should the government become involved? It seems so far that nothing is helping.

    Robyn Ammon