Sunday, June 13, 2010

The BP Gulf Disaster: the Proximate vs. the Ultimate Cause

The New Jersey Star-Ledger is demanding BP's financial head, in this editorial entitled, Polluter must pay: Congress should lift the oil spill liability cap. The Editors write:

"Now that it’s obvious BP wasn’t prepared for a worst-case scenario with its deepwater drilling in the Gulf of Mexico, the massive cleanup effort comes down to two questions:

"How much will it cost to make communities whole again? And how do we make sure BP pays for all of it?

"Innocent towns trapped in BP’s viscous mess shouldn’t have to pick up the tab for the historic screw-up of a multibillion-dollar company. Neither should taxpayers.

"BP, the creators of this disaster and the subject of a criminal investigation, should keep writing checks until every pelican is squeaky clean, every marsh is bustling again with wildlife and every droplet of oil is gone."

Fair enough, up to a point. BP should pay damages to any human being whose property was damaged. Damages paid must be based upon legitimate, objectively determined criteria grounded in the principle of individual rights, not on the whims of any do-gooder who spots a bird covered in oil, or of government officials wielding arbitrary powers. The proper venue for settling claims is the civil court system. (Unfortunately, the knowledge of objective law, individual rights, including property rights, and the proper role of government has largely been lost to Americans, including the Editors.) But yes, BP should be held liable.

But the saga doesn't end there. The question is, why was it that "BP wasn’t prepared for a worst-case scenario"? Let's turn to the second subject of this editorial, the liability cap. The Editors write:

"To ensure that, Congress must lift the current $75 million federal liability cap — pennies in a spill this size — to $10 billion (or beyond) for any company that causes the pollution."

Is there a connection between BP's unpreparedness,and that $75 million government-imposed cap? Let's go a little further:

"Oil industry officials say a $10 billion cap would force smaller companies to abandon deepwater drilling because insurance would become too expensive."

Now we have the insurance connection, which is key here. I posted these comments:

zemack June 10, 2010 at 4:18PM

Another disaster, and once again government interference is the ultimate cause.

Notice I said ultimate cause. Yes, BP must clean up the mess, and compensate the victims, even if it bankrupts them. If BP engaged in fraud to get the permits, prosecute the company. And, NO BAILOUTS. It is BP’s well, after all.

But, the Star-Ledger uncovers government market interference as, once again, the underlying culprit. And once again, the Editors don’t draw the obvious conclusion – government regulations set the stage for this disaster, and they should be removed.

Why do oil companies get any liability protection at all? Because the politicians restrict shallow water drilling, where blown out wells are easily dealt with, and environmental damage can be contained.

By pushing oil companies into deeper waters, insurance rates skyrocket. So, to manipulate insurance rates down to make drilling feasible, the politicians cap liability – thus short circuiting the natural market mechanism of risk management. With this liability giveaway in place, the incentive to reduce risk and thus insurance rates through technological innovation evaporates. No problem, the regulators just go ahead and approve shallow water technology. That 3-story blowout preventer was the backup safety plan demanded by the government!

Just as with the financial crises, the government rigs the system to encourage excessive risk and reduce personal responsibility, and wonders why disasters happen. It’s the classic regulation spiral: government regulates, causing problems, which leads to more regulations to fix those problems, which causes more problems – and on and on.

Government should eliminate, not raise, the liability cap, and abolish shallow-water restrictions. Make laws requiring companies to pay all damages they cause, whatever the cost. Leave insurance rates to settle where they may based upon the judgements of the insurance companies’ assessments of economic, technological, and environmental reality. If oil companies find insurance rates too high, then they can abandon deep water drilling. More than likely, though, they would find better and safer ways to operate to satisfy the insurers and reduce rates. The insurance industry, it must be remembered, is the economic bulwark against excessive risk. It is impervious to the kind of cozy relationships we constantly see between regulated industries and the regulators, because the demands of the profit motive requires policies to be priced right.

We’re seeing the usual demands for more regulation, with blame being placed on a non-existent “free market”. But, like I said, BP is the proximate cause, but government regulation is the ultimate cause. We need less regulation, and more economic laissez-faire.

What role did that paltry $75 million cap play in the BP disaster? The answer is, plenty! The Editors quote Sen. Robert Menendez (D-N.J.): "Those who pollute should pay, and they should be unlimitedly responsible for their actions." For once, I agree with him. But then why is he sponsoring a bill to repeat the same governmental mistake? Why cap liability at $10 billion? After all, observe the Editors:

"Greater liability would force oil companies to think twice about risky drilling. Menendez believes the $75 million cap encouraged ecological gambling, because it was so low."

Amen to that, and what a revelation. What does Menendez think happens when government artificially limits private liability? The evidence is widespread in the economy, not the least of which is the housing bubble and bust. This is about as close as I've ever seen any statist politician come to taking the blame for problems government causes. Who placed that $75 million cap that caused BP not to think twice, or to not be "prepared for a worst-case scenario with its deepwater drilling in the Gulf of Mexico"?

The Editors conclude:

"The lesson learned from BP is simple: If companies can’t stop the gushing, clean up the mess and cover the costs when things go wrong, they shouldn’t be drilling."

But, BP wasn't the only "historic screw-up". There was an even bigger one - the one that caused the first. The lesson learned from the government is: Stop meddling in the markets!

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