Sunday, June 20, 2010

Putting the oil spill in perspective

The Deepwater Horizon oil spill has directly caused the loss of 11 lives and will result in extensive ecological and economic damage. Just as physicians obtain malpractice insurance in order to compensate patients for the inevitable occurrence of injury due to unintentional error, we rightfully expect oil companies to make similar provisions to mitigate the damage caused by their business activities. However, a reasonable degree of responsibility must be based on a full context of the character of human activity. Amidst the hue and cry, name-calling, finger pointing, and calls for retribution against BP and a halt to off-shore drilling, three authors stand out for their articles reminding us of the wider context which we must hold while evaluating the benefits and costs of drilling for oil. columnist Jeff Jacoby reminds us that "Oil fuels better lives," pointing out the importance and value of oil to the quality and even the quantity of modern life--both in numbers of human beings the earth can support, as well as individual longevity.

Awful as the catastrophe has been, however, life without oil would be far, far worse.

Americans consume oil not because they are “addicted’’ to it, but because it enriches their lives, making possible prosperity, comfort, and mobility that would have been all but unimaginable just a few generations ago. Almost by definition, an addiction is something one is healthier without. But oil-based energy improves human health and reduces poverty — it makes life longer, safer, and better. Addictions debase life. Oil improves and expands it.

Alex Epstein, a regular contributor to Voices for Reason and Pajamas Media, demonstrates the importance of oil to the simple daily occurrence of a bacon and eggs breakfast, as well as the life saving materials and technology of modern surgery.

Blogger Stephen Bourque of One Reality uniquely identifies the relative scale of the BP oil spill compared to the much larger man-made disasters central planning and government usurpation of fundamental liberties.

Mr. Obama was brazen enough to say, after describing the damage done by the oil spill, “We cannot consign our children to this future.”[Note 2, emphasis mine.] There is simply no comparison between the damage of the oil spill, large as it is, and the utter long-term devastation that the Obama administration, the Federal Reserve, and the Democrats on Capitol Hill have wreaked. (By the way, I’m focusing on President Obama here, but the same criticism applies to Bush, Paulson, etc.)

Free minds and free men are the key to solving whatever challenges we encounter. The most crucial environment to preserve is the social system which ruthlessly and consistently protects individual rights and systematically eliminates the initiation of force as a legitimate means of achieving any end.

Worse than the explosion of one oil rig, is the explosion of government mandates, taxes and debt which act as a ball-and-chain on ingenuity and industriousness. Worse than the slimy oil slick creeping into estuaries and suffocating the wildlife are the myriad of regulations and bureaucrats suffocating innovation and production in the name of safety. But worst of all is the toxic contamination of the civic mindset that freedom has failed and the solution is to relinquish ever greater amounts of control and responsibility to the central authority of the state.

We must not consign our children to a future in which they are born thousands of dollars in debt, legally obligated to live and work as servants indentured to the community, or with a legacy of dependency and statism replacing one of self-reliance and liberty.



Elisheva Hannah Levin said...

Excellent discussion. I had read several Epstein pieces, but had not seen the others.

Another point: it would have been better had the government not put a cap on liability for such a venture. Deep water drilling is at the edge of the technology, and therefore no limit to liability should be set. Such a limit is a moral hazard, causing individuals and companies to take short cuts they shouldn't take. Also, liability caps encourage insurance companies to insure companies who would otherwise display too high of risk to be doing this kind of the edgy work.

Note, that I am not saying that BP took shortcuts, or unecessary risks. That has not yet been determined. As aweful as this is, such accidents do happen from time to time. To assume that the benefits of technology can be had without risk is to assume what never was and what never can be.

Anonymous said...

Your comment echos coments I have made here previously. The moral hazard led to BP (and others?) electing not to install the costly ($500,000 per well) technology that presumably would have prevented the disaster. This equipment is required by Brazil and Norway for deep water wells, but was rendered an 'elective' precaution by the Bush administration Mineral Management Service.

The question still remains of whether removing the moral hazard would have prompted BP to install the necessary equipment, or, if humna nature would have prevailed and let them ignore the threat because its probability was 'not worth worrying about.' This is what happened with Long Term Capital about a decade ago, and more recently with AIG, Lehman, and the rest. It's not the minimally damaging occurrences in the wings of a normal probability curve that are catastrophic, it's the devastating occurences in the wings of a severely leptotic probablility curve that have extremely low probabilities that are taken for zero but are not. Human nature tends to assimilate very low probabilities as "that will never happen." Consequently, it's probable that regardless of moral hazard, BP probably would not have installed the equipment and we would be in the same place except that BP might be looking at bankruptcy.


Mo said...

I really dont think the general population has much grasp of the concept of probability at all. Hardly surprising given that a lot of scientists dont either

Anonymous said...

Thanks, Mo. That's my point.

The problem is that proper risk managment requires not only a grasp on probabilities, but an accurate estimate of consequences. Risk managment for an event with 0.001 probability but an inconsequential outcome might be "we'll cross that bridge when we come to it." On the other hand, risk management for a devastating event of the same probablility might be 'refrain from the activity,' or 'have a plan in place to handle the event,' or 'refrain from the activity until we have a plan.' It looks like BP took the 'we'll cross that bridge approach,' as did Long Term Capital in the 1990's, from which Wall Street learned nothing. Which is another charateristic of humans.

Jack said...

The problem, in my opinion at least, is that there is now a widespread culture of self- deception in the West’s confused relationship with risk, and it is widely codified and institutionalised throughout our society.

risk is no longer regarded as an opportunity but as a hazard to be avoided and so risk-taking is culturally stigmatised. People who take risks are frequently denounced for being, by definition, irresponsible. Parents who let their children roam in the outdoors are told off for ‘taking a risk with your child’. Scientists and businesses engaged in experimentation or technological innovation are often treated as pariahs for ‘putting communities at risk’. In contrast, risk aversion, the act of avoiding risk, is increasingly held up as a positive value.

In the case of BP and the rest of the oil companies for that matter their focus has shifted to reputational risk instead. They now devote far greater time and energy to managing how they appear in the eyes of the public than they do developing an effective emergency-response plan. They're trying to cultivate a public-friendly and environment-friendly image for their companies and so when they are faced with a crisis, the imperative of keeping up appearances exacts a heavy cost - the oil company bosses have spent more time proving that they are ardent followers of the ‘risk process’ than they have thinking about what to do in an actual emergency, and we can see the consequences of that now.

It comes as no surprise therefore that in a society where performing risk-management is preferred to taking risks, organisations will often lack the moral resources and leadership qualities needed to respond effectively to an emergency.

Anonymous said...

Good points, Jack. However, I know of no information that would support an increase in corporate PR managment in recent times. As far as society goes, risk averseness is a pervasive individual characteristic. So much so that it lies at the foundation of modern financial theory. Only recently have the economic psychologists gotten into the act to show us that not only are people, in general, risk averse, but they are not rtional in perceiving risk or managing it.


HaynesBE said...

Relating to risk taking, I just finished an interesting article on how government encouraged excessive risk-taking on the part of BP. ("Bashing BP-for doing exactly what government led them to do") In addition to preventing drilling in shallower waters, the government enacted a policy of royalty relief for deep water drilling. Compounding this perverse incentive, the government placed a liability cap for the increased risk--thus further encouraging taking on risk without adequate measures to address that risk. This is a perfect example of a special interest group (in this case oil companies) being able to use the power of government to its own advantage.

Certainly the oil companies are to be held accountable for seeking such special favors. But even more important is holding government accountable for its complicity by allowing this system of governance to continue.

A key role of government is to create and maintain the rule of law and equality before the law. Until this leak (of political power into the realm of economic transactions) is plugged--the primary problem is a failure of government, NOT a failure of the free market (because a free market does not currently exist.)

Less clear in my mind is how to assign responsibility for risk. Clearly the standard can not be infallibility and perfection. A zero tolerance for error is not consistent with reality. Man is neither omniscient not omnipotent and should not be held to a standard of infallibility.

That's where a system of law based on individual rights come in. The best method for discovery of the answers to these problems would be to start with clearly defining the rights of life, liberty and property, excluding the initiation of force--including definitions of just what that means--and then building up case law through application of these legal principles.

RE: the installation of safety equipment, if BP had not been legally let off the hook for the financial risks involved, any insurance company hoping to exist for the long term would have required the safety equipment as a precondition of insuring the rig. Additionally, if BP had to pay the full cost of drilling in deep water, it may never have made economic sense to drill there in the first place.

The whole regulatory system seems to me to be built upon the premise of guilty until proven innocent. The innocent are thus punished for the potential transgressions of others--and we all suffer from increased costs--costs which include not just costs of living, but to our freedom and future prosperity as well.

Government (which really come back to us) should pay more attention to the ancient Hippocratic admonition: First do no harm.

Jack said...


The New York Times discussed the failure of certain safety measures that are routinely put in place. One such measure is called the “blind shear ram” which cuts off the supply of oil in a disaster. The ram is supposed to cut off the supply but it repeatedly failed to do so in this case. There was too much confidence put into this device and many companies have already taken additional precautions.

Because they assumed that a certain number of these shears fail, sometimes hitting in the wrong spot, for instance, they have gone to installing the device twice, in different locations so if one fails they have a backup. Experts have suggested two such devices are needed. So wouldn’t a regulation forcing it solve the problem? Perhaps, but why wasn’t it done? According to the Times, the federal agency charged with regulating offshore drilling, the Minerals Management Service, repeatedly declined to act on advice from its own experts on how it could minimize the risk of a blind shear ram failure.

They also said their study showed: “ that the Obama administration failed to grapple with ... the well-known weaknesses of blowout preventers.” Reports were on file showing that there was a problem and the regulatory agencies and the politicians ignored them. Even the company involved here, has been equipping their rigs with double shears as a precaution. This, unfortunately, was not one of those rigs. The Times says that every other rig under lease to BP supposedly has the double shears.

So, it was widely known that double shears were a needed safety precaution, and most rigs already had them installed, the process was on-going to put them into all rigs, and this was one of the unfortunate exceptions. And all this was being done prior to the feds actually mandating it. I fully expect this mandate to be put into place, consistent with my theory that most reforms pushed by government are instituted ONLY after the private sector has already primarily implemented the reforms voluntarily. If the Times is correct, most rigs already have the double shears. And no doubt the politicians will take credit for what has already been done privately, for the most part. Those who cherish regulations for their own sake will no doubt give all the credit to the public sector and ignore the fact that the private sector has already implemented this reform.

Blowout preventions sometimes fail but government tests of blowout preventers almost always approve them. Out of 90,000 such tests conducted by the government they gave passes to all but 62, which the Times says “raised questions about the effectiveness of these test.” I’m not sure that the regulators would actually do a better job merely by being given more regulations to work with.

The Times notes that MMS did institute a new regulation which said that all companies had to provide test data showing the blind shear ram would work in each well. This was supposed to be a requirement for a drilling permit. Yet the regulator “approved BP’s permit without requiring proof that is blowout prevent could shear pipe and seal a well 5,000 feet down.” The regulator who authorized the permit, in violation of regulations that already existed, said: “When I was in training for this, I was never, as far as I can recall, even told to look for this statement.” So, not even a basic regulation that already existed was being enforced. Would another layer of regulations change that?

In confirmation of my theory that reforms by government take place after the reforms are no longer needed, the Times notes that the federal agency ignored a report about there being two blind shear rams in each rig. “The agency made no such requirement. Indeed, it waited until 2003 to require even one blind shear ram. By then, the industry had already started moving to two blind shear rams....“ By the time the government regulators required one blind shear ram virtually all rigs actually had one and one-third of the rigs had already moved to two. In other words the regulation had almost no impact.

Jack said...

To add some more: the Wall St Journal noted BP cut corners repeatedly. Rep. Henry Waxman pontificated on this in Congress. But the Times notes that, “Tony Hayward, BP’s chief executive repeatedly told Mr. Waxman’s committee last Thursday, many of these decisions were approved by the Minerals Management Service.” In other words, “federal regulators did not see any problems” with the corners that were being cut, even if employees on the rig did see problems and complained. With federal regulators giving BP the go-ahead guess what happened? So why exactly is this only blamed on a failure of private industry? Why isn’t the fact that regulators failed being talked about as much? Surely this is a case of regulatory failure in spades.

HaynesBE said...

Jack --

Thank you for the fascinating details on this case. They only serve to strengthen my conviction that the government is causing greater harm than good in its attempts to regulate (vs. holding individuals and businesses accountable for demonstrable rights violations.)

It reminds me of an article in the NYT two years ago on the fact that by the time the government gets around to passing a stimulus package, the recession has already begun to turn around.
Government necessarily is too slow and too blunt to be in the business of responding to economic issues and should stick to defining and defending individual rights and rights violations.

Anonymous said...

I think we can all agree that less government is better than more, as a general principle. However, the profit motive induces individuals and, especiall, organizations to fall into the "that will never happen" mind set. At the least outside observers with authority would be a good thing to guard against well established social phenomena such as group think, which can be exacerbated by the profit motive and pressure from higher ups.

This story illustrates that no matter how hard we try, we can't regulate everything. While all the information about the deployment of one or two shears may be accurate, it doesn't address the reports that BP ignored damage to a control pod on the blowout preventer, proceeded at a drill speed that pushed the limits of safety, and cut corners on sealing the well. The latter apparently led directly to the blowout.

Sixty Minutes interviewed a survivor of the disaster on the oil rig, as well as an engineering professor from U Cal Berkely who investigated the Challenger disaster and more than 20 oil rig accidents. Long story short, BP was spending $1,000,000 a day and they were behind schedule. When it came time to seal the well, so the Deep Water Horizon could disconnect and move on, leaving the well for a separate rig to come and re-open the well for pumping, a BP engineer big footed the Transocean engineer in public confrontation. Instead of leaving the drilling mud in place to keep the pressure on the well as the required three cement plugs were placed, BP had the mud removed before the last plug was set. The intention was to expedite opening the well again. In other words it would speed up getting to the money the well was intended to produce.

Notwithstanding all the regulations, according to the 'no-regulation' theory, market forces should have discouraged this dangerous behavior. Unfortunately, they did just the opposite.

AS far as regulations being implemented a day late and a dollare short, that is a specious argument. Apparently, to satisfy Jack that regulations are worthwhile, regulators would have to mandate technology not yet developed. IN the real world the cutting edge engineering becomes part of the code, mandating that subsequent projects meet at least that standard. Moreover, Jack's deduction that regulations are useless because deployment of double shears was taking place before regulations were in place naively assumes that industry has no clue what regulations are coming untill they are promulgated. In reality, industry knows months or years in advance. They are part of the discussions that formulate them, and they begin preparing for them well in advance of when they become law, so they don't have to stop work to bring their processes up to code. IN effect, the threat of reguations on the horizon push industry to upgrade their processes. It's irrational to require that upgrading would occur only after promulgation of regulations to show that regulations work.

Think about medicine. I don't know what is going on out on the West Coast, but where I live providers and hospitals are preparing for regulations and the healthcare environment they anticipate will be in place several years from now. And industry groups are working with government to shape those regulations, so they know pretty well what is coming and the smart money will have most of the requirements in place before the regulations go live. It's a symbiotic relationship. Regulators' visions influence industry's activities, and industry's activities modify regulators' visions, until somewhere down the line some compromise satisfying a cost-benefit threshold is reached. And by that time industry is meeting the regulatory requirements.