EXCERPTS:
"Not a drop of oil from the Gulf spill washed ashore at Tradewinds Island Resorts on Florida's St. Pete Beach, yet the company is seeking as much as $1 million in compensation for lost profits from the $20 billion fund set up by BP PLC.
The sprawling resort's proprietors say fear of soiled beaches scared away vacationers.
A fierce debate over the value of bad publicity is now roiling political and legal circles in Florida. Hoteliers and state officials say jitters over the spill have cost them billions of dollars in tourism revenue, even though the bulk of the state's Gulf Coast beaches haven't suffered direct hits from the Gulf oil spill.
Showing posts with label Oil Spill. Show all posts
Showing posts with label Oil Spill. Show all posts
Saturday, August 28, 2010
Wednesday, August 11, 2010
Boom Makers Say BP Left Them Adrift - WSJ.com
EXCERPTS:
"Containment-boom makers and their vendors that ramped up supply for BP PLC after the Gulf of Mexico oil spill say the company suddenly stopped accepting deliveries weeks ago, leaving them with millions of dollars in unused product.
Several makers of the vinyl protective sheaths known as boom and their suppliers say they are deeply in debt and have been forced to lay off workers and delay payment to vendors.
During the height of the oil spill this summer, more than four million feet of containment boom was laid on the water's surface to shield the Gulf Coast. But BP began putting boom orders on hold or rejecting them about the second week in July, as efforts to stop the flow of oil gained ground. On Tuesday, BP said concerns about storms in the Gulf would delay by several days work on a relief well expected to help permanently seal the well.
To be sure, some of the suppliers and manufacturers were speculating on demand, ordering boom and increasing production before they had contracts in place. But The Wall Street Journal interviewed 11 manufacturers and suppliers who said they had contracts with BP or were delivering to those who did. Ten of those manufacturers said they now were out money.
***
About a dozen manufacturers make all the boom used by oil companies, emergency-response companies and marinas in the U.S. The supply on hand dissipated quickly after the Deepwater Horizon oil rig, leased by BP, exploded in April, sending millions of barrels of crude oil into the Gulf. BP suddenly needed boom and lots of it.
But recently the Industrial Fabric Association International, which represents companies including boom makers and their suppliers, says it has received dozens of calls from members who say they are suddenly saddled with containers of inventory, canceled orders and no way to pay their mounting bills.
"Containment-boom makers and their vendors that ramped up supply for BP PLC after the Gulf of Mexico oil spill say the company suddenly stopped accepting deliveries weeks ago, leaving them with millions of dollars in unused product.
Several makers of the vinyl protective sheaths known as boom and their suppliers say they are deeply in debt and have been forced to lay off workers and delay payment to vendors.
During the height of the oil spill this summer, more than four million feet of containment boom was laid on the water's surface to shield the Gulf Coast. But BP began putting boom orders on hold or rejecting them about the second week in July, as efforts to stop the flow of oil gained ground. On Tuesday, BP said concerns about storms in the Gulf would delay by several days work on a relief well expected to help permanently seal the well.
To be sure, some of the suppliers and manufacturers were speculating on demand, ordering boom and increasing production before they had contracts in place. But The Wall Street Journal interviewed 11 manufacturers and suppliers who said they had contracts with BP or were delivering to those who did. Ten of those manufacturers said they now were out money.
***
About a dozen manufacturers make all the boom used by oil companies, emergency-response companies and marinas in the U.S. The supply on hand dissipated quickly after the Deepwater Horizon oil rig, leased by BP, exploded in April, sending millions of barrels of crude oil into the Gulf. BP suddenly needed boom and lots of it.
But recently the Industrial Fabric Association International, which represents companies including boom makers and their suppliers, says it has received dozens of calls from members who say they are suddenly saddled with containers of inventory, canceled orders and no way to pay their mounting bills.
Wednesday, June 30, 2010
Oil Companies, Drill Operators Clash Over Idled Rigs - WSJ.com
EXCERPTS:
"Oil companies and drilling-rig operators are entering uncharted waters as they fight over who should pay for rigs idled by the recent U.S. offshore-drilling moratorium, and one case has already landed in court.
While offshore drilling could legally resume after a federal district court judge overturned the moratorium Tuesday, few if any oil companies are likely to go back to work until higher courts rule on appeals, officials at several companies said. Meanwhile, the unused rigs are costing them as much as $600,000 a day.
At least three oil companies are demanding early exits from long-term leases on five rigs in the Gulf of Mexico, alleging the ban on offshore drilling voided their contracts.
The drillers disagree, claiming the rigs could move to international projects or work in shallower waters, where the federal moratorium didn't apply.
***
But government interference is typically written into contracts only for operations in more uncertain political territory such as Venezuela and Nigeria, according to analysts and others familiar with oil-industry contracts.
They said it was unlikely most Gulf rig contracts anticipated an event like the six-month deep-water drilling moratorium instituted by President Barack Obama on May 27. That was five weeks after Transocean Inc.'s Deepwater Horizon rig caught fire and sank in the Gulf of Mexico, triggering the worst offshore oil spill in U.S. history.
"No one ever expected political risk in the Gulf of Mexico, but that's exactly what they've got now," said Michael Lynch, a consultant who has negotiated rig contracts for offshore drillers. He said he couldn't recall another rig-contract dispute involving U.S. political risk going to court, nor could several other longtime industry analysts.
Judge Martin L.C. Feldman of U.S. District Court in New Orleans overturned the drilling moratorium Tuesday, saying that plaintiffs, a group of oilfield-services companies, "established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously" in issuing the moratorium.
***
Norwegian oil company Statoil ASA, which has signaled its plan to exit two rig contracts, owes Transocean nearly $600 million through October 2013 for one rig. Transocean has denied Statoil's right to an early termination, though the companies said they were still negotiating.
About 30 rigs could end up in similar disputes, and who pays will hinge on how the contracts define force majeure, a catchall term for uncontrollable events that halt work. Anadarko's contract with Noble, for example, defines force majeure as including "rules or regulations" that make "continuance of operations impossible," though Noble contends the rig has tasks it can perform other than drilling deep-water wells.
"We don't believe this is a true force majeure situation," said a Noble spokesman.
Neither the oil companies nor the drillers have much incentive to back down. Oil companies hope to avoid being stuck paying for rigs they don't need. Rig operators have come to rely on premium-rate deep-water contracts to boost earnings.
This situation illustrates an extremely important aspect of the real world: it is a very complicated place filled with uncertainty. A stable legal system provides fixed rules concerning how private contracts will be interpreted and enforced. Having such a framework makes it possible for private individuals and businesses to write contracts which specify what each party is obligated to do if various unexpected circumstances do in fact occur. Through these contracts risk is transferred to those parties who are most willing and able to bear it.
It also illustrates that when government acts outside of the legal system, it reduces the effectiveness of the legal system and of private contracts at dealing with risk. The end result is that economic life becomes more uncertain than if the rule of law was fully respected by the government. More uncertainty means less investment, less capital, less output, and lower living standards than would otherwise occur.
"Oil companies and drilling-rig operators are entering uncharted waters as they fight over who should pay for rigs idled by the recent U.S. offshore-drilling moratorium, and one case has already landed in court.
While offshore drilling could legally resume after a federal district court judge overturned the moratorium Tuesday, few if any oil companies are likely to go back to work until higher courts rule on appeals, officials at several companies said. Meanwhile, the unused rigs are costing them as much as $600,000 a day.
At least three oil companies are demanding early exits from long-term leases on five rigs in the Gulf of Mexico, alleging the ban on offshore drilling voided their contracts.
The drillers disagree, claiming the rigs could move to international projects or work in shallower waters, where the federal moratorium didn't apply.
***
But government interference is typically written into contracts only for operations in more uncertain political territory such as Venezuela and Nigeria, according to analysts and others familiar with oil-industry contracts.
They said it was unlikely most Gulf rig contracts anticipated an event like the six-month deep-water drilling moratorium instituted by President Barack Obama on May 27. That was five weeks after Transocean Inc.'s Deepwater Horizon rig caught fire and sank in the Gulf of Mexico, triggering the worst offshore oil spill in U.S. history.
"No one ever expected political risk in the Gulf of Mexico, but that's exactly what they've got now," said Michael Lynch, a consultant who has negotiated rig contracts for offshore drillers. He said he couldn't recall another rig-contract dispute involving U.S. political risk going to court, nor could several other longtime industry analysts.
Judge Martin L.C. Feldman of U.S. District Court in New Orleans overturned the drilling moratorium Tuesday, saying that plaintiffs, a group of oilfield-services companies, "established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously" in issuing the moratorium.
***
Norwegian oil company Statoil ASA, which has signaled its plan to exit two rig contracts, owes Transocean nearly $600 million through October 2013 for one rig. Transocean has denied Statoil's right to an early termination, though the companies said they were still negotiating.
About 30 rigs could end up in similar disputes, and who pays will hinge on how the contracts define force majeure, a catchall term for uncontrollable events that halt work. Anadarko's contract with Noble, for example, defines force majeure as including "rules or regulations" that make "continuance of operations impossible," though Noble contends the rig has tasks it can perform other than drilling deep-water wells.
"We don't believe this is a true force majeure situation," said a Noble spokesman.
Neither the oil companies nor the drillers have much incentive to back down. Oil companies hope to avoid being stuck paying for rigs they don't need. Rig operators have come to rely on premium-rate deep-water contracts to boost earnings.
COMMENTS:
This situation illustrates an extremely important aspect of the real world: it is a very complicated place filled with uncertainty. A stable legal system provides fixed rules concerning how private contracts will be interpreted and enforced. Having such a framework makes it possible for private individuals and businesses to write contracts which specify what each party is obligated to do if various unexpected circumstances do in fact occur. Through these contracts risk is transferred to those parties who are most willing and able to bear it.
It also illustrates that when government acts outside of the legal system, it reduces the effectiveness of the legal system and of private contracts at dealing with risk. The end result is that economic life becomes more uncertain than if the rule of law was fully respected by the government. More uncertainty means less investment, less capital, less output, and lower living standards than would otherwise occur.
Wednesday, June 23, 2010
Let markets regulate offshore oil industry
EXCERPTS:
"Congress should consider policy changes, such as lifting the current $75 million limited liability ceiling. Offshore operators should expect to be responsible for the full costs of any environmental damage related to their activities.
There is one hitch: smaller offshore companies could accept full liability but then take shelter under bankruptcy laws in the event of a disaster. This means some additional steps must be taken.
In addition to removing any limits on liability, Congress should require that any offshore operator provide an insurance policy guaranteeing full liability coverage.
Full liability insurance not only protects taxpayers from bearing the cost of cleaning up environmental disasters, it also adds another layer of protection against future disasters. You can bet that private insurers like Lloyds of London would inspect very carefully the safety practices of those it insures.
Furthermore, by relying on private markets, taxpayers are saved the expense of monitoring offshore operations. Full liability without the option of invoking bankruptcy laws assures that offshore operators will have no incentives to cut corners.
A great advantage of this proposal is that it leaves the decision of how best to avoid disasters to the most knowledgeable agents involved: the oil operators and their insurers. These are relatively simple changes to make, and in principle the requirements involved are no different from those any homebuyer would expect of her builder.
"Congress should consider policy changes, such as lifting the current $75 million limited liability ceiling. Offshore operators should expect to be responsible for the full costs of any environmental damage related to their activities.
There is one hitch: smaller offshore companies could accept full liability but then take shelter under bankruptcy laws in the event of a disaster. This means some additional steps must be taken.
In addition to removing any limits on liability, Congress should require that any offshore operator provide an insurance policy guaranteeing full liability coverage.
Full liability insurance not only protects taxpayers from bearing the cost of cleaning up environmental disasters, it also adds another layer of protection against future disasters. You can bet that private insurers like Lloyds of London would inspect very carefully the safety practices of those it insures.
Furthermore, by relying on private markets, taxpayers are saved the expense of monitoring offshore operations. Full liability without the option of invoking bankruptcy laws assures that offshore operators will have no incentives to cut corners.
A great advantage of this proposal is that it leaves the decision of how best to avoid disasters to the most knowledgeable agents involved: the oil operators and their insurers. These are relatively simple changes to make, and in principle the requirements involved are no different from those any homebuyer would expect of her builder.
Monday, June 21, 2010
Obama's thuggery is useless in fighting spill | Washington Examiner
EXCERPTS:
"The $20 billion escrow fund that Obama pried out of the BP treasury at the White House when he talked for the first time, 57 days after the rig exploded, with BP Chairman Tony Hayward. It's pleasing to think that those injured by BP will be paid off speedily, but House Republican Joe Barton had a point, though an impolitic one, when he called this a "shakedown."
For there already are laws in place that insure that BP will be held responsible for damages and the company has said it will comply. So what we have is government transferring property from one party, an admittedly unattractive one, to others, not based on pre-existing laws but on decisions by one man, pay czar Kenneth Feinberg.
Feinberg gets good reviews from everyone. But the Constitution does not command "no person . . . shall . . . be deprived of life, liberty or property, without due process of law except by the decision of a person as wise and capable as Kenneth Feinberg." The Framers stopped at "due process of law."
Obama doesn't. "If he sees any impropriety in politicians ordering executives about, upstaging the courts and threatening confiscation, he has not said so," write the editors of the Economist, who then suggest that markets see Obama as "an American version of Vladimir Putin." Except that Putin is an effective thug.
Read more at the Washington Examiner: http://www.washingtonexaminer.com/politics/Obama_s-thuggery-is-useless-in-fighting-spill-96684389.html#ixzz0rV59clR2
"The $20 billion escrow fund that Obama pried out of the BP treasury at the White House when he talked for the first time, 57 days after the rig exploded, with BP Chairman Tony Hayward. It's pleasing to think that those injured by BP will be paid off speedily, but House Republican Joe Barton had a point, though an impolitic one, when he called this a "shakedown."
For there already are laws in place that insure that BP will be held responsible for damages and the company has said it will comply. So what we have is government transferring property from one party, an admittedly unattractive one, to others, not based on pre-existing laws but on decisions by one man, pay czar Kenneth Feinberg.
Feinberg gets good reviews from everyone. But the Constitution does not command "no person . . . shall . . . be deprived of life, liberty or property, without due process of law except by the decision of a person as wise and capable as Kenneth Feinberg." The Framers stopped at "due process of law."
Obama doesn't. "If he sees any impropriety in politicians ordering executives about, upstaging the courts and threatening confiscation, he has not said so," write the editors of the Economist, who then suggest that markets see Obama as "an American version of Vladimir Putin." Except that Putin is an effective thug.
Read more at the Washington Examiner: http://www.washingtonexaminer.com/politics/Obama_s-thuggery-is-useless-in-fighting-spill-96684389.html#ixzz0rV59clR2
Thursday, June 17, 2010
BP Oil Spill: Against Gov. Bobby Jindal's Wishes, Crude-Sucking Barges Stopped by Coast Guard - ABC News
EXCERPT:
"Sixteen barges sat stationary today, although they were sucking up thousands of gallons of BP's oil as recently as Tuesday. Workers in hazmat suits and gas masks pumped the oil out of the Louisiana waters and into steel tanks. It was a homegrown idea that seemed to be effective at collecting the thick gunk.
"These barges work. You've seen them work. You've seen them suck oil out of the water," said Jindal.
So why stop now?
"The Coast Guard came and shut them down," Jindal said. "You got men on the barges in the oil, and they have been told by the Coast Guard, 'Cease and desist. Stop sucking up that oil.'"
A Coast Guard representative told ABC News today that it shares the same goal as the governor. "We are all in this together. The enemy is the oil," said Coast Guard Lt. Cmdr. Dan Lauer.
But the Coast Guard ordered the stoppage because of reasons that Jindal found frustrating. The Coast Guard needed to confirm that there were fire extinguishers and life vests on board, and then it had trouble contacting the people who built the barges.
***
After Jindal strenuously made his case, the barges finally got the go-ahead today to return to the Gulf and get back to work, after more than 24 hours of sitting idle.
QUESTIONS:
1. Do you think the Coast Guard official who ordered the barges to stop sucking up oil was comparing the benefits of his actions with their costs, or was he simply following the rules it was his job to enforce?
2. Did the Coast Guard official have much incentive to allow a rule to be broken simply because the benefits to society of breaking the rule exceeded the likely costs?
3. If the Coast Guard official had been a manager for a corporation that was going to bear the full costs of the spill, would he have been more or less likely to weigh benefits versus costs in making his decision?
BP Doesn't Deserve a Liability Cap - Richard A. Epstein - WSJ.com
EXCERPTS:
"Our national frustration continues to rise with each new drop of BP oil that leaks into the Gulf of Mexico. Everyone knows we can't legislate away environmental risks without consigning ourselves to the Stone Age. What's needed going forward is a comprehensive legal strategy that addresses the risks though a combination of regulation before the fact and tort liability (and criminal sanctions where appropriate) afterwards.
Tort remedies are essential to protect people (and their property) who do not have contractual relations with defendants from harms such as air and water pollution. The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others—which is why the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases. The fundamental question here is one of technique: What mix of before and after sanctions will do the job at the lowest cost?
The first element in the mix is a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed. Accordingly, we have to be especially wary of statutory caps on tort damages, including the current law, under which, in the case of the oil industry, the "total of liability . . . with respect to each incident shall not exceed for an offshore facility except a deepwater port, the total of all removal costs plus $75,000,000." That $75 million is chicken feed. Fortunately, the law removes that cap if the incident was caused by "the gross negligence or willful misconduct" of any party, or its failure to comply with any "applicable Federal safety, construction, or operating regulation."
BP has waived the cap by expressing its willingness to pay "any legitimate claim." No surprise here, especially as the evidence to date suggests the cap will be blown off precisely because of the two exceptions. But we'd all be much better off if there were no statutory liability cap and if operators both big and small were required to purchase insurance—amounting to the tens of billions if necessary—when they operate in dangerous waters or terrains.
A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don't get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate. This logic also suggests that the Price Anderson Act's $375 million cap on damages for each responsible party to cover incidents at a nuclear power facilities should be rethought.
Tort liability does not preclude direct government safety inspection and regulation, especially in the Gulf of Mexico, where the government itself leases the drilling rights. So by all means work hard to make these better. Just be skeptical that this or any other presidential administration will reform the Department of Interior's hapless Minerals Management Service.
The rash decision of the Obama administration to shut down for six months all drilling in over 500 feet of water highlights the converse risk of regulatory overreaction. Why impose a ban on competitors with better safety records? Why extend it to relatively shallow waters?
***
"Our national frustration continues to rise with each new drop of BP oil that leaks into the Gulf of Mexico. Everyone knows we can't legislate away environmental risks without consigning ourselves to the Stone Age. What's needed going forward is a comprehensive legal strategy that addresses the risks though a combination of regulation before the fact and tort liability (and criminal sanctions where appropriate) afterwards.
Tort remedies are essential to protect people (and their property) who do not have contractual relations with defendants from harms such as air and water pollution. The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others—which is why the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases. The fundamental question here is one of technique: What mix of before and after sanctions will do the job at the lowest cost?
The first element in the mix is a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed. Accordingly, we have to be especially wary of statutory caps on tort damages, including the current law, under which, in the case of the oil industry, the "total of liability . . . with respect to each incident shall not exceed for an offshore facility except a deepwater port, the total of all removal costs plus $75,000,000." That $75 million is chicken feed. Fortunately, the law removes that cap if the incident was caused by "the gross negligence or willful misconduct" of any party, or its failure to comply with any "applicable Federal safety, construction, or operating regulation."
BP has waived the cap by expressing its willingness to pay "any legitimate claim." No surprise here, especially as the evidence to date suggests the cap will be blown off precisely because of the two exceptions. But we'd all be much better off if there were no statutory liability cap and if operators both big and small were required to purchase insurance—amounting to the tens of billions if necessary—when they operate in dangerous waters or terrains.
A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don't get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate. This logic also suggests that the Price Anderson Act's $375 million cap on damages for each responsible party to cover incidents at a nuclear power facilities should be rethought.
Tort liability does not preclude direct government safety inspection and regulation, especially in the Gulf of Mexico, where the government itself leases the drilling rights. So by all means work hard to make these better. Just be skeptical that this or any other presidential administration will reform the Department of Interior's hapless Minerals Management Service.
The rash decision of the Obama administration to shut down for six months all drilling in over 500 feet of water highlights the converse risk of regulatory overreaction. Why impose a ban on competitors with better safety records? Why extend it to relatively shallow waters?
***
Obama vs. BP (and You) - WSJ.com
EXCERPT:
"Government is the greatest of blessings, without which many other blessings are not possible, such as freedom from fraud and extortion and violence. The problem, and irony, is that government, in clearing the field of other fraudsters and extortionists, is ever tempted by those roles itself.
A policeman kicks out your taillight and then writes you a ticket for a faulty taillight. A president announces a moratorium on offshore drilling as a sop to a section of his public that always opposes drilling, and to be seen "doing something." Then he turns around and demands that BP compensate those injured by the president's own careless action.
"Government is the greatest of blessings, without which many other blessings are not possible, such as freedom from fraud and extortion and violence. The problem, and irony, is that government, in clearing the field of other fraudsters and extortionists, is ever tempted by those roles itself.
A policeman kicks out your taillight and then writes you a ticket for a faulty taillight. A president announces a moratorium on offshore drilling as a sop to a section of his public that always opposes drilling, and to be seen "doing something." Then he turns around and demands that BP compensate those injured by the president's own careless action.
Wednesday, June 16, 2010
Text of Barack Obama’s Oval Office Address - Washington Wire - WSJ
EXCERPT:
"You know, for generations, men and women who call this region home have made their living from the water. That living is now in jeopardy. I’ve talked to shrimpers and fishermen who don’t know how they’re going to support their families this year. I’ve seen empty docks and restaurants with fewer customers – even in areas where the beaches are not yet affected. I’ve talked to owners of shops and hotels who wonder when the tourists will start to come back. The sadness and anger they feel is not just about the money they’ve lost. It’s about a wrenching anxiety that their way of life may be lost.
I refuse to let that happen. Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company’s recklessness. And this fund will not be controlled by BP. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent, third party."
"You know, for generations, men and women who call this region home have made their living from the water. That living is now in jeopardy. I’ve talked to shrimpers and fishermen who don’t know how they’re going to support their families this year. I’ve seen empty docks and restaurants with fewer customers – even in areas where the beaches are not yet affected. I’ve talked to owners of shops and hotels who wonder when the tourists will start to come back. The sadness and anger they feel is not just about the money they’ve lost. It’s about a wrenching anxiety that their way of life may be lost.
I refuse to let that happen. Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company’s recklessness. And this fund will not be controlled by BP. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent, third party."
The Gulf Spill, the Financial Crisis and the Failure of Big Government - WSJ.com
EXCERPTS:
"The Gulf oil spill and the global financial crisis both demonstrate the failings of big government. Partisan politics obscures the linkage, with the consequence that each political party repeats the mistakes of the other as its turn to govern arrives.
First, consider the oil spill. BP and its contractors are surely responsible for the accident. They may also be responsible for a poor response. The nature and scope of legal culpability is yet to be determined. What is the government's role? Offshore drilling is a dangerous activity with potential undesirable consequences now actualized. For this reason, as we have learned, it is heavily regulated. The agency directly responsible for regulating the activity is the Minerals Management Service (MMS) of the Department of the Interior.
... the federal government has assumed the role of solving a collective action problem. Potentially all Americans benefit from the drilling, but those living in coastal areas suffer disproportionate harm from mishaps. The government theoretically negotiates on their behalf and establishes rules to protect them.
Obviously, regulation failed. By all accounts, MMS operated as a rubber stamp for BP. It is a striking example of regulatory capture: Agencies tasked with protecting the public interest come to identify with the regulated industry and protect its interests against that of the public. The result: Government fails to protect the public. That conclusion is precisely the same for the financial services industry.
***
Advocates of heavy regulation promise that risky behavior by banks can be controlled and limited by regulators. There are two major reasons such efforts fail. I have already discussed the first: regulatory capture.
The second source of regulatory failure is the knowledge problem identified by Nobel Laureate Friedrich Hayek. The knowledge required by regulators is dispersed throughout the industry and broader economy. For regulation to work, that dispersed knowledge must be centralized in the regulatory agency. To successfully accomplish this requires central planning of the industry, if not the economy. But the local knowledge of specific circumstances of time and place cannot be aggregated in one mind or agency. We know that is impossible, and that impossibility was the reason for the collapse of the Soviet Empire and the transformation of the Chinese economy.
Regulatory practice represents islands of central planning in otherwise decentralized market economies. If we add back in the problem of regulatory capture, then we get industries coddled and protected by government. When business and politics become intertwined we move from market economies to crony capitalism.
***
A big-government conservative administration failed in crisis, as has a big-government liberal administration. The regulatory state did not prevent excessive risk taking whether in financial services, nor perhaps in offshore oil drilling. Government response to crises once they occur is slow and inept. All this is not because either Republicans or Democrats are in power, but because big government doesn't work. It can't deliver on its promises. Big government overpromises and underdelivers. In reaching to do more, big government accomplishes less. That is not an ideological statement, but an empirical observation.
***
University of Chicago law professor Richard Epstein has observed that we need simple rules for a complex world. The complexity of rules is self-defeating, because that complexity requires more knowledge than can be acquired. Brazil has a simple rule for directors of failed banks: They are personally liable. That concentrates the mind of directors on reining in risk-taking by management more effectively than would creating a systemic-risk regulator.
The Obama administration and Congress propose more of the same failed approach to regulation. Instead they should heed Hayek, who observed that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
"The Gulf oil spill and the global financial crisis both demonstrate the failings of big government. Partisan politics obscures the linkage, with the consequence that each political party repeats the mistakes of the other as its turn to govern arrives.
First, consider the oil spill. BP and its contractors are surely responsible for the accident. They may also be responsible for a poor response. The nature and scope of legal culpability is yet to be determined. What is the government's role? Offshore drilling is a dangerous activity with potential undesirable consequences now actualized. For this reason, as we have learned, it is heavily regulated. The agency directly responsible for regulating the activity is the Minerals Management Service (MMS) of the Department of the Interior.
... the federal government has assumed the role of solving a collective action problem. Potentially all Americans benefit from the drilling, but those living in coastal areas suffer disproportionate harm from mishaps. The government theoretically negotiates on their behalf and establishes rules to protect them.
Obviously, regulation failed. By all accounts, MMS operated as a rubber stamp for BP. It is a striking example of regulatory capture: Agencies tasked with protecting the public interest come to identify with the regulated industry and protect its interests against that of the public. The result: Government fails to protect the public. That conclusion is precisely the same for the financial services industry.
***
Advocates of heavy regulation promise that risky behavior by banks can be controlled and limited by regulators. There are two major reasons such efforts fail. I have already discussed the first: regulatory capture.
The second source of regulatory failure is the knowledge problem identified by Nobel Laureate Friedrich Hayek. The knowledge required by regulators is dispersed throughout the industry and broader economy. For regulation to work, that dispersed knowledge must be centralized in the regulatory agency. To successfully accomplish this requires central planning of the industry, if not the economy. But the local knowledge of specific circumstances of time and place cannot be aggregated in one mind or agency. We know that is impossible, and that impossibility was the reason for the collapse of the Soviet Empire and the transformation of the Chinese economy.
Regulatory practice represents islands of central planning in otherwise decentralized market economies. If we add back in the problem of regulatory capture, then we get industries coddled and protected by government. When business and politics become intertwined we move from market economies to crony capitalism.
***
A big-government conservative administration failed in crisis, as has a big-government liberal administration. The regulatory state did not prevent excessive risk taking whether in financial services, nor perhaps in offshore oil drilling. Government response to crises once they occur is slow and inept. All this is not because either Republicans or Democrats are in power, but because big government doesn't work. It can't deliver on its promises. Big government overpromises and underdelivers. In reaching to do more, big government accomplishes less. That is not an ideological statement, but an empirical observation.
***
University of Chicago law professor Richard Epstein has observed that we need simple rules for a complex world. The complexity of rules is self-defeating, because that complexity requires more knowledge than can be acquired. Brazil has a simple rule for directors of failed banks: They are personally liable. That concentrates the mind of directors on reining in risk-taking by management more effectively than would creating a systemic-risk regulator.
The Obama administration and Congress propose more of the same failed approach to regulation. Instead they should heed Hayek, who observed that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
Tuesday, June 15, 2010
Obama's Political Oil Fund - WSJ.com
EXCERPTS:
"The BP oil spill is already a calamity for the Gulf Coast ecosystem and economy, but now that Washington is looking to deflect all political blame it could also became a disaster for the rule of law. Exhibit C ... is the new White House demand that BP pay into an escrow account controlled by government to pay for the economic costs of the spill....
Then came the President's suggestion that BP suspend its dividend, which is crucial to the retirement of thousands of shareholders. BP may decide it is prudent to suspend its dividend while it gets a better handle on its ultimate liability. But the White House has no legal basis to compel such a decision. Meanwhile, Democrats in Congress are preparing to lift their own $75 million liability cap and apply that retroactively to BP, another move of dubious legality.
No wonder Britain's Prime Minister and other officials are alarmed about the fate of one of their country's foremost corporations. This is the kind of treatment that Americans would protest if it were applied to U.S. companies by Venezuela or Russia.
***
None of this is to absolve BP for any bad judgments or shortcuts that contributed to this disaster....
BP is financially responsible for the Deepwater Horizon gusher, and the White House should want the company to stay healthy enough to honor those obligations. Instead, the Administration's denunciations and legally dubious demands are compounding the damage.
***
Offshore drilling, even in shallow water, is coming to a stop as the entire industry considers the additional political risks of operating amid a political panic in which even the President of United States seems oblivious to the rule of law....
"The BP oil spill is already a calamity for the Gulf Coast ecosystem and economy, but now that Washington is looking to deflect all political blame it could also became a disaster for the rule of law. Exhibit C ... is the new White House demand that BP pay into an escrow account controlled by government to pay for the economic costs of the spill....
Then came the President's suggestion that BP suspend its dividend, which is crucial to the retirement of thousands of shareholders. BP may decide it is prudent to suspend its dividend while it gets a better handle on its ultimate liability. But the White House has no legal basis to compel such a decision. Meanwhile, Democrats in Congress are preparing to lift their own $75 million liability cap and apply that retroactively to BP, another move of dubious legality.
No wonder Britain's Prime Minister and other officials are alarmed about the fate of one of their country's foremost corporations. This is the kind of treatment that Americans would protest if it were applied to U.S. companies by Venezuela or Russia.
***
None of this is to absolve BP for any bad judgments or shortcuts that contributed to this disaster....
BP is financially responsible for the Deepwater Horizon gusher, and the White House should want the company to stay healthy enough to honor those obligations. Instead, the Administration's denunciations and legally dubious demands are compounding the damage.
***
Offshore drilling, even in shallow water, is coming to a stop as the entire industry considers the additional political risks of operating amid a political panic in which even the President of United States seems oblivious to the rule of law....
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