The Wisdom of the Market and the BP Disaster

The BP oil spill in the Gulf of Mexico has the potential to become one of the worst environmental catastrophes in history—a disaster that may rival the destruction of the Aral Sea under Soviet Communism.

Does this mean that at protecting the environment, capitalism is no better than socialism? For some, this catastrophe reinforces their narrative about capitalism. We will be told that BP and its contractors endangered an important ecosystem in the world as they recklessly pursued profits. We will be told that there is an inherent conflict between the pursuit of profits and the interests of humanity and that government is an essential mediator.

In fact, it may well be true that BP recklessly pursued profits; but rather than blaming free-market capitalism, the fault lies in central planning and what Ron Paul calls corporatism. Corporatism Paul tells us is: “A system where businesses are nominally in private hands, but are in fact controlled by the government. In a corporatist state, government officials often act in collusion with their favored business interests to design polices that give those interests a monopoly position, to the detriment of both competitors and consumers.”

This morning the New York Times reports that “prominent oceanographers [are] accusing the government of failing to conduct an adequate scientific analysis of the damage and of allowing BP to obscure the spill’s true scope.”  Most independent experts dispute the government’s estimate that the BP leak is producing 5000 barrels of oil a day; some experts estimate up to 50,000 barrels a day are being spewed.

Now, the government’s poor response to the disaster doesn’t remove the culpability of BP and it doesn’t address the critique that the pursuit of profits by BP is to blame.  But, there is much more to government’s role in this disaster. Let’s focus on the government’s Oil Spill Liability Trust Fund passed by Congress in 1986. Under the law, operators of an offshore rig face no more than $75 million in liability for damages caused by an accident. Damages from the BP accident are certain to run into the billions.

On a free-market there would be no laws limiting liability. Laws that limit liability encourage the taking of risks that would not otherwise be taken. Experts can argue all they want about whether offshore oil drilling is inherently safe or not. Experts can argue all they want about what safety precautions BP should have had at the rig but didn’t. Their views are interesting and often informative, but they keep us rooted where the problem is not.

I live in a rural area and we cook on a gas stove. There is no natural gas pipeline, and so every few months a truck brings us propane gas that is stored in a tank outside of our house. The tank meets certain safety standards, and it passes muster with our insurance company. Suppose we began to store propane on our property in an unapproved container? We would quickly find out that our insurance would be canceled. Further, the fire department and the town would pay us a visit. If we had an accident, the effects would likely impact not only us but our neighbors.  In other words, in a free market, insurance companies play a vital role in determining acceptable risk.

Suppose you began to routinely speed on the interstate, driving over 90 miles an hour. Suppose you received many speeding tickets but managed to keep your license to drive. You would quickly find that your automobile insurance company would either cancel your policy or drastically raise your insurance rates. Would it make sense for the government to pass a law capping your liability in case of an accident? Of course not, that would encourage risky behavior.

In January I wrote at this blog:

Under current law, it is literally impossible to build a safe, clean nuclear power plant. My 1984 paper explains why. The text is available here. In short, there would be no nuclear power plants operating in the United States without government subsidies. The Price-Anderson Act places a cap on damages that a nuclear power plant operator will incur should the plant have an accident. In other words, for over 50 years the government has introduced the same type of systemic risk that we have seen in financial industry. The industry gets the rewards, the government says, and taxpayers absorb the risks.

In their book World Politics: International Politics on the World Stage John Rourke and Mark Boyer write of the Aral Sea:

There are few stories better than that of the sad fate of the Aral Sea  to illustrate humankind’s abuse of the environment and its devastating consequences. The inland sea is located between Kazakhstan to the north and Uzbekistan to the south. In 1960, when those countries were still part of the Soviet Union, the sea was the fourth largest inland body of water, covering 26,300 square miles, an area about the size of Belgium and the Netherlands combined.

Then, beginning in the 1960s, Soviet agriculture demands and horrendous planning began to drain water from the sea and from the two great rivers that feed it (the Amu Darya from the north and the Syr Darya from the south) faster than the water could be replenished.

The sea started to shrink rapidly. As it did, the level of its salinity rose, and by 1977 the catch from the once-important fishery had declined by over 75 percent. Still the water level continued to fall, as the sea provided irrigation for cotton fields and for other agricultural production. The same Soviet planning that brought the world the Chernobyl nuclear plant disaster in Ukraine, stood by paralyzed as the Aral Sea began to disappear before the world’s eyes.

Now, in reality, geographical name Aral Sea is a fiction, because it has shrunk in size and depth so much that a land bridge separates the so-called Greater Sea to the north from the Lesser Sea to the South. What was a single sea has lost 75 percent of its water and 50 percent of its surface area in the past 40 years. That is roughly equivalent to draining Lake Erie and Lake Ontario. The Uzbek town of Munak was once the Aral Sea’s leading port, with its fishermen harvesting the sea’s abundant catch. Now there are few fish, but even if there were many, it would not help the people of Munak. The town is now in the middle of a desert; the shoreline of the Lesser Sea is 50 miles away.

Let’s put all of this together. The same failed idea—central planning—gives us the destruction of the Aral Sea, gives us nuclear power, and gives us offshore oil drilling. Human greed exists, but it needs an agent of coercion to do widespread damage. That tool of coercion is government.

BP may be reckless, but only the government grants them the privilege of capping their liability. Without that cap on liability, their ability to raise money in the financial markets would be severely hampered. In other words, without a capped liability, offshore oil drilling in its current form would not exist. I write in its current form, because it is possible that the removal of the limit on liability would encourage new technology that could lead to safe offshore oil drilling.

All this is speculative, but we know that the BP accident is not an inevitable result of free-market capitalism. Like the destruction of the Aral Sea, the accident is an inevitable result of central planning. Mankind seems determined to not learn the lesson: At our peril, we substitute our own judgment for the wisdom of the market.


3 Responses to The Wisdom of the Market and the BP Disaster

  1. The Destructionist says:

    While watching the latest news about the BP Oil spill, a frightening thought came to mind: what if we can’t stop the oil? I mean, what happens if after all the measures to cap the pipe fail, (i.e., “Top Hat”, “Small Hat” and “Top Kill”). What then? An accident this problematic is new territory for BP. The oil pipeline is nearly a mile down on the ocean floor, accessible only by robots. Add on top of that the extreme pressure at which the oil is flowing out of the pipeline and there you have it: the perfect storm.

    Moreover, scientists also claim that they’ve found an enormous plume of oil floating just under the surface of the ocean measuring approximately 10 miles long, 3 miles wide and 300 feet thick. (I’m no math genius, but I bet one of you reading this could figure out just how many barrels of oil that is…)

    There are new estimates that the amount of oil spewing into the Gulf of Mexico is anywhere from 50,000 to 100,000 barrels of oil a day: that’s a far cry from BP’s estimated 5,000 barrels a day. If BP’s estimates are correct, the total amount of oil now in the Gulf would be approximately 150,000 barrels (or 6,300,000 gallons). That’s barely enough to fill 286 swimming pools: sixteen feet, by thirty-two feet, by eight and a half feet deep. That wouldn’t cover an area the size of New York City, let alone an area the size of Delaware. Obviously, the spill is much larger than we are being led to believe. If the leak can’t be stopped, in a year’s time, we’ll have roughly 18,250,000 barrels of oil (or 766,500,000 gallons) in our oceans, killing our marine and animal wildlife. Such a calamity would be environmentally and economically disastrous. I’m not a religious man, but I pray that BP and our government work fast to end this catastrophe.

  2. Mike L says:

    Professor, I was wondering where you were going with this post. I always thought the liability caps would enhance capitalism since it enables smaller firms to compete for offshore drilling contracts. Correct me if I’m wrong but you’re saying that under a ‘pure’ capitalist system, the liabilities would be too great to drill offshore for anyone to do perform and ultimately, make oil so expensive that the market would be forced to find alternate solutions such as solar, batteries, or hydrogen.

    It’s an interesting theory, however I believe we’re stuck with petroleum and the combustion engine for the next 100 years or so. The president keeps talking about utilizing wind, solar and geothermal to power our cars and cities, however these technologies rely heavily on government subsidies because the market says they are currently not economically feasible.

  3. Mike,

    You are correct, without the liability limit offshore oil drilling would be greatly reduced. Subsidized energy–be it offshore oil, nuclear, ethanol or wind–distorts the wisdom of the market and creates energy problems.

    None of us are smart enough to forecast the next energy breakthrough–it must be discovered. Energy prices have been falling for centuries as capitalism as unleashed entrepreneurial discovery.

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