Why the Oil Spill isn’t BP’s Fault

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There’s nothing the mainstream press enjoys more than an environmental disaster.

And paradoxically, there’s nothing the green lobby gets a bigger kick from than an environmental disaster.

But the real disaster isn’t the oil spill it’s the fact that eleven people were killed when the oil rig exploded in late April.

Not that you hear too much about that.

You see, as terrible as it may seem, and as incomprehensible as the amount of oil leaking into the Gulf of Mexico is – up to 162,000 barrels equivalent per day – the long term effect of the oil spill is likely to be, well, hardly noticeable.

Sure, you’ve seen the protests about the impact on wildlife and oil washing up on the beaches. And sure, there have been plenty of references to the Exxon Valdez in 1989, which according to our friends at Wikipedia resulted in the deaths of “100,000 to as many as 250,000 seabirds.”

We’ll agree, that’s a lot of birds. Although, when you put it in perspective, even the top-of-the-range number would have only resulted in a decline of the world bird population by 0.00025%.

And even the population of the formerly endangered bald eagle was barely dinted by the Exxon Valdez. According to the same Wikipedia reference, 247 bald eagles died following the incident.

If we assume they died as a direct result of the Exxon Valdez oil spill it still only reduced the total bald eagle population of the Alaska/British Columbia region by about 0.35%, given that population numbers in that region in the early 1990s were forecast to be between 60,000 and 80,000 individual birds.

In other words would would have taken a disaster 243 times larger than the Exxon Valdez to wipe out the entire bald eagle population.

So the miniscule impact on wildlife following that event hardly warrants the use of the term “ecological disaster.”

Ecological annoyance would probably be more accurate.

Look, I’m not saying that you can just go around killing things and then say, “Oh, but it’s only 0.0000000001% of the total population, it doesn’t matter.” What I am saying is this…

First of all, there’s a tendency by the mainstream media to fall for the environmental propaganda too easily. All they need is a couple of videos of a budgie covered in oil and a distressed rock drenched in the same for it to make front page news.

But secondly, and perhaps more importantly, whenever such a “disaster” as this happens it’s invariably the case that the blame is apportioned to the wrong person or organisation.

As you’ll have noticed, the evildoer tag has been attached to BP, with the CEO Tony Hayward being cast as the Dick Dastardly of the corporate world.

But as is usually the case, the real cause of the problem has been overlooked. You see, it’s not BP that is ultimately to blame, even though the oil has come from their oil rig. And it’s not entirely the fault of the legislation passed in the US during the 1980s that limited the liability of oil companies to just USD$75 million if a spill occurred.

No, the ultimate cause of the problem is something as basic as a lack of private property rights.

Yep, that’s right, a lack of private property rights over gulfs, oceans and shorelines is the direct and ultimate cause of the BP oil “disaster” and the Exxon Valdez oil “disaster”, and any other oil disaster you can think of.

A few weeks ago Daily Reckoning editor Dan Denning referred to a term known as tragedy of the commons.

The gist of the argument is that property that is either owned communally or by no-one in particular is cared for less than property that is freely owned by a private individual or organisation.

You can see that in almost every instance in society. In most cases where property is privately owned and where the owner values the property, it is better taken care of than property that is publicly owned.

Which is exactly the reason why the oil spill in the Gulf of Mexico occurred.

A lack of private property rights over seas and oceans naturally means that individuals and organisations are less careful about what they do in it or to it.

As an aside, take for example the case of the young American lass who was trying to sail around the world and had to be rescued in the Indian Ocean at a cost of $300,000 to the Australian taxpayer.

Do you really think that if the oceans were privately owned the owner would allow a 16 year old to sail through unassisted, without paying a fee to do so, without insurance should an accident occur, or without paying the private owner an insurance fee in the event of a rescue being needed? Something not too dissimilar to the fees you pay to the RACV or NRMA I suppose!

Anyway, when nobody owns something then there’s no recourse for compensation should you do any harm to it. Even if it’s publicly owned property the quest for compensation will be less rigorous than if it’s privately owned property.

Simply because of the lack of a profit motive and the lack of direct ownership. If oil washes ashore at a theme park located on a private beach and a public beach, odds are that the private owner will act faster to clear the mess as it could have an impact on revenues and profits.

But the public beach would have less of an incentive. The clean up process would probably need approval from committees or boards. It would need to be the “right” kind of cleaning process, not just any old process, and so on. The bureaucrats would be in their element. Looking busy doing nothing.

Then there’s the matter of private ownership of the oceans. It’s not such a crazy idea you know. It’s no crazier than private ownership of land.

Of course we’ll agree that it’s harder to erect a fence in the middle of the Atlantic Ocean, but that’s the beauty of technology that can simply and easily record boundaries electronically on maps. Just as national waters are recorded on maps today.

Consider the situation in the Gulf of Mexico right now if specific areas of the gulf were owned by the private sector. As an owner of a particular area you’d be keen to ensure that those using it took good care of it.

Not only because it would make it more attractive for others to do business there – eg. Other oil drillers or fishermen or tourist operators – but also because of the consequences of inappropriate actions by firms in your property could have on adjacent sea and land properties.

We’ve got no idea whether BP has been negligent with their drilling operations or not. But what we do know is, that if BP was drilling in a privately owned Gulf of Mexico, the private owner would want to be darn sure that BP was behaving itself.

The private owner would want to receive a fee from BP for the use of that particular sea area. Doubtless the owner would also want to make sure that BP had adequate insurance should anything happen.

The private owner may also provide addition services to those using it’s sea property – such as oil spill services.

After all, an oil spill by one driller would have a major impact on other companies doing business in that area of private sea – other drillers, fishermen, shipping firms, etc.

And imagine the consequence of the oil drifting into adjacent sea areas.

For the private sea owner, if one business causes other businesses to stop using that area of the sea then that’s going to be bad news for the owner.

But as another aside, what about other issues, such as piracy on the high seas? If you own a section of the ocean and you’re able to charge ships to use it, you’d be able to attract more traffic if you can demonstrate how secure your section of the ocean is. That ships can pass freely without the fear of ambush.

Anyway, getting back to the oil spill. While BP is being cast as the villain, the truth is that BP isn’t as villainous as the mainstream media, politicians and special interest groups claim.

I mean, does anyone seriously believe that BP intentionally caused the oil rig to explode, killing eleven men and releasing millions of barrels of oil into the Gulf of Mexico.

Yet listen to the mainstream knuckleheads and you’d think BP couldn’t give a stuff that up to USD$11.3 million worth of oil is leaking into the Gulf each day. Could it really be true that BP doesn’t care that it’s losing so much money in potential profits?

No, of course it isn’t. BP would rather have the oil flow into a tanker rather than into the sea.

However, because of a lack of private property rights there’s no private owner putting pressure on BP to clean the mess up. In addition, there’s no private owner who could have invested in equipment or chemicals to ensure the problem didn’t spread into adjacent privately owned areas.

Or, there was no private owner to stipulate that BP should have an emergency plan in place should the worst occur.

Instead you’ve got US president Obama calling the oil spill “the worst environmental disaster America has ever faced.” And claiming that he’s going to “kick ass” – we assume he means kicking bottoms not kicking donkeys.

But funnily enough, nearly two months after the rig exploded we’re yet to see exactly what governments or government agencies have done.

The fact is that if oceans were privately owned BP may never have been able to afford to locate a rig where it did. After all, drilling thousands of metres under the sea bed is pretty expensive and risky.

But as is usually the case, when you’ve got a government manipulating a market to encourage offshore exploration in areas that otherwise would not be economical, it will always create distortions and lead to unintended consequences.

Especially when a government passes a law limiting the liability of offshore drillers to just USD$75 million. Which – if you’ll pardon the pun – is a drop in the ocean compared to the billions the clean-up is forecast to cost.

So look, I won’t deny that perhaps BP deserves to shoulder some of the blame. But the fact remains that the biggest contributor to the current oil spill, the Exxon Valdez, and all other so-called environmental disasters is actually the basic lack of private property rights over the seas.

Cheers,
Kris.

Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Read more about Publisher and Investment Director Kris Sayce.

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59 Responses to “Why the Oil Spill isn’t BP’s Fault”

  1. davidgry@melbpc.org.au'

    David Gray

    2010-06-19T15:38:08+00:00

    Who would you choose to regulate and inspect etc a project like the BP Well? The Technology is so new only a handful of people would even understand the entire chain of innovations they needed to drill at such incredible depths and pressures.

    Reading BP’s earlier words regarding the number of ‘Teams’ working on separate problems…down to the last ‘Widget’.

    Statistically if the chance of catastrophic Failure is 100:1 and you repeat that action a 1000 times then a failure is statistically inevitable.
    JP Morgan owns a substantial amount of BP. Also our friends at Halliburton (I wonder how Dick Cheney is doing?) were involved with critical elements in the project.

    Is there such a thing as a Spill Ship? A fleet of ships designed to deploy and contain these Mega Disasters. I say Mega as it seems the erosion effect on the underground pipe is probably if the pipe is ‘cut through’ we will have an open hole under 5000 feet pumping Crude at rates of 50 -70 Thousand Barrels a day unstoppable even with relief wells.

    Our love of Oil will have ramifications far beyond imagination. God help us when the inevitable Hurricane comes along.

    This event was bound to happen, the US Govt is powerless to do anything but posture and placate as this Pipe deteriorates the BOP will collapse, oil & Gas will start bubbling up from the sea floor. We / They are in the S**t.

    BP Global – Reports and publications – Thunderous innovation

    “The list of development breakthroughs is formidable even by the standards of large oil industry projects, pushing technical know-how out to new boundaries. In operation, many of these equipment developments will be out of sight beneath the waves. Another set of first-time achievements will be even more invisible – deep down inside Thunder Horse’s wells.

    O’Connell notes that having five completions engineers in the design team alone, compared to a more usual one or two, was an indication of the work that had to be done.

    ‘We were doing virtually everything from scratch, and had to question even the most basic assumptions. For example, with wells flowing at 50,000bpd, could the whole completions string vibrate itself to pieces? Answering such questions required an extensive testing and quality assurance programme for the many new components. It is astounding to think that of the 32 major components in a 140mm diameter Thunder Horse completions string, 18 of these are classed as “Serial Number Ones” – that is to say, they are the first of their kind ever made. You might expect one or two Number Ones in a completion. But certainly not eighteen.’

    The 18 new design components were just the tip of the iceberg – a further seven were existing designs that had to be modified. And by the time the operations team had developed ways to install and operate the completions strings, a further 89 Serial Number Ones were notched up”.

  2. jwexler@bigpond.net.au'

    Jon Wexler

    2010-06-19T17:32:57+00:00

    Kris,
    If you owned a fishing business or beach house on the Gulf coast you’d be looking a whole lot differently at this massive disaster instead of pissing about with irrelevant wildlife population counts and smart-arse, totally fallacious propositions about catastrophe avoidance from privatising the seas. I’ll be taking future utterances from you with far greater salinity.

  3. oh184718@bigpond.net.au'

    Otto

    2010-06-19T19:27:19+00:00

    Hello Kris , I really have to say you are way off beam with this one . The headline already suggested to me that not all is well with this article and sadly it was . Perhaps you will all have us own a wild Lion or Crocodile in future to monitor their activities and prevent problems . There is far more care required by the Oil companies . If BP is financially able to pay the huge costs involved in the clean up then the money must be there in the first place to fund environmental protection right from the start .

  4. dolphin@ocean.com'

    Drowning Dolphin

    2010-06-20T05:36:23+00:00

    I agree with Steve in that the suggestion of privatising the Oceans is coming from a soul that likes to brag about its ability to survive without government intervention. I think he is just trying to cause argument for the sake of it. Anyone with a passion for human rights, knowledge or nature should be horrified by the suggestion. The fact that he had to apologise to a property spruiker infers a provocative style and lack of tact but this is ridiculous.

  5. etch6@mail.com'

    OREO-ruddxpin-BASHER-BUMMER

    2010-06-20T15:06:25+00:00

    @ 28 I’d be interested to know…
    “””””””””””What i do know about Joye is that he is one of Australia’s main property spruikers whose business (Rismark Int) has vested interests in perpetuating the lie that Australia’s property market is not in a bubble. Having read only a couple of Joye’s comments and articles on his blog site i can already tell that he has published misleading information (i.e. blatant lies) on his blog, for example his claims as to the ratio of property prices to average income in Australia is pure fiction.
    When will we get an apology from him for the tripe he’s been spouting about Australia’s mystical property market?? After the crash perhaps?
    IF he’s man enough to apologise that is, which i suspect he isn’t, we probably would not have to wait a very long time then…”””””””””””””””

    when it/if it all goes belly-up ..it wouldnt matter to him as he’s got more than enough money to LIVE IN MAJORCA

  6. i.borg@ymail.com'

    borg

    2010-06-20T16:22:26+00:00

    once again a stupid article by a one eyed privately biased idiot… “private” doesnt equal responsible… private equals ‘do whatever I like to make the most profit’!! and thats exactly what BP did. cut corners to ensure the most profit… but now its bitten them hard! I only hope these private companies learn the lesson! unlike the author of this article!

  7. aindholaus09@live.com'

    Harry

    2010-06-20T18:40:28+00:00

    I am a mettalurgist, and had part of my (practical)training with “Royal Shell” (KSLA). I also pressure tested pipes.Aboveground.
    What would the world think if there were a Gas-Explosion? Not the fault of the carrier of the gas/energy corporation ?What about the “disaster in India a few years back.Who paid for that? What if a refinery here would have an explosion?Would “rudd” fix it, or have to fix it?,Out of our taxpayments?We would shove it back to the refinery ownner,would we not?
    Coming back to Shell, they had a MASSIVE testing laboratory,
    nearly fifty years ago (candidate for senility?),one of the most impressive in the world .Some of their test benches went through THREE floors. On someof their test the WHOLE building would shake.
    To me it is a shortcoming of BP one way or the other,probably coupled to bad luck.
    Who would be responsible if an “act of God” happened? And ruptured the setup. Earthquake?
    If I owned that peace of ocean realestate –or YOU ?—would you have 2 billion PLUS!! for spare to fix the blow out?
    Still to my mind: It isBP’s Bunny,if they go bust because of it..so be it,
    Though i would be seriously sorry about it.From Shell I learned that BP is not owned by BP only , also by Shell, and Caltex etc.
    Consequently WE ALL have to pay more for our fuel.So be it.
    More truckies going bust.
    CATS…?? I cried when my cat of 18 y old died, here in Australia.Nearly 20 years ago.I still feel sorry.BUT!!! Live Cats as a pet should not be in Australia, not more than CANE-TOADS!! Cats are just more appealing and charming; which one is more disasterous to the Ozzie Fauna? I don’t know. High taxes on cats…that is not politically appealing.

  8. clueblog@yahoo.com'

    Jono

    2010-06-21T16:04:47+00:00

    This reminds me of an excellent article I read a few years back that gave a prime example of how property rights lead to better environmental management over common ownership.

    That example was the French regulation of their oyster industry during the 18th century, versus the British example of leasehold arrangements. The French went through a wave of crises as overfishing occurred, whilst the British never suffered the same problems.

    I only wish I c0uld find the link to the original article. It highlights just how government management is completely un-sustainable and private ownership leads to all kinds of environmental resources – fish, trees, coral, flowers – never running out and being renewable.

  9. grahjos@tiscali.co.uk'

    Josh

    2010-06-23T05:46:51+00:00

    BP did not own the rig, it was owned by a US company called Transocean. Transocean were being paid $500,000 a day to mantai the rig, including a key part in the well to prevent blowouts, which in this case killed 11 men.

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