Friday, June 4, 2010

Some Rational thoughts on the BP Oil Spill


I find myself in constant amazement at the stupidity of the American people. Just when I start thinking that maybe my fellow citizens deserve a little credit for having some common sense, another reason to have no faith in the economic intelligence of humans resurfaces.


To date, BP has lost over $1 billion as a result of this historically epic oil spill. Every second, BP officials can watch an underwater camera film profits gushing into the Gulf of Mexico. BP will end up spending far more on lawsuits, cleanup costs, new regulatory contraints on deepwater drilling and more. BP's reputation with consumers is tanking. Stockholders are fleeing. Bondholders are probably selling off in droves.

And yet, the American people think BP does not care about what is taking place. BP cares more than anyone! BP cares because it has the biggest reason (over 1 billion of them) to care. It is as if - when you listen to other people - that this evil corporation is somehow responding slowing and/or stupidly to the spill because it is, of course, an evil corporation that cares only about profits and stockholders. It is precisely because BP only cares about profits and stockholders that BP keeps trying to stop this spill.

Many will say that this is proof that deepwater drilling is too risky to continue or that BP and other companies should have had to take more precautions before they started drilling that deep. Nonsense.

First, the odds of something like this happening were - and still are - so low that it would not have made sense for BP to incur tens, if not hundreds of millions of dollars in added costs to drill relief wells at the same time the primary wells were being drilled. Think of it this way. We have a better chance of dying from a car wreck than an oil rig has of sinking. Should Ford build cars that look like tanks with several feet of protective steel, bomb-proof windows and bumpers that are 10 feet thick? That would save many more lives, right? What would cars then cost?

If all of the oil companies took into account every possible disaster and then incurred costs to prevent even the lowest probability events, you would have the pleasure of paying much more for gas than you do now. Then you would complain about $6 gas and the "excessive measures" that oil companies are wasting money on.

The reality of this spill is quite simple. BP engaged in rational engineering to provide us with fuel at the lowest possible cost. Government regulators (who failed over and over again to do their jobs) implicitly trusted that BP loved getting money for oil and would try not to spill any. When the lowest probability event actually happened we got a spill into the nation's common property that BP should now pay to clean up. It will be bad for the Gulf States for a long time. Billions, potentially in tourism and seafood revenue will be lost. That is part of the price of keeping gas around $2.50 per gallon.

If you want a full-proof method for keeping all oil out of the ocean, then ban all drilling offshore, pay your $6 per gallon and shut up about the high price of gas.


4 comments:

  1. It's nice to know there are still some rational people left in the country, although I think the numbers are dwindling.

    I had someone tell me the Obama administration secretly caused the oil leak so they could bankrupt BP and take it over.

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  2. Professor Chambless, for once I will have to disagree with you. This incident shows we that deep water drilling is not a place where cutting cost should not be considered. You taught me a lot when I was your student, but I believe something important has been missed here. When you consider the cost/benefit analysis of any off shore drilling, the cost/benefit better include ecology services as well. Even though this is a rare incident, we now see the catastrophic impacts that occur when it happens. None of the deep water wells should have ever been done without the relief well in place. We obviously do not have the technology to just plug the leak, and now this oil is not only threatening the livelihood of those along the coast, but the entire gulf ecosystem. As far as the cost of gas, when you consider the profits oil companies accrue every year, the loss of having the relief wells pre-drilled would be minimal impact to the consumer. The cost of cleaning up this mess will most likely cost much more, with impacts that could be around for decades. I am a Libertarian and I am all for the free market, but unfortunatly I do not beleive that people are rational. I truly beleive that greed and corruption outnumber the rational thinkers of this world, and I belive this oil spill is proof.

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