Posts Tagged ‘regulation’

A Fatal Flaw

June 1, 2010

I try hard to keep politics out of my editorials about the energy world, but the major energy story today is the continuing oil spill in the Gulf of Mexico, and the really consequential parts of that story are all about politics.

The political philosophy which has reigned over the past 30 years says “Any regulation that restricts the oil industry’s freedom to operate is bad – doubly bad, if it comes from Washington. Accidents or mistakes? Don’t worry – market forces will incentivize companies to do the right thing.” On its surface, it’s an appealing policy. It has enabled the ‘can do’ attitude of great innovation in oilfield technology which has kept oil flowing to our gas tanks and factories. On a philosophical level, it satisfies our urge for personal freedom and the ability to earn great reward for great success.

Appealing as this philosophy might be, the way it has been implemented these past 30 years is fatally flawed. In this case, BP gambled big – perhaps by stretching its technology beyond its limits, perhaps by cutting safety corners – with little prudence or restraint. While BP will pay some of the costs of their mistakes, most of the assets they gambled with – the homes and livelihood of Gulf coast residents, the barrier islands which provide protection from hurricanes, the shrimp and oyster fisheries, and Gulf and Caribbean environment – weren’t theirs to wager.

The bottom line problem – it’s a problem that runs to the very core of American society – is that over the past 30 years, politicians of both parties have designed the rules so that the big and powerful can gain great rewards, while the government and society in general are there to back-stop their great failures. As the BP case illustrates, there’s no one sitting at the regulatory table who represents the interests of the average American people, making sure the Big Boys are not playing fast and loose with our assets.

As columnist David Brooks, certainly no friend of big government, said in a recent editorial:
If this disaster teaches anything, it is that we are a venturesome, entrepreneurial society. We rely on corporations like BP to bring us energy. At the same time, it is clear that even well-meaning corporations sometimes take shortcuts when it comes to controlling pollution and protecting worker safety.
So we want government to regulate business. We want regulation to be strong enough to reduce risk but not so strong as to stifle innovation. We want regulators to work cooperatively but not be captured by those they monitor.
We have known, for a long time, that regulation is about balance. The proper regulatory regime has to be set case by case and year by year.

The problem is that today, the balance between entrepreneurial freedom and the public interest is badly out of whack. Whether it’s the oil industry, Wall Street, or mortgage bankers, the existing regulations – and the way the regulators apply them – all too often allow the rich and powerful to get richer and more powerful, while the rest of us pick up their tab.

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“Drill, baby …” Oops, Never Mind

May 5, 2010

Not long ago, I wrote – pretty favorably – about Pres Obama’s decision to open up some offshore areas to more drilling and petroleum development. I said then that decades of technology improvements have substantially reduced the risks of accidents and spills.

Well, that statement was certainly factually true when I made it, and it’s no less true today. But the BP disaster off Louisiana shows that the risk isn’t ZERO. We don’t know yet just where the system failed – equipment malfunction, poor design, or human error – but there was a failure point, and it is within our ability to identify it, along with the culprits.

Oil producers and drillers have lots of incentive to avoid these disasters. It will cost BP many times more in clean-up costs and bad publicity than they could ever have saved by cutting safety and environmental corners. But even if a company has the best of intentions – and it’s pretty clear now that planning for potential spills by BP, Halliburton, et al was dreadfully negligent – familiarity always breeds complacency, and it’s easy to become lax when you’re policing your own behavior.

Better oversight and regulation – by an independent organization that doesn’t have a direct stake in getting oil out of the ground – must be a major part of the response to this mess. Taking $$$ out of the hide of unfortunate or negligent offenders is satisfying, but bancrupting BP isn’t going to clean up the mess in the Gulf, bring back the dead fish, birds and turtles, or replace the lost tourism and fishing revenues.

Energy development is vital to our individual economic health and to our country’s basic security. But debacles like the BP mess underscore the urgency of developing alternative sources, along with more effective and reliable regulation of oil and coal resources.

And the fact that our near term energy mix will have to include a fair amount of oil that’s not from the Middle East as a bridge to a non-fossil fuel future underscores the urgent need for an independent regulatory body with the resources and teeth to make sure industry doesn’t cut corners when it comes to safety and the environment.