The tragic accident at British Petroleum’s Deepwater Horizon drilling platform in the Gulf of Mexico precipitated a major economic and environmental disaster from which that company may never recover. Eleven lives were lost in the calamity and the crude oil in the Gulf’s marine ecosystem likely will destroy the livelihoods of countless shrimpers, oystermen and the owners of businesses who depend on the income generated by tourists looking to take advantage of recreational amenities on the coasts of Alabama, Florida, Louisiana and Mississippi.
How could this catastrophe have happened? Nearly all of the blame can be assigned to BP, which in its rush to meet a self-imposed deadline for finishing the project so that the Deepwater Horizon could be moved to another location, ignored widely accepted principles of risk management.
Another culprit is BP’s too-cozy relationship with the regulatory agency responsible for ensuring that it and other oil companies follow best practices in exploring potential crude oil deposits in ultra-deep waters. Just ahead of the explosion, the Minerals Management Service reportedly approved (i.e., rubber-stamped) three significant—and in hindsight fatal—changes to BP’s plans for capping what would have turned out to be the most productive oil well ever drilled in the Gulf.
The conventional wisdom for avoiding similar disasters in the future is more and tighter federal governmental control of offshore drilling. President Obama already has declared a six-month moratorium on drilling in waters deeper than 500 feet and is exploiting the accident in the Gulf to generate political support for “cap and trade” along with other initiatives intended to wean Americans from their dependency on fossil fuels.
Lost in the analysis of the causes and consequences of the BP disaster is the contribution of existing regulatory rules that assign “ownership” of crude oil deposits underneath the U.S. outer continental shelf to the federal government. This creates a problem that economists call the “tragedy of the commons.” In the absence of well-defined and protected private property rights, overexploitation of a collectively owned resource is the predictable outcome. Common ownership is not ownership in any meaningful sense.
So rather than allowing the best use of a parcel of seabed and of the waters above it to be revealed by market-determined prices, access to offshore deposits of crude oil is leased to the highest bidder in auctions of exploration rights conducted periodically by the MMS.
Since they cannot benefit personally from the decisions they make (except for the sexual favors and other perks some seem to have taken advantage of), the bureaucrats in charge of the auctions have no incentive to consider the values of the alternatives foregone, such as recreational uses, commercial fishing, exploiting other mineral deposits or simply maintaining a pristine ocean environment, when exploration rights are awarded.
Indeed, because Washington treats offshore drilling rights as a “cash cow,” leases are auctioned willy-nilly, frequently ignoring safety concerns in the process in order to maximize governmental revenue rather than to ensure that the natural resources on the outer continental shelf are allocated efficiently. Because oil companies submit bids only for drilling rights and thus do not have to compete with others who may assign higher values to alternative uses, they undertake exploration projects that would not be profitable otherwise.
Bureaucratic regulation always fails to advance social welfare as a result of the absence of market-based price and profit signals. The solution is to privatize the ownership of the outer continental shelf so that decision-makers are forced to weigh the full costs and benefits of their actions.