Business and Self-Regulation

Grass somehow manages to grow up through small cracks in the sidewalk. Similarly, the American private sector somehow seems to be exerting itself despite the vast expansion of government by the White House and Democratic Congress.

Case in point: The announcement last week by four oil companies - Chevron, ConocoPhillips, ExxonMobil and Shell - that they are setting up a $1 billion joint venture to design, build and operate a rapid-response system to contain spills as deep as and deeper than BP’s Deepwater Horizon disaster.

Their goal is a system that can start mobilizing within 24 hours of an oil spill. They hope to have it up and running within 18 months.

I suppose one might ask why oil companies didn’t do this before. But it seems a vivid contrast with the apparently hapless performance of the Minerals Management Service, recently renamed the Bureau of Ocean Energy Management, Regulation and Enforcement, which seems to have sat on out-of-date response plans for years and which was not able to call in equipment and personnel to respond to the April 20 BP spill for weeks or months...

Consider Underwriters Laboratories, founded in 1894, whose UL stickers come attached to regulator products. Or the Society of Automotive Engineers, founded in 1905, which sets standards for the automobile and other industries.

Government hasn’t had to step in because UL and SAE work well without them. Federal regulators couldn’t plug the BP well. The oil companies’ joint venture promises to be able to do so.

Another case in point, which is different and more diffuse: the “capital strike.” In the wake of the uncertainty raised by the Obama Democrats’ huge increase in regulations and pending increases in taxes, businesses are sitting on cash and not hiring, banks are buying Treasury bonds and not lending, investors are not investing and consumers aren’t buying. The economy languishes...

Two lessons seem apparent here. One is that private firms can do things government regulators can’t do. The other is that if you choke the golden goose enough, it stops producing eggs - and you have to get your hands off its neck.

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Cartoon: BP Oil Spill

BP Gulf Oil Spill

The tragic April 20 explosion that destroyed BP's Deepwater Horizon oil platform in the Gulf of Mexico, killing 11 crew members, didn't happen in a vacuum.

BP clearly is culpable. And the Interior Department's Minerals Management Service, now known as the Bureau of Ocean Energy Management, Regulation and Enforcement, shares in the blame, for failing to exercise proper oversight.

Many other factors also contributed to the accident, however.

First among them is the important issue of ownership. BP did not own the Deepwater Horizon, but leased it from another company, Transocean. The contractual relationship between Transocean and BP created a classic "principal-agent" problem in which the duties and responsibilities of the lessor, or owner, and lessee, the renter, may not have been spelled out adequately...

A second contributor to the disaster is the federal law limiting liability for damages caused by offshore oil spills...

Third, BP may have been misled in calculating its exposure to risk by MMS computer models that predict the likely path of large-scale oil spills in the Gulf of Mexico...

Fourth, BP and other oil companies have been forced to drill in ultra-deep waters as a result of federal laws and White House and court rulings that limit access to oil reserves in shallower waters and on federally owned land in the continental United States...

There is plenty of blame to go around for the Deepwater Horizon disaster. But don't jump to the conclusion that the best way to prevent future catastrophes is simply through further regulation.

More regulation will not necessarily work any better than existing regulation. What will work is getting the incentives right — through clearly defined ownership, responsibility and liability — and exploiting proven oil reserves onshore and in shallow waters offshore.

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Crony Capitalism and Regulatory Capture

Ron Paul writes:

What is happening to this country when the Republic of Congo is better for business than the United States? One big factor is regime uncertainty.

Regime uncertainty is the opposite of the rule of law. It is the rule of the whims of the people in charge and what mood they are in on any particular day. It is usually associated with third world dictatorships and plays a major role in why some countries remain poor. When a business cannot predict whether a government will issue a permit, confiscate or nationalize their capital investments, tax them into bankruptcy, or arbitrarily stall their operations, they tend to do business elsewhere. This type of government hostility is not conducive to wealth creation and it is tragic to see it chasing away businesses here when we need the jobs and productivity more than ever.

When the rule of law is respected, it provides business with some measure of predictability so they can plan and operate smoothly. When it is not respected, there are just too many variables, too much risk of loss or waste.

Of course, disregard of the rule of law creates other problems too. For the larger and better-connected businesses, it creates the opportunity of regulatory capture. If the government becomes too unpredictable, one business survival strategy is to become so involved in government and regulatory bodies that they effectively gain control over the very entities that are supposed to keep them in line. In other words, if you can’t beat the government, become the government. A business that achieves regulatory capture is also able to write and implement laws and regulations that it can deal with, but its competitors cannot. The eventual outcome is that companies use regulation to drive everyone else out of business until a monopoly is achieved, putting consumers at its mercy.

Meanwhile, the people develop a false sense of security, assuming that the many regulatory bodies in place are protecting them. Without respect for the rule of law, however, those bodies and their regulations are more likely protecting and enabling big business at the expense of small business and the consumer.

We see this not only with big oil, but big banking, big defense contractors, you name it. This is why, especially in a crisis, we should uphold the Constitution. It is the ultimate consumer protection from crony corporatism.

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Deep Water Horizon v. Exxon Valdez

source of lots of other visuals

Cartoon: BP

Gulf Oil Spill Diaster: The Result of Government Regulations?

BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one. The government models, which oil companies are required to use but have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models, prepared by the Interior Department’s Mineral Management Service, wrong…. The government’s optimistic forecasts reinforced the oil industry’s confidence in its spill-prevention technology, leading to decisions that left both oil companies and the government ill-prepared for the disaster that has unfolded in the Gulf since April 20.

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BP and the Rule of Law

Cartoon: BP

Jacob Hornberger: Obama, BP, and the Rule of Law

I pointed out that President Obama exercised brute dictatorial powers in dictating to BP to hand over $20 billion of corporate money to federal officials, who plan on distributing the loot to victims of the BP oil spill.

Most everyone is familiar with the term “the rule of law.” Many people, however, don’t understand what it really means. They think that it means that people should obey the law.

But that’s not what the rule of law means. What it means is this: In a free society, people should never have to answer to the arbitrary dictates of government officials. That type of society is described as one based on the “rule of men.” It is what dictatorship is all about. In a society based on the rule of law, people have to answer only to well-defined and pre-existing laws that have been duly enacted by the legislature.

As the Nobel Prize winning libertarian economist Friedrich Hayek pointed out in his book The Constitution of Liberty, the rule of law is a necessary prerequisite for a free society.

At the time of the BP oil spill, the law provided that BP would be required to pay for all clean-up costs but was liable for a maximum of $75 million to private parties who suffered losses because of an oil spill.

Now, obviously that liability cap violated fundamental principles of responsibility. People should be fully responsible for all the damages they cause. The $75 million cap was likely enacted as part of the cozy corporatist relationship that has long existed between big corporations and federal politicians.

One thing is for sure: The liability cap almost certainly played an important role in BP’s safety precautions. After all, when a company thinks that its maximum liability for an oil spill will be only $75 million, as compared to the possibility of facing unlimited liability for an oil spill, that is going to cause the company to act differently when it comes to deciding how many precautions to take and how much money to spend on safety precautions.

In any event, the reasons the $75 million cap were enacted are irrelevant when it comes to BP’s liability. The rule of law entitles BP to the full protection of the law, no matter how distasteful the results.

The $75 liability cap did provide exceptions to the cap in cases where the company could be shown to be guilty of gross negligence or willful misconduct.

But a system based on the rule of law requires such issues to be litigated in a court of law. Victims of the disaster must go into court and convince a jury (or judge) by a preponderance of the evidence that BP was guilty of gross negligence or willful misconduct. They must also document with sworn testimony their financial losses.

That’s what the rule of law requires.

Instead, what Obama did was effectively declare: “Well, I don’t like the law and I wish it had never been enacted because it is a bad law. I’m going to decree that the law will not apply in this case. I am summoning BP executives to my office and dictating what BP must do, beginning with the delivery of a down payment of $20 billion dollars in corporate money to a political commission that I am appointing. That commission will dole out money to victims of the oil spill based on criteria that I deem appropriate.”

Notice that there is no judicial process concerning how the loot is going to be distributed. That is how things are handled in a society based on the rule of men, a society based on dictatorship. The dictator simply dictates and the person being dictated to is expected to submit and obey.

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BP Saga: Tony Hayward Before Congress

Poor Tony Hayward.

The man was devoured by zombies last week.

Now that we’ve figured out how history works, we’re begging to see the forces of history at work all around us – an eternal fight between the zombies and the producers. We’re surrounded by zombies. They are all around us. Tort lawyers. Bureaucrats. Politicians. Welfare slaves. Chiselers. Layabouts. Whiners.

On the way to work, on the Washington beltway, there are so many lobbyists, we have to put up the windows and lock the doors...

Mr. Hayward was confronted by a panel of zombies in Congress. They chained him to a rock so the members of the energy committee could take turns feeding on his internal organs...

But the zombies didn’t really care about getting to the bottom of things. They were going for the jugular. And the right arm. And the liver.

From the reports we’ve read, Mr. Hayward held up pretty well. He played his part. He did not wander from the script. He remained calm as he was dismembered. His voice did not quake or complain as his liver was removed...

What disturbed us was the crowd reaction. There was a time when Americans had a sense of fair play. At least, we’d like to think so. In a fight between a group of zombies and a real producer, their sympathies should be with the oil man. After all, when they drive into the filling station, it’s not the Congressional Record that they pump into their fuel tanks. And when they heat their homes, it’s not tort lawyers whom they look to for fuel. Gasoline is valuable. They know it. And they know that someone has to get it. In fact, so keen is their demand for octane, and so high is the price, that the producers are lured farther and farther away from dry land. No one would drill a mile below the water for oil unless a lot of people wanted it badly. Sooner or later, one of the rigs was bound to spring a big leak.

You’d think the public would have more sympathy for the people who risk their lives and their money bringing oil to market.

read the entire essay

The Slow Decay of a Healthy Economy

Bill Bonner writes:

Today, we boldly announce a NEW THEORY about the way the world works....

Something is wrong...

We just had the biggest financial crack-up of all time. Even under ideal conditions, it will take people a long time to rebuild lost savings…to get rid of houses they can’t afford…and to restructure debt they can’t pay. While this restructuring and adjustment is going on, you’d expect the markets to be a little punky.

But instead of letting people get on with it, the zombies have moved in. At first, you hardly notice. An arm here. A leg there. Pretty soon, you’re dead!

The percentage of the economy controlled, guaranteed, or paid for by the government is increasing. Since the feds were already deeply in debt themselves, the only way they could spend more money was by borrowing more. You can’t cure a debt problem by borrowing more money. Net debt is going up. So, there’s something wrong. The economy isn’t recovering… It’s just not possible.

Which brings us back to our new theory…

Here we offer a new and improved theory with a dynamic of its own: the producers vs. the parasites...

A bigger illustration can be found on the front page of yesterday’s paper.

BP has agreed to provide the zombies with $20 billion dollars of raw meat:

“BP backs $20 billion spill fund,” says The Financial Times.

BP is a producer. It makes something valuable. In fact, it makes the thing that is the pentagon’s most valuable and most important resource – liquid energy. It does so at a profit, also rewarding all the little old ladies, lonely orphans and rich sons-of-a-gun who own its shares. BP normally pays dividends; those dividends are currently suspended, as BP diverts cash to the spill fund.

Yes, it also makes mistakes, for which it must pay.

But circling BP today is an army of parasites. Zombies who toil not. Neither do they spin. Instead, they file lawsuits and try to get something from the producers without paying for it. BP’s Gulf disaster is a godsend for them...

Remember the giant tobacco settlement? In 1998, the tobacco companies lay down and opened their veins. A quarter of a trillion dollars was paid out in a huge class action settlement. The money was supposed to go to redress the damage done by smoking. But $19 out of every $20 found its way, instead, into the pockets of the lawyers, the activists, and the bureaucrats. That is to say – the zombies got it.

Will the oil settlement be any different? Not likely. The zombies will take most of it. Much of the rest will be used to turn honest working people into zombies. Instead of finding new work in new areas, for example, Gulf-area residents will be encouraged to stay put and collect checks. If they take up new work, the measure of their ‘damages’ will go down!...

The zombies win. And then…there is collapse, war, revolution, bankruptcy… The zombies are killed off…new life begins.

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BP

BP PLC said it was canceling dividend payments this year, a move investors hoped would help ease the political pressure the company has come under since its well began spilling oil into the Gulf of Mexico.

BP also said it was creating a $20 billion fund over the next 3½ years to cover compensation claims arising from the massive spill.

from the WSJ

about a month before they declare Chapter 11. They’re going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn’t enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they’ll panic and go into Chapter 11.

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BP and Big Government

The [John] Kerry-BP alliance for an energy bill that included a cap-and-trade scheme for greenhouse gases pokes a hole in a favorite claim of President Obama and his allies in the media — that BP's lobbyists have fought fiercely to be left alone. Lobbying records show that BP is no free-market crusader, but instead a close friend of big government whenever it serves the company's bottom line.

While BP has resisted some government interventions, it has lobbied for tax hikes, greenhouse gas restraints, the stimulus bill, the Wall Street bailout, and subsidies for oil pipelines, solar panels, natural gas and biofuels.

Now that BP's oil rig has caused the biggest environmental disaster in American history, the Left is pulling the same bogus trick it did with Enron and AIG: Whenever a company earns universal ire, declare it the poster boy for the free market.

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Oil in the Gulf

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Cartoon: The Loop Current

BP Gulf Oil Spill

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BP Disaster

BP Oil Diaster and Louisiana Seafood

When New Orleans, Louisiana, chef John Besh recently urged people to choose U.S. shrimp over imports during an interview about the state of seafood in the wake of the Gulf of Mexico spill, commenters responded negatively, writing, "What's a little tar or mercury in your system anyways?!" and "I hope you enjoy the petrol in your fish."

Another commented, "You eat the fish from down there, don't complain to anyone when you get cancer in 10-15 years. I can't even believe a responsible human being would advocate for eating seafood slathered in oil first."...

ABC reports that in light of the reduced amount of seafood on the market, "Fish that normally sold for $2.50 a pound were going for $3.25."

On Tuesday, Louisiana Gov. Bobby Jindal declared a commercial fisheries failure to trigger aid for commercial fishermen from the Economic Development Administration.

In a letter to Secretary of Commerce Gary Locke, the governor wrote, "The waters offshore Louisiana's coast supply nearly one-third of all commercial seafood harvested in the lower 48 states, with values in excess of $2.85 billion annually. As the largest provider of domestic seafood in the continental United States, protection of Louisiana's fisheries, habitats and catch are critical to our nation's economy and food supply.

read the CNN article