BP’s oil well disaster in the Gulf of Mexico has predictably encouraged various political interests to use the tragedy in seeking support for their views. Environmentalists opposed to oil and gas exploration, and in favor of alternative energy, argue that the incident shows the need to subsidize their favored fuels. Some proponents of the fallacious concept of energy independence argue that we should embrace alternative energy, while others worry that drilling now will be curtailed.
This article presents a different approach, reviewing ways the federal government may have facilitated the disaster, and suggesting privatization frameworks that would lead to better stewardship of the Gulf.
I. Role of Federal Government in Disaster
The federal government may have facilitated the disaster. Observers have raised three factors.
Cap on Liability
First, the oil industry influenced enactment of laws limiting BP’s liability to the remarkably low figure of $75 million. This cap may have influenced the company in its determination of the extent to which it would invest in preventing a spill. While all oil companies have an incentive to avoid the costs, lost revenue, and public relations damage from oil spills, BP’s risk tolerance may have been higher than desirable, and a cap would have exacerbated this.
BP’s actual exposure now is far in excess of the cap. Firms are liable for clean-up costs, which are not capped, and BP has waived the cap. (“BP’s Escalating Costs Put Investors on Edge,” WSJ.com, May 1, 2010.) The waiver may be moot, since one or more statutory exceptions, including violation of safety rules, may be applicable. (“BP Cap Waiver May Be Moot in Light of Possible Lapses (Update1),” Bloomberg.com, May 21, 2010.) Nonetheless, the existence of the cap logically would have been a factor in BP’s calculations prior to the disaster.
Restrictions on Safer Drilling
Second, federal restrictions on drilling in shallower water and onshore may have pushed BP to engage in the more hazardous drilling in deep water. The materiality of this factor will have to be explored through facts from the industry.
Deepwater drilling may have made economic sense regardless of restrictions on other drilling. (See “BP’s murky deep-water future,” Fortune.com, May 11, 2010: “The U.S. gets more than a third of the oil it produces domestically from the Gulf of Mexico. Already 20% to 25% of this is from ultra-deepwater; and that share is rising as fields in shallower water decline in productivity.”) The restrictions, though, at the least limit the availability of other drilling options, to some degree making deepwater drilling more attractive.
The restrictions tend to be political rather than rational, reflecting ideological opposition to oil and gas. (See “No Energy from this Executive,” Fred Barnes, WeeklyStandard.com, June 15, 2009.) Where the disallowance of drilling is unreasonable, whether on land or offshore, this unnecessarily blocks productive economic activity.
Regulatory Failures
Third, the regulator, Minerals Management Service, a bureau of the Department of the Interior, as acknowledged by the Secretary, “could have done more to check that equipment used on off-shore drilling rigs met its standards …”(“MMS admits shortcomings in BP spill,” FT.com, May 18, 2010 [Gated].) The MMS has a conflict of interest in that it leases and regulates. The government is planning to split the bureau between its two functions, though this may not only not make a difference, it may worsen decision-making. (See Jonathan H. Adler, “Splitting Up MMS to Avoid Oil Spills,” The Volokh Conspiracy, May 12, 2010.)
The MMS also exempted BP from a detailed environmental impact analysis. (“U.S. exempted BP’s Gulf of Mexico drilling from environmental impact study,” WashingtonPost.com, May 5, 2010.) The industry and MMS failed to heed warnings concerning the risks of drilling and the limitations of controls. (“Oil industry failed to heed blowout warnings,” NewScientist.com, May 10, 2010; “Disaster Plans Lacking at Deep Rigs,” WSJ.com, May 18, 2010.) This meant not only that the drilling took place without adequate technology, but also without appropriate preparation for dealing with a major spill.
In addition, BP’s own blunders in drilling the subject well suggest a recklessness that would not have occurred with proper regulation. (See “BP Decisions Set Stage for Disaster,” WSJ.com, May 27, 2010.)
Summary
Consistent with public choice theory, the federal government, in legislating an unreasonably low cap on liability, and apparently mismanaging the regulation of the drilling, favored a special interest, the oil industry. The government’s discouraging of drilling in shallow water and onshore also favored a special interest, the anti-capitalist segment of environmentalists.
II. Enhancing Stewardship of the Gulf
The oil spill disaster exposed the federal government’s failures in connection with deepwater drilling. The issue is broader, though, since government’s management of any resources, including the Gulf as a whole, is always problematic. The disaster can encourage the reexamination of alternatives to government control of the Gulf.
Background: Property Interests in Fisheries
The federal government controls resources out 200 nautical miles, the exclusive economic zone (EEZ) under the Law of the Sea Convention. While the U.S. has not ratified the Convention, it recognizes the EEZ as customary international law.
The creation of EEZs allows the creation of property interests in fisheries within the zones. (Donald R. Leal, Director of Research of Property & Environment Research Center (PERC), reviewing Rögnvaldur Hannesson’s The Privatization of the Oceans in The Independent Review, Winter 2007.
The creation of property rights in fisheries, through Limited Access Privilege Programs (LAPPs), including Individual Transferable Quotas (ITQs) (or Individual Fishing Quotas, IFQs), is a well-established means of managing this resource. The market approach has been successful in restoring and maintaining fisheries resources. (See, e.g., Donald R. Leal, “Saving Fisheries with Free Markets,” PERC.org, Feb. 2006 (published in Milliken Institute Review), and Donald R. Leal, et al., “Beyond IFQs in marine fisheries,” PERC.org, 2008.)
PERC has encouraged the use of transferable quotas for fisheries in the Gulf of Mexico. (See media release, “Don Leal Appointed to Gulf of Mexico Advisory Panel.”) Such programs are in place for several species. (See Southeast Fishery Bulletin, March 9, 2010 [PDF].)
Commercial and recreational fishing are just two of the economic interests related to the Gulf of Mexico. Other interests include shellfishing, oil and gas development, commercial shipping, swimming, tourism, and recreational boating. In addition, there is the general environmental interest in maintaining water quality and preserving wildlife.
The experience in creating property interest in fisheries demonstrates the feasibility of moving beyond government’s direct management of public resources, and substituting the market for government command and control.
Beyond Property Interests in Fisheries: Privatizing the Gulf
Government tends to be the worst manager of resources because it lacks economic incentives to properly manage them, and because, pursuant to public choice theory, it favors special interests. Private ownership of resources leads to stewardship. (See generally, “Earth Day 2010: Protect Human Freedom as We Protect the Environment.”)
Government’s control of the Gulf has allowed the occurrence of an environmental disaster, to the detriment of economic and environmental interests. Government is likely to continue to mismanage the Gulf through, e.g., avoiding political risk by banning all drilling for years, without real consideration of risk.
This leads to the idea of exploring an alternative to government control, i.e., private ownership or control of either the Gulf or all natural resources in the Gulf (within the U.S.’s EEZ). Private control could take a number of forms. Any solution would have to recognize the multitude of economic and environmental interests represented by the Gulf.
The most straightforward alternative would entail the sale or long-term lease of the Gulf or its resources. In order to accommodate the need for respect for all the interests involved, however, control by a purely commercial entity would be politically impossible, and probably economically infeasible.
Non-Profit Ownership
An alternative to pure commercial control would be granting ownership of the Gulf, or all resources in the Gulf, to a non-profit organization. The organization would have to be one that would implicitly respect environmental concerns, while also having an incentive to create and maintain revenue to fund its mission. The goal would be for the organization to intelligently balance the various interests, such as oil and gas development and fishing, while acting as a private regulator (or facilitator of self-regulatory organizations) of activities such as drilling.
Non-profit organizations, such as the Nature Conservancy and the Audubon Society, successfully manage land, balancing economic and environmental objectives. (See, e.g., David J. Theroux, President of The Independent Institute, “The Tragedy of the Commons,” Commentary, Independent Institute, published in Las Vegas Review-Journal, June 12, 1994.) The same dynamic would apply in managing ocean resources such as the Gulf.
In order to enhance the likelihood that the organization would be responsive to all the economic and environmental interests, a stakeholder board might be appropriate. This is the structure recommended by Robert Poole, Director of Transportation Policy and Searle Freedom Trust Transportation Fellow at the Reason Foundation, for the proposed non-profit entity to privatize air traffic control in the U.S. (“How to Commercialize Air Traffic Control,” Policy Study, Reason Foundation, Feb. 1, 2001.)
The board would include representatives from the public, environmental organizations, the federal government, the states on the Gulf, the commercial and recreational fisheries industry, the shellfish industry, the oil and gas industry, and other interests. The owner would compensate taxpayers through paying the U.S. government a percentage of its revenue from the sale or lease of rights to resources, as well as user fees.
A benefit of stakeholder representation is that this would limit the risk that the organization’s own interests could evolve to become inconsistent with those of the stakeholders. Just as foundations established by ideological capitalists often have become champions of statism or socialism, so an organization without stakeholder representation could, over time, unacceptably favor certain interests.
Fiduciary Trusts
Randal O’Toole, a Senior Fellow at the Cato Institute, has developed the idea of managing federal lands through the creation of two types of trusts, market and non-market, with responsibility for, respectively, commercial and non-commercial interests. (“A Matter of Trust: Why Congress Should Turn Federal Lands into Fiduciary Trust,” Policy Analysis, Cato Institute, Jan. 15, 2009.) Mr. O’Toole has outlined a suggested structure for such trusts, designed to encourage responsible management of resources and responsiveness to public concerns.
Congress would create the trusts and specify the missions. The beneficiaries would be the citizens of the U.S. “Friends’ associations,” made up of any interested people, would elect the trustees, or some of the trustees, and serve as a check on the trusts’ compliance with their missions.
The problems with government control of lands are parallel to those of control of the Gulf, i.e., capture by special interests and poor stewardship. The concept of fiduciary trusts appears to be an approach potentially applicable to the Gulf.
Mr. O’Toole recommends having separate pairs of trusts for geographic regions, rather than for either small areas or the entire country. For the Gulf, a single pair of trusts probably would be appropriate.
Mr. O’Toole recommends, in his proposal for managing federal land, making the beneficiaries of the trusts the citizens of the U.S. This appears wise, because it would help the trustees focus on doing what is best for the people of the country rather than special interests or the government.
Congress would have to consider who would have standing to sue the trustees for breach of their duties. Allowing individuals to sue could hobble the trusts and cause them to incur huge defense costs.
The possible advantage of trusts over other approaches is that the trustees would be legally required to manage the Gulf for the benefit of the public. As Mr. O’Toole discusses in his proposal, well-established principles of trust law would require the trustees to adhere to their fiduciary obligations.
Hybrid Approach: Formal Stakeholder Involvement in Fiduciary Trusts
Another approach would be to utilize the fiduciary trusts recommended by Mr. O’Toole, but with formal stakeholder involvement. Congress could structure the trusts to include involvement by the interests that otherwise would be stakeholders in the non-profit alternative discussed above. This could enhance the political palatability of the use of trusts. It would also help avoid the risk of special interests stacking friends’ associations with representatives, electing trustees who favor these particular interests.
One way to structure the involvement would be to have stakeholders appoint a board, which would then elect trustees. Each trustee would have a fiduciary responsibility towards the trust’s overall mission.
Summary
Three approaches to privatizing the Gulf have been examined. Ownership could lie in a non-profit organization with stakeholder representation, fiduciary trusts, or fiduciary trusts with formal stakeholder involvement.
III. Conclusion
The oil spill disaster exposed failures of the federal government in managing resources in the Gulf of Mexico. The U.S. should consider a new framework for private control of the Gulf.
While the Gulf is currently the focus due to the disaster, the ideas may be applicable to governmentally controlled lakes, seas, and ocean resources in general, in the U.S. and globally.
