But BP’s defenders and statist critics both have it wrong. This is not the story of a well-meaning or negligent firm operating in the free market. Negligent or not, BP is a player in a corporatist system that for generations has featured a close relationship between government and major business firms. (It wouldn’t have surprised Adam Smith.) Prominent companies have always been influential at all levels of government — and no industry more so than oil, which has long been a top concern of the national policy elite, most particularly the foreign-policy establishment.
When state and federal governments failed in the 1920s to put a lid on unruly competition and low prices through wellhead production quotas (prorationing), the oil companies turned to Franklin Roosevelt and the federal government, winning the cartelizing Petroleum Code, significant parts of which were revived after the National Recovery Administration was declared unconstitutional. In the 1950s, when cheap imports depressed prices, the national government imposed quotas on foreign oil. Venezuela was the chief target at the time. (In 1960 OPEC, a “cartel to confront a cartel,” was founded.) Republican or Democratic, energy policy is not made without oil industry input.
In this context there’s less to the contrast between government regulation and corporate self-regulation than meets the eye. Self-regulation in a corporate state does not constitute the free market. When companies are sheltered in any substantial way from the competitive market’s disciplinary forces, incentives turn perverse. Moreover, “state capitalism” and the corporate form (pdf) – with its agency problem – can produce the temptation to cut costs imprudently in order to make the next quarterly report look attractive to shareholders.
“Putting profits before people” is a feature of state, or crony, capitalism not the free market.
Those who see “tougher” government regulation as the answer are evading some formidable objections. First is the knowledge problem. Empowering regulators to prevent the next disaster tells us nothing about how they would know what to do without imposing costs that would dwarf any benefits.
Second is “regulatory capture.” Regulators and the industries they oversee develop mutually beneficial relationships that would appall those who idealize regulators as watchdogs. The rules that emerge from those relationships tend to foster more monopolistic industries.
It took the Deepwater Horizon tragedy to bring out the fact that a single federal agency, the Minerals Management Service, is “responsible for both policing the oil industry and acting as its partner in drilling activities,” writes the New York Times. “Decades of law and custom have joined government and the oil industry in the pursuit of petroleum and profit. The Minerals Management Service brings in an average of $13 billion a year. Under federal law, even in the case of a major accident, the company responsible for the oil well acts in concert with government in cleanup activities.”
The coziness between government and the oil industry is also apparent in the cap on liability for damages – a paltry $75 million — from offshore oil spills (not including cleanup costs). The interesting question is whether BP’s dubious conduct would have been different without the cap. Hayward, the Wall Street Journal reports, “admitted the U.K.-based oil giant had not had the technology available to stop the leak, and said in hindsight it was ‘probably true’ that BP should have done more to prepare for an emergency of this kind.” Transocean, owner and operator of the rig, is petitioning to limit its own liability to $26.7 million. (Moral hazard matters, but the story is complicated. Oil spills have been decreasing, and no energy development is without its risks.)
The free market will undoubtedly take the rap — but it’s an unjust rap. According to Reuters, “Like BP, both Transocean … and Halliburton, a contractor, also pumped money into the campaign war chests of senators who sit on the Energy and Natural Resources Committee and the Environment and Public Works Committee.”
I have a feeling the companies weren’t buying repeal of corporate favors.”