Professor Mark J. Perry's Blog for Economics and Finance
Wikipedia link. Note that it's been 18 years since a major oil spill of more than 100,000 tons (30 million gallons), the last one was in 1992 in Uzbekistan. And there hasn't been a major U.S. oil spill since 1989 - Exxon Valdez - which ranks #15 by size on this list (and at 30,000 tons doesn't really even qualify for the list?).
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
24 Comments:
Drill, baby, drill.
Natural Seepage of Crude Oil into the Marine Environment
Dr. Perry,
I expanded upon this insight (and included the deserved hat tip).
Is this one of the famous unintended consequences we keep hearing about?
How rich they are! Share the blessings!
Benjamin, I heard an interview with a CEO of an oil fire fighting company. (Not involved in this incident.) He said he thought they messed up by putting out the fire originally. He said all that water dumped onto the rig is likely what sunk it, which snapped the pipe. He said the first rule is don't sink the rig, but they focused on putting out the fire. Seemingly to minimize the disaster of the burning oil.
I've watched videos of the firefighting since then and it was the Coast Guard who was dumping all that water on it.
http://www.youtube.com/watch?v=y-k7GMyj0BM
Why is this disaster happened? Is it because of lack of maintenance?
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Mayweather,
Click here for speculation on the cause.
OA:
I know nothing, but see link provided by SBVOR below. It suggests otherwise, in WJJ. Maybe you are grasping for a reason to bash government-bash away, but this time you may have a long stretch.
Pollution is, of course, an unintended consequence of free enterprise and the price system. The cheaper you can pollute, the more competitive you will be.
The price signal tells enterprise to spend nothing on pollution prevention and clean-up, or risk losing business to those who don't.
It is a conundrum, a topic of squeamish disinterest to Milton Friedman and others.
WWMFD (What would Milton Friedman Do)?
Ultimately, he supported taxing pollution--I don;t know how that works, as it would be retroactive in the case of this oil spill.
Ahh, the realm of unintended consequences and oil spills.
According to this calculation, the Transocean spill has now overtaken the Exxon Valdez spill as the worst in U.S. history. If the slick gets into the Gulf Loop, coral reefs as far away as Key West, Florida are at risk.
There weren't too many beach front condos in Prince William Sound, Alaska, were there?
Benji, in a free market system you sue the polluter if they hurt your property values. Can't do that so much any more because the government regulations you love so much has replaced that with a system whereby the big polluters pay the government for the right to pollute. Nice going.
It is a myth that big businesses don't have to account for their pollution in a free market system. It is just so long since we have seen a free market system that includes suing for pollution that we have forgotten about it.
Benjamin, that link from SBVOR is the suspected cause of the blowout that started the fire and killed the people.
But we're talking about the oil spill here. When the rig was burning that oil wasn't really dumping in the water, it was the rig going down that seems to have snapped the pipe 5,000 feet down.
You mentioned unintended consequences. I gave one that someone had mentioned in I think a CNBC interview. I didn't know the Coast Guard was the one fighting the fire until I looked up the video.
In this video they mention they'd tried to trip the shutoff valve to try to put the fire out.
http://www.youtube.com/watch?v=aSc_zx-kKRc&feature=related
In this video, the Coast Guard says no oil was leaking from the well head on the ocean floor or the riser after the sinking. She refers to the "sinking yesterday." That seems odd after it burned for 2 days. Seems like the oil is leaking from somewhere along the pipe where before it was coming all the way up.
http://www.youtube.com/watch?v=4jj0hKedMUk&feature=channel
Another video mentioned the rig sunk in spite of attempts to put the fire out and save the rig.
I don't doubt that everyone has acted with the best intentions from the start of this. That's why this would be a case of unintended consequences if that is what happened.
Marko-
I am a fervent believer in the free market system.
A lawsuit? Fine, perhaps, in this case, although one wonders about collectability.
How about in cases in which the polluter is unknown, or so numerous that ID cannot be made.
As in, you own a farm east of Los Angeles, and your spinach dies (this really happened in the 1950s, the spinach farms were wiped out). And your house becomes worth less in the smog zone--who do you sue? Let's not get into what happens to your lungs (smog was considered the equal of two packs a day).
There is also the neat little item we have in America called a corporation. People do things through a corporation. If the corporation, or LLC, LLP, etc, doesn't have enough assets or insurance to pay your lawsuit, you are basically sunk.
Lawsuits, btw, are fantastically expensive. We are talking $400 an hour for run-of-the-mill lawyers in Los Angeles. The free market has arrived at legal fees that simply stun the average guy. I still don't understand lawyer fees. It seems like the kind of work that should get about $50 an hour.
OA: I don't know why the oil is gushing out of the ground. BP has not blamed the Coast Guard. Some say it is 25 times as large as initially thought.
Seems like no way to cap it, and it will soon outrank other huge spills-blow outs.
It's difficult to say at this point what caused the BP blowout. We may never really know. I experienced a deadly blowout firsthand in Russia back in '98. Six workers were killed, and the fire that ensumed destroyed the rig. Needless to say, oil exploration is a dangerous and unpredictable business - especially at the depth BP was drilling, which commands extraordinary pressure and extreme temperature variances.
Unfortunately, the spillage (which is now expected to go around Florida) is likely to delay any plans to expand drilling offshore or into ANWR, and this will exacerbate the global depletion picture. While both options aren’t enough to offset global depletion, I was hopeful that together, they would buffer the impact enough so that America could make a somewhat less painful transition. It now seems America's future has gotten bleaker.
Ever since the IEA (which previously was cocksure production could meet demand until 2030) completed its study of the world's 800 largest oil fields, it's been in a panic. As Faith Birol said, "Even if growth in global demand was at zero for the next 22 years, in order to compensate the decline in the existing fields, we need to increase the production by around 45 million barrels per day (bpd), which is the equivalent to bringing four new Saudi Arabias to the markets."
Isn't it misleading to say it's not on the top 15 worst when it hasn't been stopped yet and won't be for a long time? You can forget about drill, baby, drill. Time for Obama to preach the moonshine of renewables while we getting the reality of subsidizing the Saudis and the terrorist groups they fund.
Benjamin said...
OA:
“Pollution is, of course, an unintended consequence of free enterprise and the price system. The cheaper you can pollute, the more competitive you will be. “
No Benjamin, pollution is an “externality” not an unintended consequence.
Any price system in any economic system (the big bad scary free enterprise system, socialistic systems, fascist systems, communist systems, monarchy, etc.) can and will create externalities. Its that the price may not include all costs and benefits accruing to the buyer and seller in a transaction.
However, your price system in the Benjamin Utopia, that world of make believe, that world that the big bad free enterprise system threatens, is surely perfect as utopias and make believe are generally constructed in a perfect fashion.
Maybe whats needed is to raise the engineering standard for the rigs so they will stand up better to weather and other forces without breaking.
Maybe drilling and safety regulations need tightening up also after this many disasters.
Who is in control the government or the oil companys.
Daniel? Maybe what you are saying is that it should be full speed ahead into searching for alternatives to reliance on oil for energy.
Your post certainly raises the need to at least think more aggressively about shifting towards renewable energy and new technology.Electric cars?
QA,
An oil blowout fueling a fire of that magnitude will weaken the rig's structural integrity; that is likely what sunk the Deep Horizon.
Grant,
Today's offshore rigs are engineered enough as is. Many are built with an intended life span of 20-30 years, are designed to work in salt-laden water, and to withstand some nasty waves and storms. The Deep Horizon was a $600 million rig that was considered among the most advanced in the world.
The question in mind isn't whether offshore rigs are well engineered, but what preventative measures are in place to prevent blowouts to begin with. Some people believe the well's cement casing is at fault, but at this point, it's hard to say.
Of course anyone who drills at those depths are taking big, dangerous risks no matter what.
NASA Satellite Imagery Keeping Eye on the Gulf Oil Spill
The spill is bad for oil production out of the Gulf. Obama was never eager to allow drilling and will likely use this event as an excuse to stop companies from drilling in American waters.
It also shows why much of the optimism regarding deep water finds is unwarranted. Not only are these fields small, they are very difficult to develop due to the huge pressures and other technical difficulties. Even if development continues the hike in insurance rates will make investments even more risky than they already are. And while this spill is relatively minor and unlikely to do lasting damage it is a certainty that the US court system will make it very difficult for producers to justify drilling in US waters.
This means that our estimates of future production need to be revised downward. The promise of deepwater drilling just ran into stormy weather.
Benjamin wrote, "Pollution is, of course, an unintended consequence of free enterprise and the price system. The cheaper you can pollute, the more competitive you will be."
I think that you are confused. The issue is one of property rights, not free enterprise. It is hardly free enterprise when the government owns the land and leases out the mineral rights to the producers. You also seem not to have been around and observed the real world. If you had paid attention you would have found that the biggest pollution problems occur in countries where governments own more of the assets.
Daniel wrote:
Ever since the IEA (which previously was cocksure production could meet demand until 2030) completed its study of the world's 800 largest oil fields, it's been in a panic. As Faith Birol said, "Even if growth in global demand was at zero for the next 22 years, in order to compensate the decline in the existing fields, we need to increase the production by around 45 million barrels per day (bpd), which is the equivalent to bringing four new Saudi Arabias to the markets."
I liked your comments. It is good to have someone who knows a few things about the subject comment on the issue rather than to sift through all of the political statements that are mainly based on ignorance of the facts.
I agree that the IEA really screwed up when it bought into the mythology that CERA and the major producers were spinning.
No matter how we may wish to look at the subject it is clear that we are at Hubbert's peak or already sliding down the back end of the curve. Even after spending hundreds of billions in new investment the producers were unable to get production of light sweet crude to rise materially higher than the 2005 peak.
While we were 'saved' by the credit collapse and saw demand fall enough to get prices to pull back the only real solution will come from developing new alternatives. Sadly, I don't see that as a realistic option for a while because the process is dominated by governments and rent seeking groups rather than people capable of coming up with the necessary solutions.
The Obama administration is mainly run by political hacks with little real world experience or a record of meaningful accomplishment. They are mostly lobbyists, academics, and professional politicians at a time when engineers and market oriented businessmen are needed.
The way I see it, the energy companies will pull back on their energy investments and will stick with small projects where the risks are easier to control in states where the court systems are not as corrupt. The majors will try to make plays for resources in other countries and the US will be even more dependent on foreign imports.
To keep some of their political supporters happy we are likely to see the idiots in Congress subsidize white elephants like the Spanish solar and wind farms. But those type of projects are not economic and will not help. As they add to the debt and make it harder for energy intensive businesses operating in the US job losses in the real economy will dwarf any 'gains' in the green sector. Eventually the US dollar will go the way of all fiat paper and Americans will find that they cannot afford to pay for the oil that they are currently used to consuming.
Buy gold. Look at the Canadian tar sands and other production abroad.
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