A shocking moment of honesty from Big Oil: ConocoPhillips CEO says offshore oil isn’t economical without big government support, demands bailout

One of the complaints free marketeers frequently level against renewable energy is that it can’t survive without government support, whereas dirty fuels are economical in their own right. So when a major oil company CEO admits that offshore oil is only economical because of government support, that should cause any so-called libertarian to reconsider his beliefs.

We already knew that fossil fuels hardly compete solely on their own merits. Far from it: subsidies for dirty fuels dwarf those for clean energy. From 2002-08, the US spent about seven times as much subsidizing dirty energy than it did renewables. And an analysis by Bloomberg found that worldwide, governments spend twelve times more subsidizing dirty energy: $557 billion per year for fossil fuels vs. only $43-$46 billion for renewables. Government-dependent indeed.

But those are just the explicit subsidies: cash directly given to companies, or requirements to use specific fuels. The true shocker here is how heavily offshore oil development depends on anti-market protection from liability in order to be profitable. At least, that’s what ConocoPhillips CEO Jim Mulva unwittingly declared the other day. In an article entitled, “Unlimited liability for Gulf oil spills would kill development,” the Financial Times reports:

Jim Mulva, ConocoPhillips’ chief executive, says that the unlimited liability some are proposing in Congress to punish operators for further spills in the Gulf of Mexico is inappropriate. That would raise the question of how many of the smaller companies operating in the Gulf could afford to get back out there to work following the lifting of the moratorium and even whether the risk reward equation would favor going out into the waters again for the biggest of companies. He said to analysts:

We will not develop the resources if we have that situation.

It may have sounded like a threat, but it is also a realistic assessment of the situation.It is true that an increasing number of companies have been looking to the Gulf for prospects, given that it has been a good source of oil and natural gas over the years and new technology has made it even more so. But they will not risk their entire futures to get at the resources.

Mulva’s intent, of course, was to argue against imposing unlimited liability for oil spills. But assuming his statement was more than bluster, his implicit admission is that the risks of oil spills are so great that in a free market, the costs of paying for spill damages would outweigh the benefits of developing the resources.

Of course, the situation in the Gulf is hardly a free market, and neither oil companies nor Congressional Republicans have any interest in creating one (corporate welfare is good for the shareholders). Liability for damages from oil spills is capped at $75 million, which means that oil companies do not have to account for the full costs of oil production in their resource planning. It’s an implicit subsidy (or more accurately, a bailout): no matter how bad the damages to the tourism industry, the fishing industry, and the intrinsic value of the coastal ecology, oil companies will only ever have to pay $75 million to compensate them. Either the taxpayer picks up the tab, or the non-oil industries are just left with losses, while Big Oil gets bailed out.

In other words, when Jim Mulva or coastal congressmen say, “lifting the liability cap will hurt production and kill jobs,” what they’re actually saying is, “offshore production only occurs because of market-distorting protections that insulate companies from the consequences of their decisions and lead to overproduction of a resource.” Would making oil companies responsible for damages they cause reduce oil production and oil jobs? Probably. But jobs and money are not reasons to subsidize irresponsibility. There’s no constitutional right to drill for oil: if paying for the full cost of oil spills would make offshore drilling unprofitable, then offshore drilling probably shouldn’t be happening, and it’s not the government’s job to make it profitable.

And let’s not forget that for every offshore driller who’s hard at work, there’s also a fisherman whose fishing grounds are ruined by oil, and a hotel worker whose rooms are empty of tourists. If oil companies are insulated from liability, it means that drilling is necessarily happening in an economically inefficient manner, which likely means that the jobs destroyed by oil are greater than the jobs created by it.

If companies have rights just like people, then they also have responsibilities. Personal responsibility is not just for individuals.

RELATED POSTS

I actually agree with Rand Paul... sort of

What happens when we delve too greedily and too deep - maybe Gandalf can stop the gusher

What happens when we delve too greedily and too deep - maybe Gandalf can stop the gusher

"Too deep we delved there, and woke the nameless fear."
- Gloin, The Fellowship of the Ring

The Dwarves of Khazad-Dum perished not because their analysts failed to plan for Balrog attack, but because their reckless lust to mine, control, and profit from the earth's natural wealth led them into places they should not have been, unleashing forces they could not control.

Maybe we do owe BP boss Tony Hayward an apology - not for getting BP to pay for the clean up (seriously Republicans, don't you remember the concept of personal responsibility?), but for the way he's been demonized by the media and liberal activists. As if BP isn't doing everything it can to stop the gusher.

We also owe the President and his officials an apology for the ridiculous assertions that the failure to stop the oil from flowing is somehow their fault. As if regulators and politicians can just invent technology to seal the leak.

Such misguided criticism spans the political spectrum. Climate blogger Joe Romm shrieks "Why oh why hasn’t Hayward been fired yet???" Sarah "half-term" Palin accuses the administration of not putting enough effort into stopping the oil leak - and gets called out by Bill O'Reilly. Frank Rich criticizes the President's "impotence," melodramatically portending, "What’s also being tarred daily by the gushing oil is the very notion that government can accomplish anything." The CEO of Anadarko Petroleum - BP's partner on the Deepwater Horizon well - stabs his onetime ally in the back to save his own skin, alleging that "this tragedy was preventable and the direct result of BP’s reckless decisions and actions." For an industry built on ash and flame, oil is a cold cold business.

The truth is, the President isn't Aquaman, and firing Tony Hayward will not seal the hole in the seafloor. If anything, a post-firing leadership vacuum would frustrate efforts to stop the gusher. As bad as we want a villain to blame and whose head to roll, there is no bad guy here. Accidents just happen: while any single accident may be preventable in hindsight, the laws of probability make eventual tragedy inevitable in any risky endeavor - especially 5,000 feet under the sea. If not BP, then Exxon or Shell; if not in 2010, then 2012 or 2020. The oil spill doesn't mean Tony Hayward is incompetent - it just means he is imperfect, because he is human, using imperfect technology invented by humans. "Blaming" BP makes about as much sense as "blaming" NASA engineers for the Challenger disaster.

Not that I'm shedding tears for BP. Hurt feelings are not the greatest harm in castigating CEOs and politicians for not staunching the oil, but rather the way in which such criticism paints the disaster as a technical slip-up rather than a philosophical quandary - a problem resulting from insufficient planning and engineering rather than the inevitable consequence of messing with forces we don't understand. Much of the natural world is still a mystery to us, and failing to respect that mystery, placing too much faith in our engineering expertise, will end in tears.

The doom of Icarus was not that his wings were poorly constructed but that his technology carried him too close to the sun. In The Lord of the Rings, the Dwarves of Khazad-Dum perished not because their analysts failed to plan for Balrog attack, but because their reckless lust to mine, control, and profit from the earth's natural wealth led them into places they should not have been, unleashing forces they could not control.

And that's the lesson in the Gulf: the reason we can't blame BP for the uncontrollable gusher is that the oil is not something humans can always control. BP's disaster was indeed caused by recklessness, but not that of an individual company ignoring technical warning signs - rather, like the Dwarves, it was the collective recklessness of the human race in our wild thirst for comfort and wealth subduing Man and Nature with vain rigor, not for truth or love or basic need but to fuel our production of all that is unnecessary for happiness. We pricked the earth and unleashed a fury we were powerless to undo.

The critics' creeping technocracy, which assumes any problem can be broken into its component parts and methodically solved, casts Nature as something that can be subdued and controlled if only we throw enough money and smart people at it. If the disaster was merely a problem of BP's "recklessness," of not properly anticipating and fixing technical risks, then there's nothing inherently dangerous with the activity of offshore drilling itself - and the great human project to conquer Nature and engineer her to our image of the mathematically perfect world marches on.

This is not to say that we should never take risks or venture into the unknown. But when we take such ventures, the prize must be a higher purpose than profit, and the harm of any inevitable disaster confined mostly to the venturers themselves.

The unknown unknown of what would happen if a deepwater rig failed is tragically being answered before our eyes: 15 times worse than we ever thought possible. This local spill, of course, offers a grim preview of the looming, great Unknown Unknown of the 21st Century which we've just begun to taste: global climate change. Skeptics claim that uncertainty in the science means we can continue recklessly pumping heat-trapping gases into the atmosphere, when in reality the uncertainty is exactly why we must stop. Just as early estimates of the oil spill turned out to be woefully low, we have no idea what the worst consequences of climate change could be - and I don't want to find out what they are. The longer we mess with Nature, the likelier we are to get burned - and not every fire that's started can be easily put out.

The story of the BP spill is not about an overlooked technical fix that could have prevented a disaster, but about what happens when we pry into forces of Nature we don't understand and certainly can't control. The tragedy of Moria was not that the Dwarves didn't predict the location of the Balrog which would have enabled them to continue digging safely, but that the greed of their digging itself made disaster inevitable. Eventually, they would have run out of safe places to dig.

In The Lord of the Rings, it took a wizard to defeat the menace awoken by delving too greedily and too deep. Unfortunately there's no such magic in the real world, and neither President Obama nor Tony Hayward are wizards. Not all that is done can be undone; not every problem can be prevented.

RELATED POSTS

Why I'm not even mad at BP

Government is the problem until you need a solution: some belated thoughts on the BP-Transocean oil catastrophe

As black oil oozes toward Louisiana's coast, it's worth remembering what the state's governor said a year ago deriding the federal government's role in disaster relief:

Today in Washington, some are promising that government will rescue us from the economic storms raging all around us.

Those of us who lived through Hurricane Katrina -- we have our doubts...

The strength of America is not found in our government. It is found in the compassionate hearts and the enterprising spirit of our citizens. We are grateful for the support we have received from across the nation for the ongoing recovery efforts. This spirit got Louisiana through the hurricanes and this spirit will get our nation through the storms we face today...

Democratic leaders in Washington -- they place their hope in the federal government. We place our hope in you, the American people. In the end, it comes down to an honest and fundamental disagreement about the proper role of government. We oppose the National Democratic view that says the way to strengthen our country is to increase dependence on government. We believe the way to strengthen our country is to restrain spending in Washington, to empower individuals and small businesses to grow our economy and to create jobs.

Today, not only has government rescued us from the economic storm, but another disaster--this one caused by very large businesses that were empowered to grow their earnings from the ocean deep--has put Louisiana's coasts in its cross-hairs, forcing Governor Jindal to beg the federal government for help:

Governor Jindal today met with DHS Sec. Napolitano, Dept. of Interior Sec. Salazar, EPA Administrator Jackson, White House Energy Dir. Browner, Coast Guard's Admiral Landry, and BP officials at the Shell Robert Training & Conference Center in Robert, LA. The Governor received an update on the efforts to respond to the oil spilling into the Gulf and stressed the need for federal support resources that have already been requested by the state from federal agencies.

Governor Jindal said, “I appreciate Secretary Salazar, Secretary Napolitano and Secretary Jackson for coming down to Louisiana and seeing first-hand the response efforts. As I told the President yesterday, we’re urging the federal government and BP to deploy more resources to help mitigate the impact of the oil spill that is threatening the coast of our state...

“I do have concerns that BP’s current resources are not adequate to meet the three challenges we face and I have urged them to seek more help.”

Well well well, look who's come crawling back.

Okay, that's too snarky for a serious situation. Truth be told, I applaud Governor Jindal's change of heart--and I mean that. The reason is that Governor Jindal has learned a key lesson the hard way--a lesson that's so far eluded his tea party compatriots. The lesson, simply put, is that for some problems, government is the only viable solution.

It's not that government can solve all our problems. It can't. I agree with the Governor that in most cases, the strength of our nation is found in our people and businesses rather than our government. But there are some problems that are too big for compassionate individuals--and too unprofitable for enterprising businesses--to address. In other cases problems result from a failure of collective action, in which behaviors beneficial to individuals cause collective harm to the group. And it's in these situations that government has to step in.

Hurricane Katrina was the epitome of such disasters: an act of Nature brought on by no fault or laziness of the people it devastated, and which wrought destruction on a scale beyond the capacity of individuals and businesses to cope.

Similarly, the BP-Transocean oil volcano seems likely to outstrip the resources of even the world's 4th largest company, threatening unmitigated disaster to the innocent inhabitants of the Gulf Coast--human and otherwise. And unfortunately, as Governor Jindal is finding out, it seems the federal government will have to play a larger role in cleaning up BP's mess than any of us would like it to in an ideal world.

(Of course, disaster mitigation isn't the government's only tool for preventing oil spills from reaching the shore--a far easier solution is preventing such drilling in the first place. Then again, prevention's a tough strategy when then-Representative Jindal was busy sponsoring the Deep Ocean Energy Resources Act of 2006 (H.R. 4761)to open even more ocean to drilling. Maybe that's one he wants to reconsider as well).

The bottom line: None of us wants a bailout (at least those of us who are not publicly-traded investment banks), and no one enjoys having the government tell them what to do. No one wants to beg the government for help, and few find life on the dole fulfilling. But sometimes there's no other way to solve a problem than government action--when disaster strikes, it's just a little more obvious.

Is it not the fundamental role of government to protect its citizens from external threats, whether imposed by a foreign army, a profit-seeking company, or Nature herself? If Tea Partiers decry the role of the government in responding to disasters like Katrina and BP-Transocean (Rush Limbaugh, for instance, said that the oil spill should be "left alone and left out there"), then what exactly do they think government should do? Besides torture, tap phones, and harass Hispanics, of course.

RELATED POSTS

Yes, government creates jobs

Fight Club and coal company death panels: the value of a statistical life