Oil and the Apocalypse

by Christopher Westley

So, I am getting a ride home from daily Mass, and my friend and driver, a history professor at my school, is angry at British Petroleum’s latest announcement that a major oil field is being shutdown. This was news to me because I hadn’t checked any of the news sites that day, although I must admit that following Mass, such events are furthest from my mind.

“What happened?” I asked.

“The biggest oilfield in the United States is being shut down because of corrosion damage,” he said. “Oil prices spiked today to a new record. Thanks, a lot, BP. They’re going to make me buy a Honda!” My friend is a committed Ford-o-phile.

Many thoughts zip through my mind at this point. The first is that BP doesn’t seem like the best-run oil company in recent years. This pipeline shutdown is just the latest of several missteps for this firm. It is still recovering from the largest oil spill in history in the North Slope earlier this year, as well as from a devastating refinery explosion in Texas City, Texas, last year that killed 15 employees. Many are saying the BP must actually stand for “Big Problem.”

Also, as devastating as this development may be, it does not necessarily translate to higher gas prices elsewhere. Oil is a homogeneous good. Since the amount of oil affected by the shutdown of the oil fields represents a small fraction of the world’s oil supplies, any resulting spike in prices will reflect the ease with which other sources of supply replace the amount lost by this event. In the end, it may result in higher gas prices in California, where much of the oil from Prudhoe Bay goes, but probably not.

And finally, blaming BP for higher gas prices misses the mark. The real world is characterized by risk, and that bad things will happen is a given. Tsunamis can happen, as do hurricanes, earthquakes, blizzards, and droughts. The key point is that when they do, the price system reacts in ways that ensure the quickest and most socially optimal response. Prices rise for scarce goods in demand following such tragedies. They signal both consumers to find substitutes and producers to increase and reallocate output so as to alleviate these problems.

To the extent that governments interfere with this process, these problems persist and worsen.

It doesn’t help matters that BP, which purchased Amoco several years ago, and the oil industry in general, has received special favors from the federal government since the Coolidge administration. Thomas DiLorenzo summarizes its involvement in chapter seven of his highly readable and recommended book: How Capitalism Saved America.

One of the costs of this involvement is that firms have less of an incentive to care for their property. When the government intervenes to protect a handful of large oil producing firms, it creates a domestic version of OPEC. While this domestic cartel is still comprised of price takers – oil prices are still determined by global supply and demand conditions – it can still act in ways that reflect little concern for competition.

Time preferences can rise for these firms, making them more likely to opt for short-term profit taking over long-term resource management, a decision that can bring market penalty in a more competitive environment.

Is this a factor in BP’s decision to allow one of its most important conduits of oil to one of its largest markets to corrode? It may be, and it may not. One thing that is certain is that such decisions are more likely in the absence of competition. It is one of the inevitable effects of government’s decision to favor certain industries.

But such thoughts are apparently too deep for the regime in Washington. Later, I learned that White House Press Secretary Tony Snow was grilled about the BP issue and he blurted out an answer worthy of any central planner from days of old:

[W]e’re also in the process of accelerating the rule-making process that would enable the creation of a robust regulatory regime over those pipelines. As you probably know, the low-pressure pipelines – and that’s what these are, these are relatively low-volume pipelines – have not had the kind of federal oversight that the high-volume pipelines have had. And the administration is working quickly to get that into place.

So there you have it: a theory of causation (lack of regulation) and a proposed solution (more regulation). Are we supposed to believe that in a properly and full-regulated world, there would be no unexpected accidents or any regrettable malfunctions?

Snow personally knows better, but in his capacity as government spokesman, he can be sure that by promoting more government management; he is on safe ground. Government is always glad for more power, and the press is always pleased to believe that all is well so long as government is seizing more control over the private sector.

Of course, I do not share any of these thoughts with my friend, a domestic-car lover who just wondered out loud about whether he will buy a Honda. Prior to this event, I would have considered such a statement from his mouth as being, well, apocalyptic. Perhaps such eschatological musings, even in the context of BP’s recent troubles, are not all that unusual during a drive home from Mass.

Editor’s Note: Christopher Westley teaches economics at Jacksonville State University