Home > Uncategorized > In a shocking moment of honesty, ConocoPhillips CEO says offshore oil isn’t economical without government gifts of limited liability

In a shocking moment of honesty, ConocoPhillips CEO says offshore oil isn’t economical without government gifts of limited liability

I have a number of blog posts up discussing the BP oil well blow-out and the limited liaibility corporate structures and additional oil drilling liability caps that heighten moral hazard in offshore oil drilling.

I have just run across a post by another blogger, who refers to comments made by ConocoPhillip’s CEO and noted in the Financial Times, which strongly reinforces my view (emphasis in original):

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 [in an article titled, “Unlimited liability for Gulf spills would kill development”]:

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.

The blogger is largely correct, though he misses the roles of the government (1) in denying property rights – and an ability to control their own lives – to fishermen, and (2) in further encouraging irresponsibility by the grant of limited liaibility to corporation shareholders.

More from the FT:

There are other offshore prospects, in places ranging from Ghana to Brazil to the Black Sea. And while it has long been easiser to work in the Gulf of Mexico than in most other parts of the world, the tightening of rules and enforcement will certainly require not only newer technology but more work.

The companies accept this is needed, and say they are prepared to accept it in the Gulf. Indeed, it may be something they end up having to deal with around the world.

But they will not agree to bet the company on a prospect in the Gulf.


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