Wednesday, June 23, 2010

Who killed free market oil salvage?

How to turn an industrial mishap into an ecological disaster. Just add bureaucrats.

We have all seen the unfolding disaster of the BP Deepwater Horizon oil spill as it spreads to the southern coast of the USA. The bill for damage appears likely to reach US$20 to $40 billion but a close look at the actual base numbers at play here makes it very clear that it is the collective failure of the American intellect that has turned an industrial mishap into an ecological and financial catastrophe that could punch a serious hole in the retirement savings of many Britons.

We are provided with potent images of a virulent discharge of oil and continually reminded of the estimated 30,000 - 60,000 barrels a day that is lost. See Like a car on an ice bound motorway, everyone from the media, the US EPA, to the politicians, all slide towards an apparently unavoidable collision with an ecological disaster with minimal avoidance effort. They are so transfixed by the assumed end result that even the most elementary mitigation options are left undone. And foremost amongst the institutional "stunned mullet" are the respective state and federal environmental protection authorities, the very same organisations that have held themselves out to the budget process as the agencies of first response.

The fatal flaw of these organisations is that their singular overriding perspective is pessimistic. Their sole focus is on the identification of environmental problems and the implementation of regulations to minimise any associated harm. Their collective myopia is so severe that they are incapable of even recognising an economic opportunity, let alone using open, functioning, minimally regulated markets to first solve the problem and eliminate harm.

Someone forgot to tell them that

"Where there's muck there's money".

But in fact, someone did. It has recently come to light that, back on the 4th of May, two Dutch companies had approached the authorities for approval to enter US waters with equipment capable of capturing a large portion of the oil as it first escaped to the surface next to the sunken platform. But no such approval was given. It seems authorities were concerned that the method left small droplets of oil when the cleaned water was returned to the sea. See and

and [courtesy Bill Pounder]

But lets take a close look at what we are actually dealing with here. A vast reservoir of crude oil worth billions of dollars, 65% owned BP, is leaking into the ocean. Each of these 30,000 barrels of oil is worth US$76.50 each so some $2,295,000 worth of valuable salvage is made available every day. Each barrel equates to a volume of 159 litres so there are 6.29 barrels in each cubic metre of oil. And the daily discharge amounts to 4,770 M3. Each cubic metre has a value of $480 and as there is 5 standard 200 litre, 44 Imp gallon or 55 US gallon, drums in each M3, then each drum full is worth $96.00 on the world crude market.

According to the RNW link above, the US authorities favoured a chemical treatment that broke down the oil, thereby extinguishing its salvage value. But Dutch research had already concluded that this method caused more harm to wetlands than the oil itself.

In contrast, each 200 litre drum of oil is of equal value to half a days pre-tax pay for an American worker earning $24/hour. Tens of millions of Americans earn much less than this, especially the 10% of the workforce who are out of work altogether. There appears to be no valid reason why an average American could not collect two drums of oil in a normal working day. But the logistics of the exercise may complicate the equation somewhat. Add an open boat, fuel and storage capacity and the break even capacity gets greater, as does the minimum effective number of workers in each team. A 3 person team with boat etc would see the minimum daily collection target go out to about ten drums, or 2m3/day worth $960, from each team. And this, aside from the obvious ecological cost minimisation imperatives, means a bigger boat to cover a wider area and renders the economics of small patch oil collection marginal. This is the volume of oil one might find in a 400m2 patch of oil that is 5 mm thick. It would require at least 300 metres of floating barrier and a pump capable of processing the 40 tonnes of water in the top 10cm.

But this only applies to American wage rates. Lets not forget that this oil spill is in the Gulf of Mexico, and there are 109 million Mexicans who are closer to this problem than most Americans. The Mexican GDP per capita is $13,600 but this obscures the fact that 60% of the population share just 26% of the GDP. And that makes 65 million people with an average share of $6,000 a year each. That works out at $116/week, or just under $24/day or $3.00 an hour. At this rate, a crew of three on a small local craft might start to lose interest in the exercise if it took them a whole day to collect a single 200 litre drum of oil worth $96.00. This is the volume one would find in a 40m2 (5m x 8m) patch of oil that is 5 mm thick.

Most could collect a whole lot more using nothing but frying pans, especially if larger storages were maintained close to the collection area. Indeed, even if there were no larger industrial scale collection efforts in operation, the entire daily discharge volume could be collected by the number of Mexicans who try to cross the US border each week.

The leaking well is just 800km, or two days by slow boat, from the coast of Yucatan where the most disadvantaged Mexicans live. And the further the oil drifts eastward to the Alabama and Florida coasts the more dispersed and fragmented the oil patches become and the more imperative the use of free market, non-american labour, becomes. The exclusive use of American labour may have some traction when dividing the benefits of production but it has no traction, nor even logic, in minimising serious ecological harm.

The worlds poor, and the not so poor, have willingly scavenged for items of value from maritime disasters for millenia. Everything from shipwrecked cargo to drifting planks and sailcloth has been removed from the environment and returned to human use, both personal and through resale. Even beached whales were seen by early humans as a plentiful bounty, and a time of opportunity, for hundreds of millenia. But for some extraordinary reason we now have a collective intellect that is capable of compartmentalising our problems in a way that leaves us wringing our hands, transfixed by an approaching disaster when a normally functioning market place would instantly recognise an opportunity and proceed to exploit it to the point where the problem disappears altogether.

For some reason, apparently beyond the comprehension of reasonable men, this oil is deemed to be still in the possession of BP when it is clearly abandoned salvage on the high seas. Yes, BP has a legal obligation to clean up the mess but why is it being deemed to remain the exclusive property of BP?

If it were not so serious it would be high comedy. The US Coast Guard and the relevant Environmental Protection Agencies have diligently applied exclusion laws, that were designed to protect fish stocks, to an abnormal outbreak of oil stocks. With scant regard for the actual ecological outcomes, they carefully 'protected' their newly discovered mobile oil patches from rapacious foreign scavengers. Well done, fellas, (wave that flag, cue photo op).

BP has every right to argue that the bulk of the responsibility, and liability, for the harm that has befallen the southern coast of the USA rests squarely on the inactions of their own agencies. The means to collect the largest oil patches when it first came to the surface was available to them, at minimal net cost after sale of salvage proceeds, courtesy of the Dutch. But this offer was declined or not responded to in a timely manner.

The means to collect medium sized patches, again at minimal net cost after sale of salvage proceeds, by their own local fishing fleet, was also declined or not acted upon in a timely manner. And the means to collect even the smallest, dispersed oil patches was also available to them, at minimal net cost after sale of salvage proceeds, courtesy of the thousands of low income Mexican fishermen who lived within three days slow transit of the discharge zone.

This proper functioning of a salvage market would have been quite capable of capturing the overwhelming majority of the discharge for as long as it takes to relieve the pressure on the discharge site with additional drill holes. And BP itself would have been the logical buyer for all that salvaged oil which it could then on-sell to its existing customers at little more than the cost of consolidating volumes. Instead, one of the best run companies on the planet now has a huge financial exposure thanks to the collective intellectual lard of the US environmental protection industry who simply cannot understand that there is always a place for free market ecology to turn entrenched notions on their head and convert imaginary problems into real opportunities.

More sinister is the revelation in the last paragraph of the Dutch article above. "In 1989, a Dutch team and equipment had already been flown in to tackle the Exxon Valdez oil tanker disaster off the coast of Alaska. But in the end the US authorities sent them home." This technology has been around for more than 21 years but it is standard operating procedure for the US environmental protection authorities to reject proven harm minimisation options. One can only conclude that they seek some sort of perverted publicity gain from an unrestrained ecological disaster.

The BP legal defence team needs to take a good hard look at the option of laying formal charges of gross negligence on US authorities.