The problem is not deregulation, its badly designed regulation

mardi 8 juin 2010 ·

I rarely end up agreeing with The New Yorker and today does provide a partial exception to confirm the rule. In its most recent piece concerning the damages caused by British Petroleum. It argued that the oil spill from the Deep Horizon rig was the "all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst". While rightfully pointing out the "revolving door between government and industry", they believe that "regulation itself became delegitimatized, seen as little more than the tool of Washington busybodies".

While I fail to disagree on the issue of lobbyists doing their job of distorting markets for special favours, I cannot end up blaming anybody else that the regulator(read: Congress or the President) for two reasons. Most obviously, not standing up to the oil industry and giving in to demands. Less obviously, but far more important was the design of the regulation in the first place.

The oil drilling ban dates from 1990 under Bush Sr. It banned drilling pretty much everywhere along the US coastline with the exception of the gulf of Mexico. Even if Bush Jr. lifted the executive order, offshore drilling along the entire West and East Coast of the United States is banned. But a logical application of regulation would have banned offshore drilling all along the coasts rather than point everyone to the Gulf of Mexico as Bush Sr. did when he leased offshore drilling rights to only the areas of Texas, Mississippi, Alabama and Louisiana. Oil companies hoarded the entire region. It seems that at first, production did increase in this region as a result of the regulation. Notice that as production increases, methods of production are more and more focused on deep sea drilling, hence creating higher risks especially when firms attempt to modernize their equipment. Back then, the logical step would have been to add a further regulatory requirement concerning depth.

So my gut feeling is that the failure of regulation is because the regulation pushed everyone to go there and take lots of risks. Of course I am not trying to excuse British Petroleum, it was their failure to act and they must assume the consequences. But there is a lesson for regulators as well as for BP. A regulation of something by itself does not guarantee that it is good and efficient, quite the contrary. A more intelligent regulation in the case at hand would have been for example to regulate the depth at which you can drill not the area in which you drill. For example, why not allow shallow water drilling in general while banning drilling below certain distances? That would have been a considerably more intelligent approach to regulation that might have avoided the problem rather than increasing the odds of an accident like the deepwater horizon rig.

To some credit, the Obama administration seems to have partially understood that the problem is related to depth as it reflects in its recent regulatory response to the crisis by adopting a moratorium on deep sea and ultra deep sea production, yet allowing it to continue in shallow waters. By adopting a more logical regulatory response earlier, this might have been avoided.

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Bryan Breguet est candidat au doctorat en sciences économiques à l’université de Colombie-Britannique. D’origine Suisse, il a passé les cinq dernières années au Québec au cours desquelles il s’est engagé en politique provinciale malgré le fait qu’il ne possédait pas encore la citoyenneté canadienne. Il détient un B.Sc en économie et politique ainsi qu’une maitrise en sciences économiques de l’université de Montréal. Récipiendaire de plusieurs prix d’excellences et bourses, il connaît bien les méthodes quantitatives et leurs applications à la politique.

Vincent Geloso holds a master’s degree in economic history from the London School of Economics, with a focus on business cycles, international development, labor markets in preindustrial Europe and the new institutional economics. His research work examined the economic history of the province of Quebec from 1920 to 1960. He holds a bachelor’s degree in economics and political science from the Université de Montréal. He has also studied in the United States at the Washington Centre for Academic Seminars and Internships. Mr. Geloso has been an intern for the Prime Minister’s cabinet in Ottawa and for the National Post. He has also been the recipient of a fellowship from the Institute for Humane Studies and an international mobility bursary from the Ministère des Relations internationales du Québec. Currently, he is an economist at the Montreal Economic Institute.

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