Tuesday, May 11, 2010

Regulating Offshore Oil Drilling

I've written recently (here) about regulatory conflicts of interest that arise whenever the government has a direct financial stake in industries it is charged with regulating for public or environmental health and safety. Those conflicts of interest usually lead to lax regulatory oversight.

The problem is well exemplified by the recent Gulf oil spill. The Minerals Management Service (MMS), the federal agency charged with regulating offshore oil drilling, earns revenues, in the form of lease payments and royalties, from oil companies. It is a very lucrative business. According to an article published today by Bloomberg (here), the MMS is second only to the Internal Revenue Service in the revenues it generates for the US government, upwards of $13 billion per year. The Bloomberg article quotes Kevin Book, managing director of a policy research firm, Clearview Energy Partners LLC, as follows:
“The oil spill is the cost of having a relationship with industry like the one MMS has,” Book said. “MMS by charter is in the business of doing business with industry.”
In belated response to this institutional and organizational problem, the Obama administration has released a proposal today (see here) to split the MMS into two separate sub-agencies within the Interior Department, one in charge of negotiating leases and collecting royalties, the other in charge of regulating drilling operations. It's a step in the right direction, but I don't think it is enough. Also needed are clear rules for cases where conflicts between the two sub-agencies arise. It is easy to imagine circumstances in which the financial side  pressures the regulatory side to relax conditions. That needs to be institutionally prevented by clear rules that prevent the regulatory agency from negotiating regulatory adjustments. In addition, I continue to support legislation or a regulatory rule that would mandate the installation of remote shut-off valves for all offshore oil rigs.

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