Nichole Gelinas at The National Review makes a couple of good points about how markets can help price oil production externalities. But this is nowhere near a comprehensive solution, nor is it any argument against other policies designed to influence demand for oil.
Gelinas makes a good point. But this is hardly a comprehensive solution either to pricing externalities or to controlling oil demand. Note first this free-market pricing of risk will only work if the U.S. government holds oil companies’ (in this case BP) feet to the fire for the full cost of damage and cleanup. Which will require that a reasonable number of pro-business politicians ignore the special pleading of BP and do the right thing. Because, in the case of the Deepwater Horizon spill, those costs are likely to run well into the tens of billions of dollars; enough to wipe out the better part of a couple of years’ worth of BP profits.
But U.S.-based production accounts only for a smidgen of world oil production. Oil is a fungible asset. BP sells its oil from the wellhead to refiners who get crude from all over the world, refine it, then sell it back to BP’s chains of gas stations. The oil from a BP pump doesn’t necessarily come from a BP well somewhere. I might come from a Petrobras or a Yukos well.
Those who think that free-market approaches to pricing in externalities and risk would be well-advised to do a little research on the success of the residents of the Niger Delta region in getting adequate settlement for the environmental degradation of their region by various oil companies. Hint: not much. Or of the efforts of environmental activists in Russia. Hint: they end up dead.
