Barry Meier’s portrait of Transocean, owner of the rig behind the oilocalypse, describes a “push-the-envelope” mentality at the corporation:
Human rights advocates have called for an investigation into Transocean’s recent dealings in Myanmar. . . . Transocean has disclosed in Securities and Exchange Commission filings that its drilling equipment was shipped by a forwarder through Iran and that until last year it held a stake in a company that did business in Syria. The State Department says Syria and Iran sponsor terrorism. . . . In Norway, Transocean is the subject of a criminal investigation into possible tax fraud. The company has said in S.E.C. filings that Norwegian officials could assess it about $840 million in taxes and penalties. . . . Transocean is also the target of tax inquiries in the United States and Brazil.
Owners and operators of oil rigs can be slippery targets for regulators. As David Kocieniewski explains,
Transocean . . . moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes. . . . [A]n examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.
How does a destructive industry become one of the most subsidized?
One answer lies in political economy models of the purchase of legislation and regulation by powerful companies. They can give campaign contributions to legislators, who are also more easily “cognitively captured” by an army of lobbyists. A regulatory revolving door will make current government officials jealously protect any future chances they have to be employed by well-paying corporations. Anyone who’s read 13 Bankers can see this process at work in the finance industry, and a recent blog post compares MMS with the SEC:
The ecological disaster was aided and abetted by the systematized incompetence and cronyism of the MMS, just as the financial meltdown was stoked by the laxity and inadequacy of the SEC. Both regulatory agencies were designed to fail. At the time of the critical regulatory lapses, they were run by leaders chosen because of their anti-regulatory stance.
Both agencies have been failures for at least a decade. In both instances, the regulators accepted industry assertions about the reliability of their safety mechanisms while failing to acknowledge — much less investigate — the darker, more complex reality. In each crisis, we had the same story of a belief in the reporting done by corporations, and in each case, we had a failure to recognize the enormous potential for fraud and the lack of incentives these corporate entities have in ascertaining and measuring potential risks to the public. The regulators continued to believe the lies fed them by CEOs even when the lies had become absurd.
Amazingly, the SEC continues to block journalist access to paperwork that might help it do its job.
Beyond the transactional, exchange-oriented theories familiar from public choice theory, we can also discern cultural explanations for objectively unreasonable behavior. Adam Haslett’s Union Atlantic makes for a great read on this front, evoking a world where too-big-to-fail banks know exactly how much power they wield and when to shift from flattering to threatening regulators. Regulators and the regulated are connected by old school ties, country clubs, and plain old friendship. The chilling scene where the failing bank’s CEO barks “spare me the civics lesson” at a Fed president (whom he knows he has cornered) speaks volumes about the way power really operates in the shadowy public/private world inside the Fed.
Combine the economic and the cultural models of power here, and it’s easy to see how both finance and energy powerhouses can extract lax regulation from the government as easily as they extract fees from deals or oil from deposits. James Kwak explains the parallels between the two extractive industries:
[T]here is a systematic bias within these companies against certain assessments and in favor of others. That is, the guy who shouts, “Danger! Danger!” will be ignored (or fired), and the guy who says, “Everything’s fine, the model says disaster can strike only happen once every hundred million years” will get the promotion—because the people in charge make more money listening to the latter guy. This is why banks don’t accidentally hold too much capital. It’s why oil companies don’t accidentally take too many safety precautions. The mistakes only go one way.
[T]he Energy Policy Act of 2005 forbids the EPA from regulating fracking under the Safe Drinking Water Act — by simply stipulating, without proof, that the chemicals are removed after being used, and therefore there is nothing to regulate. If this reminds you of the Commodity Futures Modernization Act, it probably should. . . .
This is what happens when you have a weak regulatory agency crippled by pressure from above (and political appointees who are opposed to regulation) and a private sector that simply does whatever it pleases in pursuit of profits. It’s not individual irrationality; it’s power, pure and simple.
Transocean has operated in a regulatory Ultima Thule for so long for the same reason banks continued to operate SIVs even after Enron and finance gangs even after the PATRIOT Act. Excess returns make it ever easier to finance the campaign contributions, lobbyists, and cultural cachet that reduce the taxes and regulation of those windfall profits. It’s a self-reinforcing process so numbingly familiar to us that only disaster can disturb it.
Image Credits: Cover of William Brittain-Catlin, Offshore: The Dark Side of the Global Economy; picture of Wall St. subway station by me; abandoned to the public domain.