One of my favourite books is Daniel Yergin's Commanding Heights. In Commanding Heights, Yergin gives a great description of how, over the course of the 20th century, many of the commanding heights of the economy such as the telecommunications and transport sector transferred from central government control to the private sector. The benefits of this transition toward free markets, whether it be increased innovation or more efficient delivery, are clear and well proven. However one obstacle that has prevented government from completely backing away from certain sectors of the economy is the concept of major catastrophic risk.
By catastrophic risk I mean risk that is large (on the scale of a natural disaster), difficult to predict in terms of cost, and whose impact is felt widely across society. In the past few years we have witnessed such catastrophes come to fruition at the international level in both the financial and energy sectors. British Columbians in particular should learn from these experiences because catastrophic risk is a central issue associated with one of the greatest economic developments of our day: oil and bitumen pipelines.
The most severe recent example of catastrophic risk has to be the financial crisis of 2008. If there is one cliche that defines that crisis, it is that the banks are "too big too fail". This term was used by regulators and politicians around the world to justify the huge bailouts that were given to banks. Although very frustrating to the taxpayers who were financing these bailouts (luckily, there were no bailouts in Canada), the truth is that because financial institutions had become so interconnected, if even a small number of banks had been allowed to go under the damage to the worlds financial system would likely have been even worse than it already was. Now, even the staunchest defenders of the free market accept that there is a strong role for government to play in regulating the world's financial system precisely because this kind of catastrophic risk cannot be borne by the private sector alone.
In the energy sector specifically, there are two recent catastrophes that come to mind; Fukushima and Deep Water Horizon. One was a nuclear disaster in Japan while the other was an oil spill in the Gulf of Mexico. Both illustrate the limited ability of the private sector to deal with these large catastrophic risks. The private company, Tokyo Electric Power Company owns the Fukishima nuclear plant and was supposed to be on the hook for any costs associated with a nuclear incident. However, as the losses from the disaster kept mounting (current estimates are around the $100 billion mark), the company had to be nationalised and now the Japanese taxpayer is on the hook for the costs of the nuclear disaster. BP was of course responsible for the Deepwater Horizon disaster. In the immediate aftermath of the incident the U.S. government placed liens on BP assets in the United States to ensure BP would pay up. Although the final cost of Deepwater Horizon has not been settled on yet, BP is large enough that it will likely be able to pay. But BP is one of the largest companies in the world. What if one of the smaller oil companies had caused a similar disaster? The U.S. government would likely be on the hook.
Closer to home, there are a number of proposals for oil/gas/bitumen pipelines in B.C. at the moment. British Columbians are naturally concerned about the risks to our environment. There is no doubt that even though it may be extremely unlikely, a major oil spill in B.C. would be a huge catastrophe. One principle commonly stated is that any and all costs associated with a potential disaster from these private sector projects should be paid for by the private sector. That sounds great but how realistic is this? Fukushima and Deep Water Horizon illustrate that these costs can be huge and unquantifiable (and therefore uninsurable) beforehand. Does this mean we should only allow the world's largest companies with the deepest pockets to build oil and gas pipelines? And the financial crises shows us how risk often arises from the interconnectedness of companies and is difficult to assign to one company or another. In the case of a pipeline through B.C., should an oil sands miner in Alberta be liable if its bitumen is spilled from a tanker in the Pacific?
These are not easy questions to answer. But whether its the Fukishima disaster or the 2008 financial crisis there are some great examples out there to guide us how we should treat catastrophic risk for oil and gas pipelines.
