Lessons of Deregulation: Corporate Cost-Cutting and the BP Disaster

Corporations are not inherently bad, but they have strong incentives to behave badly to increase their profits and stock value. The free market, which tends to push companies to behave positively when it comes to innovation, price, and customer service, often offers few counter-weights to the strong incentives which exist to cut corners ethically and take huge risks.

The story of BP, and the Gulf of Mexico oil spill, perfectly illustrates all this. BP does a great job of pulling oil from the earth in faraway and treacherous places and bringing gasoline to the gas station near my home at consistently competitive prices. And for that I am thankful, my climate change worries aside.

But, as we learned since the Deepwater Horizon spill, BP has turned into an increasingly unethical and irresponsible corporation over the past decade or two. Now that inside story is being fully told in a new book. As the Chicago Tribue reports today:

"Run to Failure: BP and the Making of the Deepwater Horizon Disaster," by ProPublica investigative reporter Abrahm Lustgarten, offers a detailed portrait of a corporate culture that seemed to value controlling costs above human life.

Lustgarten argues that the culture had been spreading like a cancer through the British oil company for years, culminating in the April 2010 tragedy that killed 11, seriously injured 16 and spewed crude oil into the Gulf for 87 days. .  . .

From 1989, when [John] Browne took over BP's exploration and production group, and after he became CEO in 1995, Browne drove a stunning spree of acquisitions while pushing BP into riskier drilling and ruthlessly cutting costs. In 1990, for example, he cut 1,700 jobs before having managers find $750 million in budget reductions.

"Even before he had settled on a plan, one thing was clear," Lustgarten writes. "The way out of the trap was through abandoning British Petroleum's historical affinity for safe and predictable operations and through taking some chances."

Under this new regime, the author claims, pipeline inspectors in Alaska were pressured to doctor their results, key safety infrastructure deteriorated, and managers pushed aside brave employees who spoke out, even blacklisting them.

An internal "fire and explosion" risk assessment in 2000 went so far as to calculate the worth of individual workers: $10 million a head, according to Lustgarten.

"The workers were fewer and the hours longer," he writes. "Tasks that a pipeline inspector used to complete every three months now happened maybe once a year."

BP failed to right itself even after major accidents, including a 2006 oil spill in Alaska and the explosion of a Texas City, Texas, refinery in 2005 that killed 15. By the time Hayward became CEO in 2007, Lustgarten argues, disregard for safety was entrenched in BP's culture.

This culture comes to a head in "Run to Failure" with a gripping, minute-by-minute account of the Deepwater Horizon events. Before the rig exploded, BP managers, behind deadline and over budget, brushed aside serious warnings and skipped a routine but critical test, Lustgarten says.

One moral of the BP story is that effective government reglation has become ever more important as the bottom-line pressures on corporations have grown in an age where shareholders are clamoring relentlessly for higher profits and CEOs are extravagantly compensated for increasing stock price. Ironically, though, regulators have become weaker, not stronger, as these trends have intensified thanks to attacks on government.

The result? We've seen both the biggest financial and environmental disasters in memory in just the past few years.