How the Oil Industry Stepped in the Gulf Spill

Remember that imported English television game show from a few years ago? The host would dismiss the unfortunate slob who failed to guess the answer to some obscure bit of trivia with a withering sneer: “You are the weakest link.”

The Weakest Link was a zero-sum game in which the demise of one contestant enhanced the status and earnings of the survivors. Business has generally followed that ethos. The failure of a rival is an opportunity to pick up market share. After Circuit City went down, Best Buy thrived. When Toyota’s Prius was recalled, consumers didn’t stop buying cars. They just bought more Fords.

Upon glimpsing a rival foundering, executives think first about how they might take advantage, and last about whether they should toss a life preserver. But three recent examples show that’s not always the best strategy. In each, the failure to band together to help the weakest link has had a negative impact on the entire industry.

At first blush, the corporate reaction to the oil spill in the Gulf of Mexico seemed to be collective irresponsibility. One would think that everybody worth his weight in petrodollars would recognize the ability of a single event to set back the entire industry by decades. The 1969 Santa Barbara oil spill queered the prospects of prospecting for oil off the coast of California for 41 years—and counting. And a Democratic president had just come out for expanding offshore drilling, over the howls of his environmentalist base. Given this, I would have expected the global oil industry to run in with equipment and expertise to clean up a spill. Sure, British Petroleum first downplayed the size of the spill, which started on April 20, and then said Transocean, which owned the rig, was responsible for cleaning up the mess. Yes, Shell offered up its training facility in Robert, La., to BP as a command center, and Exxon helped transport booms. But the broader industry generally remained mum—concerned about liability and competitive issues. Effectively, the industry outsourced the cleanup to BP, a company with a dodgy safety history that seems to be taking a public-relations lesson from Goldman Sachs. The CEOs should have formed a human boom to stop the slick.

This seemingly blasé attitude has been enormously damaging to the entire petroleum industry. With “Drill, baby, drill” being replaced by “Spill, baby, spill” the window for offshore drilling has been slammed, nailed, and caulked shut. On May 3, California Gov. Arnold Schwarzenegger, a recent convert to the offshore-drilling cause, changed his mind. A Rasmussen poll found support for offshore drilling fell from 72 percent in March to 58 percent in early May.

Now consider another disaster zone: Wall Street. One of my big takeaways from the mile-high pile of business books on the crisis is that Wall Street refused to heed the repeated urgings of Federal Reserve and Treasury officials to save the industry’s weakest links—first Bear Stearns and then Lehman Brothers. Of course, helping out wounded rivals is anathema in the zero-sum zone of Wall Street. But CEOs failed to see how an expensive, bailout-requiring epic failure in a regulated industry would harm all the surviving players. The investigations, commissions, and proposed reform efforts—aimed at ensuring there can be no repeat of the Bear and Lehman toxic spills—have included some draconian suggestions. The proposals to ban derivatives trading and proprietary trading are the equivalent of an offshore-drilling ban, placing off limits an area where big profits can easily be made.

The Mediterranean countries have their own toxic ooze—from Greece. In theory, the euro zone was supposed to achieve greater stability by using a single monetary policy and currency. But here, again, the failure of the weakest link proved to be a danger—not a boon—to the healthier ones. When Greece started running into trouble, German bankers, Belgian accountants, and Dutch budget experts should have flooded in, doing everything necessary to halt the contagion. But the Europeans (and the Greeks) delayed, hemmed, and hawed. And so the failure of Greece, about 3 percent of the euro zone’s economy, is dragging down the value of the euro and forcing its neighbors to fund a cleanup operation.

As was the case with the oil industry and Wall Street, European leaders who thought they were in a race with their neighbors and frenemies failed to realize they were all in the same boat.

Daniel Gross is also the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and Pop!: Why Bubbles Are Great For The Economy.