Moral hazard

Limited Liability, Oil Spills, and Moral Hazard

|

A study I'd like to see: the effects of this system on how oil companies approach risky behavior.

Under the law that established the…Oil Spill Liability Trust Fund, the operators of the offshore rig face no more than $75 million in liability for the damages that might be claimed by individuals, companies or the government, although they are responsible for the cost of containing and cleaning up the spill.

The fund was set up by Congress in 1986 but not financed until after the Exxon Valdez ran aground in Alaska in 1989. In exchange for the limits on liability, the Oil Pollution Act of 1990 imposed a tax on oil companies, currently 8 cents for every barrel they produce in this country or import.

[Hat tip: J sub D.]

Update: Steven Horwitz has some thoughts.

NEXT: Recently at Reason.tv's Nanny of the Month for April 2010: The cop who said, Put down those flags, Tea Partiers!

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. And we’re going to get rid of Too Big to Fail, too.

  2. its usually a safe bet that when something goes wrong there’s a government program that caused it or at least exaserbated the situation.

    1. You went to public school, didn’t you?

      haha, just giving you a hard time buddy 🙂

      1. actually i did… can you tell? 😉

    2. Spoken like a true Palinite, all of whom seem to believe that removing government will turn the earth into a garden of eden. In reality, reducing oversight during the last eight years has given us Enron, Countrywide, Bear-Stearns, Lehman Brothers, Bernard Madoff, and the BP Gulf oil spill.

      1. Danbo, I’m not much of a fan of Bush, but you are letting your partisan impulses trump the facts. The Enron collapse was nine years ago during the early months of the Bush administration, and the underlying corporate fraud occurred in the 1990s during the Clinton administration. I don’t think either Clinton or Bush bear culpability for Enron’s fraudulent and criminal behavior–more regulation generally won’t deter those bent on committing a criminal act. Same goes for Bernie Madoff. By his own admission, his Ponzi scheme originated in the early 1990s–it only unraveled recently because the stock market crash of 2008 resulted in investors making a run on their holdings with Madoff. Likewise with the subprime mortgage mess. Bush did plenty of screwing up, but not with regard to oversight. Recall that it was the Bush Administration that repeatedly attempted to increase oversight and capital reserves at Fannie Mae and Freddie Mac, but were thwarted by Barney Frank and a host of other Democrats. Indeed, the proponents of more regulation of the subprime market were pilloried as “racists” and “anti-poor.” There’s a nice summary of these efforts via excerpted newspaper articles at http://frankwarner.typepad.com…..nk-op.html

  3. Hmm… The words “Liability” and “Trust Fund” side-by-side.

    I can just imagine the lawyers drooling over this.

  4. What are the chances this “Oil Spill Liability Trust Fund” actually exists, in any meaningful way? Or is this just one more of those, “I can’t be broke; I still have checks left!” moments?

    1. I like that description. Quite apt for the way our lovely government does business these days.

    2. Don’t worry; it’s in a lockbox somewhere.

      1. The bad news is that the lock box is 5000 feet below the surface.

    3. Those funds have been used to shore up the Social Security trust fund.

    4. I’m sure it’s sitting right there full of IOUs, just like the rest of the government trust funds.

  5. Yet another example on how government-run insurance and/or risk management programs create conditions of irresponsible risk taking. NFIP. Workers’ compensation statutes. No-fault automobile insurance and residual insurance pools(that last one could also be known as socialized auto insurance)

    [Off topic]
    The NYT article insinuates that declining “revenue” for government is a bad development.

    “Companies that lose business ? fishermen who cannot fish, or hotel owners who cannot rent out rooms ? can seek damages. So can governments that see tax revenues decline.”

    See? Governments seek “damages” when they are disabled from stealing.

  6. I would like to see a study that could explain why anybody would pay for this drivel.

    1. You mean Reason or the NYT?

    2. What are you talking about? You give it away for free.

    3. Edward! Shut the fuck up, Edward.

  7. Do you people want to keep your gas-powered alarm clocks affordable or not?

    1. LOL!

      That’s too funny. Hey, with all these hybrid cars on the market, the oil companies have to do something to keep people buying gas.

  8. BP and their insurance may be on the hook for more than $75 M. From the article:

    When a rich and well-insured company like BP is responsible for the spill, the government will seek reimbursement of what it spends on cleanup from the company and its insurers.

    I’m sure pressure will be greater if there’s significant negligence on BP’s part with things like a shoddy maintenance and inspection regime.

    For a little bit, I was convinced that AIG would turn out to be BP’s insurer because it would be poetic to have the government owned insurer be on the hook.

    I do not think there’s much moral hazard here, these accidents are so rare and the black eye for BP is so significant that this kind of accident is a nightmare. It would also not surprise me if there was an out for limited liability if the company was found negligent.

    1. A finding of willful misconduct or gross negligence would likely shatter any limitations on liability. Might negate a big chunk of their insurance coverage, too.

      1. Who’s the chairman of the House Energy Committee? Some lucky pol will be getting a big, fat “campaign contribution” in the mail soon.

        1. Henry “Gollum” Waxman

    2. BP and their insurance may be on the hook for more than $75 M. From the article:

      When a rich and well-insured company like BP is responsible for the spill, the government will seek reimbursement of what it spends on cleanup from the company and its insurers. [emphasis added]

      The fishermen who are losing catch, the beachfront resort owners who face cancellations and reduce bookings, the city of Biloxi who face reduced tax revenues, are not going to get paid by BP and it’s insurers. They will be payed out of a trust fund funded by an eight cents a barrel tax on every gallon of oil produed or imported into the United States. My SWAG is that that is 50% of the damages that BP just caused.

      1. Now, imagine this on the mid-Atlantic coast. Many small businesses would be out of business. I remember a raw sewage leak from Atlantic City in the late 80s, shut down beaches in the heart of the Summer season and hurt a lot of the small businesses along the shore from AC to Cape May. It’s bad enough these people have to deal with Mother Nature, and her devastating effects.

    3. I can’t help but think you are all too quick to blame BP. If Siemens has anything to do with the equipment on the platform that blew up, then I’m gonna be looking at Siemens first and foremost.

    4. BP: Behemothic Pollution. It’s a start.

  9. I’ll note that BP’s 1Q profit was $5.5 billion. Somehow, I think BP can pay for the cleanup and not come off too badly.

    I stand by my prediction that Transocean is the one that’ll get screwed over this. TO owned and operated the drilling rig. I’m confident BP has pushed, contractually, as much of the liability down on to Transocean as they could.

    1. Honestly, if you look at past examples of how the Obama Administration handles this kind of thing, they won’t go after the culprits–the people who are actually to blame. They’ll go after the bystander with the deepest pockets.

      They don’t blame Lehman, Bear and the UAW for the collapse of Lehman, Bear and GM.

      They blame Goldman.

      If this was caused by non-American entities with connections to a foreign government, that may change the equation somehow, but I don’t see why the Obama Administration would track down the responsible parties for this and blame them…

      They’ve never done it that way before.

      1. “If this was caused by non-American entities with connections to a foreign government”

        You do know what the B in BP stands for, right?

        On the other hand, BP did get us to overthrow the Iranian government in the past:
        http://en.wikipedia.org/wiki/1953_Iranian_coup_d‘?tat

        1. With the merger with Amoco and acquisitions of Arco and Castrol it’s much more of an American company than a British one. A plurality of BP’s revenues, operating profits and assets are US based.

      2. Again, I don’t see why it matters…

        The Obama Administration will twist this to try to advance whatever’s on their agenda with little regard to what really happened and why…

        Being 100% American hasn’t helped any American company yet if it stood in the way of something on the Obama Administration’s to-do list, being a British company, to whatever extent, may actually help insulate them…

        …but I wouldn’t count on it.

        ’cause again–the real cause of the problem doesn’t matter to the Obama Administration–it’s what’s on their agenda and whether you’re part of that.

      3. You really love that Calamari, don’t you, Ken? I think you are really Buffet, and I don’t mean Jimmy.

    2. The biggest issue for BP may be the tarnishing of their brand. BP has been dumping tons of ad dollars in being a different, greener oil company that bought them good will and some social capital. They may have squandered a good amount of that in this, especially if this turns out to have been due to BP negligence.

      1. At the risk of sounding evil, good. I hated that fucking rainbows and puppies ad campaign.

      2. Yeah, they’d almost come back from blowing up Pasadena, TX in 2005.

      3. I’ve no doubt there was negligence. Operational, engineering and maintenace negligence.

        The goddam emergency shutoff valve* didn’t fucking work after they blew up the fucking oil rig. This is essential safety equipment that should be properly maintained, regularly tested and whose reliabilility tracked throughout it’s life cycle.

        I eagerly await the revelations the government investigation into the disaster. I expect multiple levels of BP malfeasnce and incompetence will be uncovered. I also expect that the people who wrote and allegedly enforced safety regulations for the government will not find anything wrong with their own performance other than they need more authority and money.

        * I know it’s more complicated than a ball or gate valve. It is actually a whole complex system unto itself, a subsytem of the offshore oil extraction system if you will. But when you boil it down to essentials, it’s an emergency shutoff valve.

        1. I blame Toyota.

      4. I second the comment about the fucking rainbows and puppies ad campaign.

  10. Now that we see the government will be involved in the clean up, I think it should be obvious to everyone that what we really need is an Energy Consumer Protection Agency to make sure energy consumers can’t buy more energy than we can afford.

    Also, I think it’s pretty obvious that the government needs to take over the oil industry anyway, just like it did with the banking and automotive industries, because obviously this industry is only being run with the interests of corporate directors and Wall Street investors in mind and…

    You know the drill.

    “In exchange for the limits on liability, the Oil Pollution Act of 1990 imposed a tax on oil companies, currently 8 cents for every barrel they produce in this country or import.”

    I suspect the moral hazard here was touted as a feature rather than a bug… There have been times since 1986 when the government has wanted to encourage drilling that maybe otherwise wouldn’t have been happening, I’m sure.

  11. T-

    Are the emergency shut-off valves (supposed to be) tested on a regular basis? From experience, I have learned shut-off valves which sit open and undisturbed for a prolonged period of time have a tendency to freeze and/or leak when used. I have no idea if this is true of these set-ups.

    1. I don’t know. Given that a BOP stack is a multi-million dollar piece of equipment that is vital to your producing oil safely, I would hope there’s some kind of routine test and maintenance. But I’ve been startled before by the lack of what I would consider to be standard precautions in this industry. The oil industry has some of the best management and safety practices going right next to some of the worst. It really depends on the people involved and who has been bit in the past.

      I do know the guys who built the BOP are currently shitting bricks. So they may think they have some level of contributory responsibility.

    2. All right, after checking, subsurface BOPs are tested every 30 days or when you move them from one location to another. To test it, they plug below the BOP and pull the BOP up to the rig floor and do full integrity testing on the floor. The stack has one connection to the lower package, so once they drop it back down, they test that connection point. If everything passes, they carry on.

  12. Too funny. I was wondering how long before Reasonoids came up with a “blame the government” spin on this (free market) disaster.

    1. Too funny. I was wondering how long before Reasonoids came up with a “blame the government” spin on this (free market) disaster.

      Are there no government regulators or inspectors of off shore oil rigs?

      If these theororetical beings actually exist, do they not bear some responsibilty for this disaster?

      If these beings affect the engineering and maintenance management of safety features on oil rigs not at all, why do we have them?

      1. After all, creating a moral hazard by implicitly (and later, explicitly) guaranteeing to bail out Fannie Mae and Freddie Mac turned out so well. Perhaps we ought to take a look and see what other moral hazards the government has helped create and see if they might blow up in our face.

        Nah, better to make stupid comments about the free market, even when you don’t understand what a free market is.

      2. Oops. Meant in response to idiot boy, not you, J sub.

        Insert obligatory threaded comment rant here, thx.

    2. You don’t think it’s relevant that this is exactly the same idea that’s in the Democratic financial “reform” bill– tax all the companies (oil, banks, as appropriate) in order to bailout the ones with bad behavior?

      1. Dan T. does not think. His fingers punch keys without any input from his brain, kind of like how a chicken will run around after its head cut off, except that in Dan T.’s case, this has been going on for years.

  13. Those martyred in the service of the Great Prophet Muhammad are rewarded in paradise with seventy two virgins.
    Will those followers of the Great Prophet Owlgore who were martyred destroying the Great Platform be rewarded in paradise with seventy two vegans?

    1. Ewww. Who wants 72 scrawny, self-righteous bitches who have to take Beeno to avoid flying around the room like a released balloon?

      1. 72 Organic Girls

  14. A scrawny self-righteous asshole with similar digestive anomalies resulting from a diet that is natural only to herbivores?

    1. whoops, this was meant to be in response to Kant feel Pietzsche

  15. Finally — somebody at Reason comments (sort of) on the oil spill. The silence on this topic is getting embarassing. Surely there’s some more libertarian commentary to offer on this mess?

  16. I blame Canada.

    1. Sry, still drunk from the ‘lympics

  17. I’m surprised that nobody mentions the birds who suffer most, they’re busy with the seafood and the private beaches not with the destroyed environment

  18. Obama did it. Everything’s his fault. It rained on your picnic, Obama did it. You owe $300 to the IRS, Obama did it. Your wife left you and your hair’s turning gray, Obama did it.

  19. Have you heard the latest news.
    The Democrats are trying to raise the cap on oil company’s who cause oil spills. Currently the cap is set at 75 million…a pretty paltry amount.
    Democrats wanted to raise that to 10 billion.
    Republicans countered that that would hurt the small drillers
    Democrats then proposed no limit at all. Oil companies should just pay whatever the cost is
    Republicans again objected that this would hurt the big oil companies

    By opposing a law that would make oil companies responsible for the cost of an oil spill…no matter what the cost, the Republicans are showing whose side they are on….and it isn’t the taxpayer.

    Where are these kooks coming from and how are they being allowed to get away with it by claiming that to make an oil company responsible for unlimited costs might be too big a burden to bear.

    Are there actually people out there that believe that BP , Transocean and Halliburton should have a cap on how much they should pay America for the accident that they caused?

    I can see where Republicans are headed.
    BP may end up being asked to pay 10s of billions of dollars to stop the leak, clean up the mess and compensate people for their losses.
    Republicans are worried the price may be too high for the company and are seeking to limit BP’s exposure.
    Problem is…what BP doesn’t pay…who will pay?

    You guessed it, everyone reading this comment.

  20. Thanks for the information.This is very
    informative site.I will suggest to my friends to visit this site.
    ====================mcljackson

  21. Thanks for the information.This is very
    informative site.I will suggest to my friends to visit this site.
    ====================mcljackson

Please to post comments

Comments are closed.