There has been a lot of talk spreading blame for the BP oil spill onto BP’s poor management and subcontracting. These arguments do hold some water, but a recent lecture given by John Hasnas from Georgetown Law at an IHS summer seminar got me thinking a little differently. The question he posed was, what was BP doing in the Gulf in the first place?
Well, duh, that’s where the oil is. But doesn’t deep-water drilling seem incredibly risky? Who would insure such a risky venture?
Professor Hasnas makes the point that, on the free market, nobody would. The liability is too high in the case of a spill. But the Oil Pollution Act of 1990 caps the civil liability for offshore drilling at $75 million–making offshore drilling much more insurable. This might explain the increasing proportion of our oil production from offshore drilling since 1990:
The point is that the OPA 90 has given a perverse incentive to oil companies to undertake overly-risky behavior. Essentially, the OPA 90 divorces risk and consequence for offshore drilling. If the maximum liability is $75 million, is it any wonder that BP might cut a couple corners on safety? If we want to encourage risk-averse behavior (or at least discourage risk-prone behavior), it’s time to remove any caps on civil liability. Make offshore drillers responsible for their own actions. The BP oil spill is an indirect consequence of the OPA 90.