Sunday, June 13, 2010

Spilling on the BP oil spill

Random comments:

*Many people might not realize that in hazardous businesses, it usually doesn't even matter if the entity causing the accident was negligent - instead, strict liability applies to require responsibility of anyone who chooses to engage in the type of action where safety may be impossible to guarantee.  Oil companies use their political power to mess up the law, however.

*Lifting the $75m liability cap needs to happen ASAP.  While I think lifting the cap will probably avoid restrictions on ex post facto laws, I'm not 100% convinced.  However, I'm pretty close to 100% convinced that any oil damage occurring after the cap is lifted, from either new oil being emitted or from the spread of existing spilled oil, will be subject to the new law and different cap.  (Worth noting the cap only applies to regular negligence, not gross negligence, and I think there's a pretty good argument for gross negligence here.)

*Anyone who thinks there should be a new cap at $10b is saying the public should be held responsible for damage the spiller causes to the environment that exceeds the cap.

*Contrary to William, I think the pressure not to distribute dividends is legit when that money might be needed to fix the environment and compensate the people who've been wronged.  My suggestion - put the money in escrow to be released with a later dividend if it's not needed.  The stock price should then adjust to reflect the probability that BP won't need to dip into the dividend escrow to pay off its liabilities.

*It's a tougher argument, but also contrary to William, I think there's a legitimate claim that BP should pay for some or all of the costs of the drilling moratorium.  The argument is strongest for costs/lost wages at rigs run by the companies involved in causing the current spill.  The current disaster also makes the potential consequences of a similar disaster elsewhere so much worse that there's a decent argument that the current disaster truly caused the need for a moratorium.  Finally, an ethical argument (not really a legal one, though) - the weak regulations are a result of BP's lobbying, in part, so it doesn't have much cause to say it shouldn't have to pay for a moratorium while the weak regulations are fixed.

*Pretty telling that a developing nation like Brazil required safeguards that the US considered optional.  Pretty strong case demonstrating regulatory capture in the US.

*Without any sophisticated analysis to back it up, I think two years in is the point at which a new administration bears more responsibility for institutional failure than the old one does.  So I still award Bush more blame than Obama for the terrible regulation.  I suppose this doesn't quite fit with how I view responsibility for 9-11, but I'm willing to give some blame in that case to Clinton, while awarding special and majority discredit to Bush for not reacting to obvious warning signs.


  1. > I think the pressure not to distribute dividends is legit when that money might be needed to fix the environment and compensate the people who've been wronged

    I agree that in this case their would be such an argument. However, that argument has not been made, that I've seen. Indeed the analysts all agree that BP can afford both dividend and cleanup. Have you seen any coherent argument that they can't afford both? I've seen Obama posturing on this, but no logic.

    > I think there's a legitimate claim that BP should pay for some or all of the costs of the drilling moratorium

    I don't think you've made a good case for this. The moratorium is govt-imposed. The regulations are the govts, blaming BP seems entirely unreasonable (you say that the regs are "in part" a result of BP lobbying - so how can you justify them paying all the costs? By your reaasoning, the govt should be responsible for paying its part, no? Anyway, maybe you could elaborate on this, since to me the idea seems so manifestly unjust, I'd like to know more why you think (morally, legally) it could be justified.

  2. >"Lifting the $75m liability cap needs to happen ASAP"

    I can't really see the harm in leaving it the way it is.

    It's not clear if you realize that the $75m cap has nothing to do with direct cleanup costs but only affects third-party liability for indirect costs such as the harm they do to local tourism-driven businesses. If you realize that, have you thought through the benefits of this sort of cap? The cap only applies if they quickly report the spill to the authorities and make their data available and follow instructions and generally aren't negligent. Remember, laws are to incentivize behavior with respect to the *next* event, not this one - this one's already happened. So imagine that the next leak doesn't start with a dozen deaths and a huge fireball. With some sort of cap in place there's a big financial incentive to report it immediately and thereby draw on official expertise and resources to get it under control quickly. The lower the cap, the bigger the incentive. Without the cap or with a really large cap, the financial incentive is to cover it up for as long as possible and try to contain it in secret. Which isn't the behavior we want to encourage.

    In short, part of the reason for the $75m liability cap is the same as the reason why we don't apply the death penalty for rape. Because sometimes larger punishments encourage objectively worse outcomes than do lighter punishments.

  3. William - for dividends, the question is who should bear the risk that BP won't have enough money, even if the risk is a small one. I'd rather have BP owners bear the risk, and putting the money in an interest-earning escrow account keeps them pretty close to whole, assuming again that BP has sufficient funds.

    For paying costs of the moratorium, I think if BP has an ethical responsibility for some of the corrupted regulation, it can't get outraged that it's the one that was caught first and pays the price while regs are fixed. The best argument for paying all costs of the moratorium, though, is that we can't afford a second spill now, even if the spill isn't caused by negligence or by bad regulation, and that's BP's fault. Another strong argument is that any other rig where BP or the other companies are involved should be under a moratorium, because these companies have shown negligence/outright failure to follow regs, and these companies should be responsible for the costs of the moratorium on those other rigs where they operate.

    Glen - I think it's pretty hard to hide a huge oil spill, so I don't think your incentive argument works.

  4. Sure, it's hard to hide a *huge* oil spill but it seems plausible to hide a smaller one given that oil seeps naturally into the gulf in pretty large amounts constantly even without our help. Even when there aren't any big active spills, there are still oil slicks on the surface and tarballs washing up on beaches here and there. That's how we knew where to drill.

    The other reason to limit indirect liability is to avoid excessive rent-seeking. Even the legitimately harmed are likely to exaggerate their losses if a spill becomes a blank check.

  5. I'm not buying your argument Glen, but even if I did, then I'd structure the law so it only protects from liability smaller spills causing less than X amount of damages, and only if self-reported by the spiller within Y days from the date of the accident.

    As for rent-seeking, your argument is that legitimate and economically-efficient damage payments should be denied because some people might successfully exaggerate. That's not a way to maximize efficiency.


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