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Commentary

Preventing Another Deepwater Disaster


     
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The tragic April 20 explosion that destroyed BP’s Deepwater Horizon oil platform in the Gulf of Mexico, killing 11 crew members, didn’t happen in a vacuum.

BP clearly is culpable. And the Interior Department’s Minerals Management Service, now known as the Bureau of Ocean Energy Management, Regulation and Enforcement, shares in the blame, for failing to exercise proper oversight.

Many other factors also contributed to the accident, however.

First among them is the important issue of ownership. BP did not own the Deepwater Horizon, but leased it from another company, Transocean. The contractual relationship between Transocean and BP created a classic “principal-agent” problem in which the duties and responsibilities of the lessor, or owner, and lessee, the renter, may not have been spelled out adequately. This is especially true with respect to the rig’s maintenance, testing of its blowout preventer, or the need for an additional backup device, known as a “blind sheer ram,” which may have been able to plug the well after the blowout preventer failed.

Ownership does matter. BP may have been more safety-conscious if it held title to the Deepwater Horizon. Transocean and BP now are at loggerheads. Many lawyers will get rich in the process of determining the extent to which BP and Transocean were negligent.

A second contributor to the disaster is the federal law limiting liability for damages caused by offshore oil spills. Although the $75 million limit can be waived in cases of proven gross negligence (and likely will be in this case), BP probably would have been far more cautious from the beginning if it knew that a major blowout could cost the company billions rather than millions. Even in 2009, with energy prices sharply down from the recession, BP reported a $14 billion profit. The slim prospect of a $75 million liability “hit” may not have even raised an eyebrow.

Third, BP may have been misled in calculating its exposure to risk by MMS computer models that predict the likely path of large-scale oil spills in the Gulf of Mexico. These models, according to news reports, have not been updated since 2004 and have never included scenarios in which blowouts happen in ultra-deep waters, which the Minerals Management Service and oil industry have always considered low-probability events. After all, the last accident of any consequence at an offshore oil well in U.S. waters was more than 40 years ago, in 1969, off the coast of Santa Barbara, Calif.

Fourth, BP and other oil companies have been forced to drill in ultra-deep waters as a result of federal laws and White House and court rulings that limit access to oil reserves in shallower waters and on federally owned land in the continental United States. When blowouts occur on dry land, or in shallower waters, they are relatively easy to cap.

All of these factors may have contributed to the disaster.

But the icing on the cake has been the federal government’s muddled, inept and counterproductive response.

In some ways, President Obama’s handling of the gulf spill has been more derelict than President Bush’s handling of Hurricane Katrina.

There is plenty of blame to go around for the Deepwater Horizon disaster. But don’t jump to the conclusion that the best way to prevent future catastrophes is simply through further regulation.

More regulation will not necessarily work any better than existing regulation. What will work is getting the incentives right—through clearly defined ownership, responsibility and liability—and exploiting proven oil reserves onshore and in shallow waters offshore.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

Taxing ChoiceFrom William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation? Learn More »»






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