How Much Should We Spend to Avoid Oil Spills (and was Joe Barton Right?)
This is Gary Becker, writing at The Becker-Posner blog:
The chief executive of BP, Tony Hayward, claimed that an accident of the magnitude of this one had “a one in a million” chance… Suppose that his estimate is correct, in the sense that the probability of an accident of this magnitude in any year was one in a million. If the accident ends up causing a $100 billion worth of damages to fish, beaches, loss of lives, and in other ways, the discounted value (at a 5% interest rate) of this expected cost over time would then be approximately 20 times $100 billion divided by one million, or $2 million. A risk neutral BP would rationally not want to spend more than that amount to prevent such a leak from happening…
BP should have expected that it would be held liable in court for the damages caused by leaks from its deep water drilling. However, it could hardly have expected to be liable for new types of claims, such as the one proposed by the Obama administration that BP should be responsible for the wages lost by workers who are laid off as a result of the six month moratorium proclaimed by the president on all drilling off the American coast. It is ironic that Obama had on March 31st, just a few weeks before the Deepwater Horizon oil spill in April, proposed an extension of offshore drilling. Nevertheless, if the Deepwater leak alerted us to greater risks of offshore drilling than had been realized, BP should not be punished for (inadvertently) providing this useful information.
It’s easy to scapegoat firms like BP for being partially responsible for oil spills like occurred 50 miles off the coast of Louisiana (they were not the rig operator). However, this creates a dilemma. Experts say that virtually all major oil discoveries will be found offshore in the future. In other words, if we value the convenience of driving personal cars; and have economical transportation, there is no choice but to search for oil offshore.
Consider this: three-quarters of all Americans who commute to work (109 million) do so alone in a car. Around 15.4 million carpool. Just over 12 million walk, bicycle or take public transportation. Yet Transportation Secretary, Ray LaHood, has remarked that the Obama Administration wants to “coerce people out of their cars” (he later softened the term to “coax” or lure”). We obviously are dependent on the car – partly because they’re popular and convenient.
It has often been said that Social Security, Medicare and the home mortgage deduction are immune from Congressional meddling. How come efforts to attack offshore drilling and attempts to curtail driving are not equally off limits when it comes to political attacks? I can think of no other issue that Americans value more than personal mobility.
It’s going to cost more to drive. I think it’s safe to assume that the Obama adminstration sees this as a nice little benefit to the whole oil spill crisis.
I wonder what Richard Feynman would have said about Hayward’s “one in a million” figure. Some may recall Feynman’s remarks summarizing the Challenger disaster investigation, in which he placed the odds of another catastrophic Shuttle failure at around 1 in 100.
…That’s 1 in 100 during a given mission, of course.
With the caveat that I know nothing about deep sea oil drilling, I ask: Shouldn’t British Petroleum and other oil companies insure against the risk of disasters like the Deepwater Horizon? Doesn’t Lloyds of London or some other big insurance outfit sell a policy along those lines?
When a contractor does work on my house or in my yard, I always make sure he is insured and bonded. In the unlikely event he sets my house on fire or accidentally opens a sinkhole in my yard (or the President declares a 6-month moratorium on mowing my lawn), we are both protected by the insurance.
It’s not that it is a one in a million chance, it’s that BP went on the cheap on parts that cost relatively little. The Blow out preventer, Its safety precautions. It overlooked warning signs.
On land, there used to be manual valves beneath the Blowout preventer. Just because the well is underwater, why wasn’t there a valve in place. Even those little underwater robot subs can close a manual valve.
BP is responsible, not because it the victim of a one in a million chance, but because of simple negligence to not take reasonable precautions and using inferior equipment.