It's the second anniversary of the Macondo well blowout and it's being marked in various ways. The members of President Obama's commission on the disaster have gotten together and issued a report card grading different actors' performance since the spill. [Full disclosure: I was the Commission's communications director, but I have no formal connection to the most recent effort. All views expressed are my own].
The report card makes satisfying reading for me in the sense that at least I have found something that makes my dismal high school transcript look good in comparison. The Executive Branch receives a B, the industy a C+ and Congress a D. Congress's grade is actually not half bad when you consider that basically nothing has happened there since what some would argue was one of the greatest environmental disasters in the nation's history.
At the time of the spill, one of things that I thought was a no-brainer to get amended was the puny liability cap of $75 million contained in the Oil Pollution Control Act of of 1990. The cap hasn't been raised since the act's passage over 20 years ago, so adjusted for inflation it has actually declined significantly over time.
There are a couple of reasons to think that raising the cap might be a good idea. The first is fairness. If a firm isn't liable for all the damages it's caused, someone else will bear the costs, either the direct sufferers or the taxpayers. The second has to do with incentives. It's a pretty straightforward Econ 101 argument: If your downside risk is limited, you're going to be less inclined to invest in safety and risk reduction programs. So liability caps increase risk.
All of this has to be balanced with the potential cost of pricing out smaller firms from entering the market, which is one of the main reasons a cap exists in the first place. My colleagues at RFF have looked at this issue and made the case that the liablity cap should either be lifted in its entirety or set to a value equal to the damages in a worst-case scenario.
I have to admit, I think the incentive argument is overblown. The reputational damages alone from a Macondo-like spill provide a massive incentive to invest in safety. But having the right incentives isn't enough if you have inadequate information or are processing information incorrectly.
So I think the spill had less to do with the Econ 101 story of weak incentives and more to do with a thinking about risk in the wrong way. In other words, a behavioral economics and risk perception problem. The Commission's report identified management failures on the rig that created a situation where the crew was taking on much more risk than it realized:
Information appears to have been excessively compartmentalized at Macondo as a result of poor communication. As a result, individuals often found themselves making critical decisions without a full appreciation for the context in which they were being made (or even without recognition that the decisions were critical).
At an organizational level, the Commission noted:
Though safety was important at Macondo, BP‘s approach was strongest with respect to easily measured personal safety metrics, such as injuries, rather than process safety risks of low-frequency, high-consequence events such as a blowout. BP put safety first on individual employees' performance evaluation forms but the metrics for safety encompassed only a subset of the risks of drilling.
This is something almost as familiar to economists as incentives: the well-known lamp post issue.
By the way, my colleagues at RFF have done a tremendous amount of great work, much of it relied upon by the Commission, on deepwater drilling economics and policy that you can find here.
