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Who Should Pay for the Gulf Oil Spill?

OnPoint

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Who Should Pay for the Gulf Oil Spill?

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Even with BP’s recent announcement of success in capping the oil gusher at the bottom of the Gulf of Mexico, the debate on the risks and benefits of drilling for oil offshore is likely to continue for the foreseeable future. 

Many environmentalists used the incident to argue that offshore drilling should be banned or restricted.  On May 7, 2010, the Department of the Interior announced it was postponing “indefinitely” the preliminary processes toward opening a new offshore drilling lease in the Atlantic, citing the caseload the oil gusher has imposed on the department. Rep. Kendrick Meek and Sen. Bill Nelson, both Florida Democrats, have introduced a bill to suspend “any new exploration, development, and production activities in the outer Continental Shelf, including the conduct of seismic and other geological and geophysical surveys” until such time as the administration has completed an investigation, report, and recommendations concerning the Deepwater Horizon incident. The legislation would also suspend ongoing offshore drilling operations unless and until the Interior Secretary certified the operations as safe.

All the proposed “solutions” mentioned above are likely to be short-lived. Rather than try to arrive at some acceptable level of risk for oil drilling, as determined and enforced by government regulators, the federal government should allow the market to price risk appropriately. That would make the risk-takers internalize the costs for those risks—which, in turn, would make those responsible for disasters bear the costs of cleanup, as well as discourage risky behavior. This paper explores the current federal risk and incentive structures for offshore drilling and offers some alternatives to managing those risks in the future.