Senate Plan to Prevent Oil Spill Should Eliminate Government Cap on Liability

Washington, D.C., July 30, 2010—The Senate is preparing to vote next week on a bill aimed at preventing future BP-style oil spills—a plan that could include draconian drilling bans and restrictions. A new report from the Competitive Enterprise Institute suggests one reform that could make a difference in future oil spill risk: elimination of the government-imposed cap on liability.

“Government has encouraged risky behavior on the part of oil companies by lessening the potential cost to companies of a disaster like the BP oil spill,” said James Plummer, CEI Adjunct Analyst and author of the CEI OnPoint, “Who Should Pay for the Gulf Oil Spill? Liability and Incentive Issues Raised the by Deepwater Horizon Incident.”

The Oil Pollution Act of 1990 set a liability cap of $75 million for responsible parties on certain kinds of damage caused by oil spills. While the White House and many in Congress are supporting legislation to raise the cap or restrict drilling, the better solution would be to keep companies on the hook for clean up.

“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,” said Plummer.  “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.”

> View the CEI OnPoint, “Who Should Pay for the Gulf Oil Spill? Liability and Incentive Issues Raised the by Deepwater Horizon Incident.”