BP Oil Spill – Property Rights, Moral Hazard, and the Constitution

By now, nearly everyone is aware of the disastrous BP oil spill in the Gulf of Mexico.  An oil rig exploded, causing the death of 11 workers, and resulting in a leak of about 5,000 barrels of oil a day. In time, it is likely that this will become the worst oil disaster in history, trumping the Exxon Valdez spill of 1989. It is also being reported that the economic damages to coastal Gulf states, such as Louisiana, will be unprecedented.Oil Spill - Reuters

There is bad news for anyone who has been and will be affected by the BP spill.  It turns out the federal government passed a law about 20 years ago that essentially limited the liability for damages resultant an oil spill to $75 million. Analysts are reporting damages will likely total in the billions. Although BP has said they will “pay all legitimate claims”, they simply may not be obligated to pay any more than $75 million unless they explicitly agree to it. No one can say what they will do until this is all resolved.

As if they should have a choice!  Our government was founded on the defense of property rights. Sadly, we have received a steady dose of environmental disasters, with no end in sight, and there seems to be a correlation with the decline of property rights.

How is Congress able to get away with this time and again, while they walk the same halls that Adams and Jefferson once did? There is an absolutely common sense property rights argument that should be applied to the whole matter – You can’t dump garbage on your neighbors lawn. Likewise, you can’t dump oil all over the ocean and coast and not expect to pay to clean it up and pay full damages.

This is another case of the Federal Government using powers it does not have under the constitution to violate property rights, instead of upholding them. There will undoubtedly be calls for more regulation, and there already are. We’ve heard this before! More regulations are useless and serve to distort the market which grows our economy.  Regulations are ways for politicians to pick winners and losers in the marketplace, and often reward failure while stifling innovators.

There is a deeper problem with these so called, “government solutions”.  How can you put a limit on what an oil company will owe as the result of a spill, and still expect them to maintain the highest possible standards for safety?  Obviously, nobody at BP wanted an oil spill to occur.  But if the government has the power to shield a company, no matter what industry or circumstance, from risk, they will still never act as cautiously as they would if they were 100% exposed to risk.

It’s almost like saying here, put a whole year’s salary on one hand of blackjack, but if you lose you’ll only have to pay 40%. Some might take that bet, because the odds are in their favor for a big gain, and a much less substantial loss.  If they stood to lose it all, there is little chance the average person would act that foolishly.

Moral hazard occurs when governments shield businesses from risk, and it causes them to behave differently than they would have otherwise, if they were fully exposed to risk. Simply put, if the government didn’t have their back, BP (and other oil companies) would have a lot more incentive to make sure something like this could never happen.  The potential for financial ruin would be too great to ignore.  The most stringent standards for safety and quality would be met and exceeded, and no expense would be spared, because who could stand to pay the full damages of a major oil disaster?

Right now we have a situation where BP can refuse to pay any more than $75 million dollars beyond the cost of the cleanup itself.  It seems all of those fisherman who will now be unable to make a living in formerly clean seas are out of luck, because of an unconstitutional law passed by the government 20 years ago.  Now some in the government want to pass an ex post facto law, again explicitly unconstitutional, to force BP to pay up to $10 Billion. Where do they get these numbers?  That’s what I want to know.

Losers in all of this are not only BP and the people directly effected by this disaster, but the constitution and the people as well.  Instead of admitting that the framers of the constitution were correct in not delegating powers to impose such pandering special-interest measures, the establishment in Washington is attempting an even greater level of disrespect for the constitution by proposing a raise of the debt liability to $10 Billion, after the fact.  The people are forced to suffer these distortions of the constitution, and it does serve to diminish our Republic.  These types of things weaken our constitution and can render it useless over time.  Sadly, we’re at a point where it seems most of the things that government is doing are unconstitutional.

I think a better question would be, why don’t we send this law to the supreme court and see if it’s unconstitutional in the first place?  At the very least, government should stop abusing their powers and inventing new ones to cater to favored constituencies, and start exercising their duty to enforce contracts and property rights. Perhaps the newly re-discovered defense of property rights would pervade other areas of our society, and we would all be a lot better off.

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6 Comments.

  1. An update on this: TransOcean, the owner of the exploded oil rig, has petitioned for a limited liability of $27 million. http://www.newsinferno.com/archives/20361

    They are clearly taking an opportunity to use the law to their advantage (which is in their right, ethical or not): apparently, oil rigs are classified as maritime vessels, and the following law (US CODE: Title 46a,183) states:

    The liability of the owner of any vessel, whether American or foreign, for any embezzlement, loss, or destruction by any person of any property, goods, or merchandise shipped or put on board of such vessel, or for any loss, damage, or injury by collision, or for any act, matter, or thing, loss, damage, or forfeiture, done, occasioned, or incurred, without the privity or knowledge of such owner or owners, shall not, except in the cases provided for in subsection (b) of this section, exceed the amount or value of the interest of such owner in such vessel, and her freight then pending.

    (from http://www.law.cornell.edu/uscode/html/uscode46a/usc_sec_46a_00000183—-000-.html)

    Apparently the value of the destroyed oil rig is just under $27 million. This is an unusual argument — akin to your insurance company giving you $50 for your $50,000 BMW because it was totaled and its value as scrap is only $50.

  2. Thanks for the update. As predicted, the law is being leveraged to avoid compensating those who will be affected by the spill.

    A question: Should it be the role of government to protect innocent parties from damages, or to insulate responsible parties from liability?

  3. The former, of course — provided the law is clearly defined and limited in scope to activities which violate someone’s right to life, liberty, or property. Limitation of liabilities should only be done to mitigate frivolous litigation.

  4. Great information I have Tweeted this, I will keep a eye on your other posts. Ohh what do you all think about the about oil spill?

  5. The scary thing for me is that people need to start to realize that bad things happen and that government tends to make bad things worse. Politicians are trying to bully British Petroleum into ignoring their liability limits by embarrassing them in the media and putting them in a no win situation. The law should be the law and in Washington’s typical fashion, many of the culprits that decided to reduce the liablity like Biden and Schumer are the one’s leading the charge. BP does have a fiduciary duty to their taxpayers and it is not fair to change the rules after he fact. Moreover, changing the law now and making it retroactive is a classic “ex post facto law”.

  6. Correction:

    BP has fiduciary duty to its shareholders (not taxpayers).

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