StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Defending BP

14 Jun 2010
Posted by Andrew Samwick

Against one charge (and one charge alone).  From today's Washington Post:

The company's position is that it will pay for claims directly associated with the oil in the gulf. The Obama administration, however, ratcheted up the potential scope of BP's liability last week when Interior Secretary Ken Salazar told Congress that the administration wants BP to pay for the lost wages of oil industry workers affected by the moratorium on deep-water drilling. White House press secretary Robert Gibbs, responding to questions from reporters, affirmed Salazar's position: "The moratorium is a result of the accident that BP caused. . . . Those are claims that BP should pay."

On this one charge, I don't think BP should have to pay.  The moratorium was caused by the government imposing a moratorium -- that was the government's choice, not BP's.  BP is responsible for the damage BP causes, not the damage that other deep-water rigs might cause, so it should not be held liable for costs associated with preventing that hypothetical damage.  Why does this matter? Consider this exchange between Salazar and Senator Landrieu of Louisiana:

The offshore drilling industry is reeling from a six-month moratorium on deepwater oil and gas exploration, and a delay in drilling in shallower depths while new safety requirements are implemented. The costs to idled rigs and workers -- as well as their drilling suppliers across the Gulf Coast -- could end up dwarfing the economic damage from the spill itself, said Sen. Mary Landrieu, D-La.

She pressed Salazar to explain how the government -- and BP -- would repair the economic damage to the energy industry if the deepwater drilling ban and the delay on shallow water operations causes "oil service companies to either go out of business or take bankruptcy and lay off thousands of workers."

"Are you going to ask BP to pick up their salaries and make them whole?" Landrieu asked during a Senate Energy and Natural Resources Committee hearing on drilling safety.

"Yes, we will," Salazar said. "BP is responsible (for the spill), and BP is responsible for all of the damages that flow from the oil spill. And these are some of the consequences that flow from that oil spill."

What the government should be doing is making sure that those with the clearest and most direct claims for damages have first crack at whatever will remain of BP's assets.  Adding in these political constituencies with unjustified or at best marginal claims makes that more difficult.

Executive Branch Puts Politics over Rule of Law

Whether BP is responsible for the lost wages of workers in the region seems to me a question for the judicial branch of government, not the executive branch. This is especially the case here where the dispute is over whether BP or the executive branch is the proximate cause of the lost wages. What is most distressing about this is the clear overeaching by the administration by putting domestic politics over the rule of law. That's one of the reasons the UK government is upset, and I don't blame them.

I see the Invisible Hand...and it is working!

Other oil companies who are mired by the moratorium have a pretty straightforward path to follow: someone starts a insurance business to insure against disasters of this type which all drillers/rig operators must carry; and another company develops equipment to prevent disasters, and oil spill recovery equipment, that all companies drilling are proud to show off.

Thus improved, the industry asks the moratorium to be rescinded.

Essentially, a dangerous activity has been revealed as being inappropriately safeguarded; if the industry wants to continue, it needs to prove it is safe. I'm waiting for the proof; for the tests of equipment; for tests of backups; for data showing how this equipment works a mile below sea level, etc.

This is how the invisible hand works. The visible hand is telling the industry to be safer. The invisible hand will now respond with proof.

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