Did a government program not only lessen the incentive for oil companies to safeguard against oil spills but also add to the price of oil at the same time? This may be the case given the facts spelled out in a recent New York Times article.
The article notes the following:
The federal government has a large rainy day fund on hand to help mitigate the expanding damage on the Gulf Coast, generated by a tax on oil for use in cases like the Deepwater Horizon spill. … Under the law that established the reserve, called the Oil Spill Liability Trust Fund, the operators of the offshore rig face no more than $75 million in liability for the damages that might be claimed by individuals, companies or the government. The fund was set up by Congress in 1986 but not financed until after the Exxon Valdez ran aground in Alaska in 1989. In exchange for the limits on liability, the Oil Pollution Act of 1990 imposed a tax on oil companies, currently 8 cents for every barrel they produce in this country or import.
To what degree does this “rainy day” fund actually represent another example of the unintended consequences of government policies? Could the guaranteed limit on liability for oil companies actually decrease their financial incentive to avoid oil spills like the recent BP incident in the Gulf of Mexico?
Such a fund might also represent an example of the cozy relationship between an industry and its regulators. Such regulatory “capture” is a noted problem in the implementation of public policy.
[picapp align=”left” wrap=”true” link=”term=bp&iid=8703773″ src=”b/2/4/d/Massive_Oil_Slick_8f96.jpg?adImageId=12758063&imageId=8703773″ width=”198″ height=”297″ /]In this case, to what extent could it be argued that the oil companies were successful in decreasing the costs of their mistakes by footing the bill to their consumers through a government tax? The 8-cents tax on every barrel is in the end, as most economists would tell you, passed on to the consumers.
So, will BP foot the bill alone, or will, thanks to a government policy, consumers pitch in? This is just something to think about when you hear the Obama administration arguing that BP will have to ultimately pay the bill for the spill.
And perhaps more importantly, would BP have acted in a more responsible manner beforehand to avoid this spill had this government disincentive not existed? Would that have been enough to avoid the spill? We may never know.
* The preceding was originally posted on the Young Americans for Liberty blog.