U.S. limits BP oil spill liability to $75 million. Madness!

The monumental British Petroleum Gulf of Mexico oil spill has been held aloft by Big Government advocates as a dramatic example of “the failure of the free market.” But is it? Short answer: Hell NO!

[Ex-economist (now partisan commentator) Paul Krugman goes so far as to point to this incident to condemn libertarian thinking — chastising libertarians for trusting government to do the right thing (huh?????). For a description of the Krugman smear, and a short but devastating rebuttal that would embarrass any responsible economist (but certainly not Krugman), read this article by David Boaz. But BEFORE you read the Boaz article, finish this piece by me.]

One critical aspect of this story has largely escaped notice. In a true free market, everyone is responsible for their actions. Tort law deals with liabilities incurred by folks who harm others in the course of business. But the government largely PROTECTS BP and other oil drillers from such liability.

It turns out that — while BP is responsible for CLEANING UP the oil spill — the company’s liability for harming others is limited by federal law to a relatively paltry amount.
Under the Oil Pollution Act of 1990, BP’s liability to fishermen, property owners and other individuals and businesses will be capped at only $75 million for all claims.

From the New York Times:

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, although they are responsible for the cost of containing and cleaning up the spill.

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.

The tax adds roughly one tenth of a percent to the price of oil. Another source of revenue is fines and civil penalties from companies that spill oil.

All claims in excess of $75 million are the responsibility of the government’s Oil Spill Liability Trust Fund, which is woefully underfunded when such an accident occurs. All claims are ultimately the responsibility of the American taxpayer.

When a business’s liability is limited by law, then they make riskier decisions than full liability would allow. For instance, in this case, BP opted for single wall oil pipe casing, as double-wall was “too expensive.” Of course, if full liability is incurred, then the definition of what is “too expensive” changes dramatically.

Bottom line: This oil spill can be directly attributed to market meddling by the government. The accident MIGHT have happened anyway, but the free market with full responsibility for one’s actions both reduces the chances of such an accident, and much better assures that those that are harmed are properly compensated.

BTW, this example of failed government insurance verifies a maxim I’ve recited for years. When government provides “insurance,” it ALWAYS undercharges for the premiums, leaving the taxpayers on the hook for the shortfall. ALWAYS.

Be it crop insurance, hurricane insurance, flood insurance, financial institution insurance (FDIC, FSLIC, etc.), mortgage insurance and — most important — pensions and health care insurance (Medicare, social security, state and local pensions, etc.) — government has ALWAYS underestimated risk and the commensurate cost.

This maxim applies at the local, state, national AND international level. Rare indeed is a government anywhere in the world that does not have an underfunded liability that eventually will cause either reneging on the promises, or higher taxes on the innocent to pay the bills.

The “premiums” for any government insurance scheme are charged based on POLITICAL considerations rather than on actuarial computations. Hence it is long passed time we got the government out of the insurance business. LONG passed.