Lift the cap

I can’t help thinking that a major contributing factor to the disaster is the $75 million cap on oil spill damages. In 1990, Congress, in its wisdom, decided that the taxpayer — not the oil driller — should be responsible for most of the cost of oil spill cleanup. The separation of risk and profit has very predictable consequences that we are seeing all-too-frequently today. (And we’re going to see it even more with the entrenchment of the bailout system.)

When risk and profit are properly aligned in competitive markets, government regulators are simply meddlers. In such cases I would laud them for going along with whatever private enterprise wants to do. (It would be better yet if such regulators simply didn’t exist.) But once the taxpayer is on the hook for the risk of a private enterprise, the taxpayers are depending on those regulators to manage the risk. In this case, the regulators failed miserably.

So I support the proposal to remove the cap on oil spill damages. Some Republicans have objected that doing so would drive small drilling companies out of business. If that is so, then oil drilling has a natural economy of scale and the small players just shouldn’t be in the business.

But I’m not convinced it is so. Removing the cap may make it impossible for drillers to self-insure, but that doesn’t mean that it they couldn’t buy insurance. Today (as far as I know), there is no one who will insure against that sort of risk in the United States. And why would there be, since the taxpayers have assumed that risk? But, if oil drilling is a workable business for small companies apart from the risk, then insuring them ought to be a profitable business.

POSTSCRIPT: This is not to say that I’ll support whatever bill the Democrats put forward to lift the cap. Knowing them, I’m sure they’ll find a way to make it unacceptable.

POST-POSTSCRIPT: Another major contributing factor to the disaster are the restrictions on oil drilling on land that have forced oil exploration so far off-shore. We ought to be pumping the oil that’s safe and easy first before moving deep into the ocean.

(Previous post.)

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