The Wall Street Journal Versus Moral Responsibility

In arguing against lifting liability caps on offshore drilling, the Wall Street Journal is arguing against both moral responsibility and the free market.

The Wall Street Journal, in an editorial about climate policy, argues against responsibility and free-market policies.

As for the Senate, Mr. Reid’s new nonclimate energy bill is all about trying to link Republicans to Big Oil. With BP as the corporate villain, Democrats are proposing to lift the $75 million oil spill liability cap for economic damages to infinity. And to do so retroactively on all rig leases.

This is a bad-faith exercise. Mr. Reid knows that Democrats like Mary Landrieu of Louisiana have criticized Democratic proposals to set even a $10 billion cap, while Senate Republicans have proposed giving regulators the power to raise the cap based on specific circumstances. Mr. Reid’s proposal is designed to throw a bouquet to the trial bar and undermine any grounds for compromise so Democrats can have an election issue.

The main effect, if it passed, would be to push the small- and mid-sized producers that account for most domestic drilling out of the Gulf, regardless of their safety records. Only the supermajors would be able to afford insurance under the unlimited liability regime.

This is utter nonsense. It’s a fundamental principle of American jurisprudence that bad actors should suffer the consequences of their negligence and/or willful bad acts. The cap on liability for oil spills is an abrogation of that principle which forces the victims of negligence to suffer the economic consequences without redress. It’s one thing to limit punitive damages–that’s defensible in certain instances–however, it’s quite another to limit liability on actual damages that the oil companies cause.

The $75 million cap on liability creates a moral hazard problem, especially since, as we’ve learned with the recent oil spill in the Gulf, the economic damages of a large spill can far outstrip such a paltry amount in short order. (I’m willing to predict that as soon as the spill is shut down for good and the oil spill stops making headlines, BP’s going renege on their promise to pay out claims beyond the cap.)

Furthermore, the argument that smaller rigs won’t be able to afford insurance under a lifting of the liability cap is, as Jonathan Chait rightly points out, anti-free-market.

The Journal’s position is that this is no fair — not every oil company can afford to clean up the cost of their oil spills! So the government has to subsidize offshore drilling by promising to cover the cost of any cleanup beyond a given size.

The justification for this corporate subsidy is that even oil firms with great safety records won’t be able to afford the insurance. But why not? If they have great safety records,then insurance companies ought to be willing to cover them at some price, right? And that price ought to reflect the likelihood and size of a potential spill. In other words, the free market seems capable of determining the risk level and putting a price on it. And if insurance companies won’t cover that risk at a price small oil firms can afford, that means the risk is too high.

There is a time and a place for government intervention in the market. But protecting companies from the consequences of their negligent acts isn’t one of them.

Now, don’t get me wrong. I don’t oppose offshore drilling, and I think that making the liability cap retroactive would be a bad idea if it’s implemented immediately rather than being phased in over a period of time. But a de facto subsidy for offshore drilling–which is what the liability cap is–is a bad idea that needs to go.

FILED UNDER: Economics and Business, Law and the Courts, Oil Spill, US Politics, ,
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. Michael Reynolds says:

    The worship of the “free market” is a shuck.  Conservatives worship money, not the free market.  If it’s a choice between a free market and the interests of the rich, the GOP always backs the rich.

  2. Tim says:

    Well, all I can say is: Thank God the oil companies who pay these exorbitant sums have no way of passing that cost on to the consumer, otherwise, we consumers might have to pay it for them. And, of course, they can’t possibly go out of business at the first sign of an oil spill, and stick the citizens with the bill, because we know that oil unpaid for by an oil company cannot come to shore. (sarcasm) I had to point out the sarcasm, because it might get lost on you.

  3. sam says:

    It got lost on me. What the hell are you on about? This sentence makes no sense at all:
     
    “And, of course, they can’t possibly go out of business at the first sign of an oil spill, and stick the citizens with the bill, because we know that oil unpaid for by an oil company cannot come to shore.”

  4. john personna says:

    I think you are right that this is not at all a free market situation.  We’ve got liability caps and oil reservoir depletion tax credits, to name just two.
     
    You could argue though that it is just our Industrial Policy.  That’s not something conservatives normally like, but when it comes to oil they seem to support it point by point.  We give oil companies both special inducements and special protections.
     
    We do it because we (as a nation) love that oil.

  5. Pete says:

    Michael, conservatives may worship money which is a decidedly normal human trait, but liberals worship government which is a decidedly human failing. There are more wealthy liberals in Congress than conservatives and the Clintons have become mega rich simply by clawing their way to power in government. Of course some liberals like Kerry and Kennedy prostitute themselves to become rich. Your assertion is specious.

  6. sam says:

    One thing needs to be pointed out, though: The $75 million cap applies only to suits and damages brought and awarded in federal court. There is no cap, federal anyway, on damages arising out of tort suits brought in state courts, though, of course, damages in those cases might be limited by state law.
    And if I read the law correctly, the $75 million cap does not apply if gross negligence or willful misconduct of the operator is involved. See,
    TITLE 33–NAVIGATION AND NAVIGABLE WATERS

    CHAPTER 40–OIL POLLUTION

    SUBCHAPTER I–OIL POLLUTION LIABILITY AND COMPENSATION

    Sec. 2704. Limits on liability
    (c) Exceptions

    (1) Acts of responsible party

    (http://frwebgate.access.gpo.gov/cgi-bin/usc.cgi?ACTION=RETRIEVE&FILE=$$xa$$busc33.wais&start=4683182&SIZE=13816&TYPE=TEXT)
     
    None of the foregoing is meant to support an argument for not raising the liability cap. As was pointed out, if that part of the damages which include costs of the federal government in the cleanup exceed the cap, the taxpayers are on the hook for the overage.

  7. john personna says:

    Pete, humans have an individual and a group nature.  Conservatives think they are miles apart from Liberals, as they emphasize the individual part and the other guys emphasize the group.  If you step back, the differences are much less than the perception.
     
    I mean, conservatives will go all “group nature” when it’s a border patrol, right?

  8. sam says:

    “As was pointed out, if that part of the damages which include costs of the federal government in the cleanup exceed the cap, the taxpayers are on the hook for the overage.” Assuming no negligence or misconduct, of course.

  9. Dave Schuler says:

    No surprise.  The WSJ’s editorial position isn’t pro-market.  It’s pro-Big Business.

  10. James Joyner says:

    It may well be that the event is so rare and the potential consequences so devastating that this is a case where private companies won’t bother to insure.  There’s probably no way to leverage against an exceedingly rare risk of a $100 billion payout.
    Maybe it’s a case, as with flood insurance, where the government steps in as the insurer of last resort.
    But I agree:  However it’s financed, the companies making extraordinary profits on drilling ought pay for the risk in some manner.

  11. steve says:

    The costs will probably be passed on to the consumer, but that is what should happen. We should pay the true costs of drilling for the oil. In a true free market, the individuals making these decisions would also have personal assets at risk.
     
    Steve

  12. PD Shaw says:

    Negligence has nothing to do with this.  The damages that are capped are from a no-fault liability scheme.

  13. PD Shaw says:

    sam is partly correct.  The caps also don’t apply if BP violated federal regulations, including the permits issued pursuant to them.

  14. PD Shaw says:

    Correction:  sam is partly correct.

  15. PD Shaw says:

    Hmmm. . . The strikethrough of the word “partly” did not work for me.  Anyway I believe sam is correct.

  16. floyd says:

    Alex;
    Government interference was frontloaded by issuing permits to drill.
    This obviates  your argument.

     The limits are part of a contract with those in control of the drill site,[the government]
    thereby legitimately leaving them holding the residual bag.
    If no contract was required , full  liability would be attached to the drilling operation. 

  17. tom p says:

    “Free Markets”….

    HA HA HA hahahahahahheeheheehee….

    Alex, you are a laugh a minute. There never was such a thing as a “free market”.

  18. Juneau says:

    Furthermore, the argument that smaller rigs won’t be able to afford insurance under a lifting of the liability cap is, as Jonathan Chait rightly points out, anti-free-market.
    Quick flash for the author and Jonathan Chait:  The cost of making the government happy is not a free-market principle.  Neither is the ability to pay insurance premium costs which are artificially inflated, i.e. have no direct relation to business operating costs but, rather, are related to the vicarious whims, fancies, and fees of what government deems “appropriate.  

    Making the government happy is not part of the free-market calculation.  It is the exact opposite.

  19. Juneau says:

    @ Michael Reynolds

    Conservatives worship money, not the free market.  If it’s a choice between a free market and the interests of the rich, the GOP always backs the rich

    Yeah.  Always.  Sure.  Forget about all the working stiffs who hold shares in those companies thrugh their 401Ks and retirement plans.  They don’t benefit at all.   It’s the rich who are benefiting from the success, I tell you!