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    BP Oil Spill Continues, Moral Hazard Ensues

    For more BP logos like this check out GreenPeace UK’s Behind the Logo Flickr album. It is now over 30 days since the Deepwater Horizon oil rig sank. It is the largest environmental catastrophe in recent memory; over those 30 days it has dwarfed the Exxon Valdez spill. BP’s Operation Top Kill is taking place and […]

    bp oil logo

    For more BP logos like this check out GreenPeace UK’s Behind the Logo Flickr album.

    It is now over 30 days since the Deepwater Horizon oil rig sank. It is the largest environmental catastrophe in recent memory; over those 30 days it has dwarfed the Exxon Valdez spill.

    BP’s Operation Top Kill is taking place and we will soon know if it works. CEO Tony Howard has said the operation is “proceeding as we planned”, but it will be another 24 hours before the status of the “leak” is known. Operation Top Kill will pump dense drilling fluids (think cement) into the the well to plug the hole and theoretically stop the oil from escaping.

    The lack of regulation and oversight in the gulf has been known by those paying attention. Goldman Sachs, and other  hedge funds / prop desks shorted, or bet against, the Gulf of Mexico and related drilling operations. For these folks it is no surprise that the Department of the Interior’s Minerals Mining Service failed to inspect the Deepwater Horizon 4 times over the past 16 months. It is mandated through federal regulation that offshore drilling locations undergo inspections every 30 days. Even scarier is that Deepwater Horizon was not considered the riskiest oil rig in the gulf (pers comm with financial analysts). In a twisted irony, on the day of the explosion BP was celebrating the Horizon’s stellar safety record.

    Couple this lack of oversight with an oil spill liability cap of $75 Million and there’s plenty reason for the indolent drilling mindset we’re seeing. The U.S. government is allowing offshore drilling companies to play the odds, with a potential cap on the losses.

    This cap was enacted after the Exxon Valdez spill as part of the Oil Pollution Act in 1990. It is in a mind boggling moral hazard league of its own. Via CNN (emphasis our own):

    The act sates that company that owns the oil in any spill must pay for all clean-up costs, as BP, the owner of the Gulf oil well that exploded last month, is currently doing.

    But the act also says the amount companies may be responsible for in damages – things like lost days for fishermen or money to rehabilitate wetlands after the oil is removed – may be capped at $75 million, providing the company didn’t violate any regulations in the lead up to a spill. Damages in excess of $75 million would be paid for by the government with money from a tax on oil designed for just such a purpose.

    In simple terms this cap can insulate risk from drilling companies–many of which are publicly traded and EPS (earnings per share) is the driving force. With this cap and capitalistic mindset it comes as no surprise that oil drilling companies cut corners, like using a cheaper and riskier well casing. It makes simple economic ‘sense’. Thankfully BP has publicly said they will not use the cap as a safety net; however the moral hazard still exists for the industry.

    At the same time we have our government’s current actions that could certainly be better directed. 18 Senators are fixated on a special dividend Transocean (RIG) paid out two months before the disaster on February 16th. Is this really the best time spent for our justice department at this time? Lest we forget that hole underground hemorrhaging oil into the ocean. The latency and lack of action from the U.S. government is astounding.

    Ultimately I am disgusted with BP’s judgement and handling of the situation. I am equally upset with our own government. When it’s all said and done this entire catastrophe and it’s ‘resolution’ comes down to dollar signs. The sad reality is that no amount of money can repair the damage that has already been done.  BP’s skewed economic and operational sense will not only kill millions of animals, but cost coastal towns jobs and millions of dollars in lost revenue.

    10 Comments

    1. Nicholas Sadaka
      May 27, 2010 at 8:34 AM | Permalink

      This catastrophic situation is just absolutely depressing. The way we've treated this amazingly fantastic planet is just disgusting. Another rare time that I'm at a complete loss for words…just an absolutely crushing situation.

    2. Gordon Gekko
      May 27, 2010 at 11:31 AM | Permalink

      It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses.

    3. dont let 1 spoil it all
      May 27, 2010 at 4:11 PM | Permalink

      The risk to get that oil and help end our country's dependence on the middle east, Chinese, etc was worth it. If we dont drill they OWN us.

    4. JB
      May 27, 2010 at 4:46 PM | Permalink

      They already own us… We ourselves, our government, Walmart & many others sold us out to China long ago. As for the Mideast & oil – after nearly 100 years of driving automobiles the best way we can figure out to power them is to burn a prehistoric soup of plants and animals? We need some type of Manhattan Project for energy!

    5. Drew
      May 27, 2010 at 8:30 PM | Permalink

      We're (as in an American company) not actually drilling. BP stands for British Patroleum. It's a foreign company drilling in a leased area selling it back to us. This isn't helping us become less dependent on a foreign country. We're only really getting discounted oil in the taxes/leasing that BP pays.

      I'm not sure how letting a foreign company drill in American territory helps us with dependence on China? China doesn't produce enough of it's energy domestically to meet it's need either. It buys a fair bit like we do. Our dependence on China is for cheap manufacturing labor.

      China still owns us regarless (in part) through treasure bills.

    6. Joost's reef
      May 27, 2010 at 10:39 PM | Permalink

      The US owes 895.2 BILLION to China… 784.9 to Japan…
      They OWN US, destroying the earth isn't going to change anything.

      http://www.treas.gov/tic/mfh.txt

    7. Gvr1
      June 20, 2010 at 11:41 AM | Permalink

      They already own us. We just aren’t aware of it enough as you clearly demonstrate.

    8. Gvr1
      June 20, 2010 at 6:41 AM | Permalink

      They already own us. We just aren't aware of it enough as you clearly demonstrate.

    9. Gvr1
      June 20, 2010 at 11:45 AM | Permalink

      Manhattan Project? You mean nuclear? Too bad we absolutely buried our asses into the ground after Three Mile Island. Now the French EXPORT energy to other countries because they have so much nuclear fuel to spare. We should never have stopped our nuclear energy program. Because the same soup of plants and animals also powers our factories (the few we have left) and a host of other industries who exist on the soup. Of course, we can always build another turbine to solve our problems.

    10. Gvr1
      June 20, 2010 at 6:45 AM | Permalink

      Manhattan Project? You mean nuclear? Too bad we absolutely buried our asses into the ground after Three Mile Island. Now the French EXPORT energy to other countries because they have so much nuclear fuel to spare. We should never have stopped our nuclear energy program. Because the same soup of plants and animals also powers our factories (the few we have left) and a host of other industries who exist on the soup. Of course, we can always build another turbine to solve our problems.

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