Oil Slick

Out where the river broke
The blood wood and the desert oak
Holden wrecks and boiling diesels
Steam in forty five degrees
--Midnight Oil

A couple wks back when crude really started streaming into the Gulf from the British Petroleum (BP) rig, I ran across a snippet claiming that the maximum non-cleanup liability for an oil spill had been set by the US government at $75 million. Surely this was a typo. Damages relating to an oil spill could easily mount into the $billions and will certainly do so in this instance.

But nope. In 1990 the Oil Pollution Act was passed which indeed limited corporate liability to $75 million.

In typical reactive fashion, bureaucrats are now scrambling to raise the limit. I've heard proposals for up to $10 billion in order to 'minimize taxpayer liability'--maybe even retroactive to the present spill.

Perhaps I'm missing something here, but why should there be a limit at all? If a corporation or any other entity violates the property rights of others, then they should be fully liable. If an operator wishes to buy insurance from a private carrier to lay off the risk to another private party, then that is permissible as long as the insurer is capitalized well enough to handle the claim--otherwise liability reverts back to the violator.

But government has no business granting put options that decrease risk for private entities and increase risk for public taxpayers. As in so many other realms, this does nothing but create condtions of moral hazard, where an entity is likely to take more risk because their actions have been insured.

The proper role of government is to enforce property rights to their fullest extent in an uninterested manner.

Ironically, by writing insurance policies in so many different contexts (e.g., banking, unemployment, healthcare, and in the present case environmental), government elevates the very risks that we want to minimize.

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