Although the damages of the oil spillage in the Gulf of Mexico may exceed $50 billion, American law may limit liability to as little as $75 million. Seizing the opportunity of the BP disaster, Senator Menendez (D, NJ) proposed to raise the ceiling to $10 billion.
That may be a step in the right direction but I am left to wonder why there should be any liability limits at all. Liability sustains markets. According to Adam Smith, markets employ self-interest to the benefit of the public good because economic actors bear the costs of their activities.
Limiting liability creates an incentive for irresponsible behavior where corporations can make more money at the cost of third parties and the general public. As a consequence, liability limitations threaten property rights. We may destroy each others property not only with impunity but under the protection of the law.
That makes for a brutish, nasty and short life if you ask me. In the Gulf of Mexico, tens of thousands of fishermen are losing their jobs and their businesses as do hoteliers, gastronomers, and their employees. That is not their fault. They did not soil and pollute the Gulf. BP and its contractors did.
The logic of the market requires that the perpetrators pay for the consequences of their actions. Otherwise, there will not only be injustice but waste.
Murkowski and Inhofe claim that the insurance for $10 billion would be unaffordable for small drillers. Adam Smith might reply: “Tough, then you shouldn’t be in a business that can devastate an entire region of the United States of America.”
Even if you agree with Murkowski and Inhofe about curtailing markets, they are also wrong that insurance would be prohibitive for drillers. It turns out that liability insurance would be a relatively minor part of an oil rigs operating expenses.
NOAA maps over 3,500 rigs in the Gulf of Mexico. If they were all required to obtain $10 billion liability insurance and a disaster like the current one would occur every twenty years, then the annual premium per rig would be $200,000. That includes 40% overhead for the insurance’s costs and profits.
Stick it in a spreadsheet and see for yourself. $200,000 is barely the equivalent of four annual salaries on an oil rig. Of course, once we take smaller insurance cases into account, premiums will increase substantially. However, as a share of operating costs even a million dollars a year remains more affordable than most people’s automobile insurance.
Once we hold businesses accountable by requiring them to carry sufficient insurance, in effect, the insurance companies will protect the environment generally and the Gulf of Mexico particularly. It is not in the interest of the insurance companies to pay for damages. Therefore, the insurance companies will establish uniform minimum safety requirements, which the insurers will enforce with inspections.
Non-compliance will result in loss of insurance, which in turn, ought to suspend the operating license of the drillers.
I suppose that there is some merit in watching out for small businesses but no business should operate at the expense of the public. Being pro-business is not the same as pro-market. When Murkowski and Inhofe carry the water for the oil industry, we need to realize that their actions cost all of us and undermine the institution of the market.
By contrast, abolishing liability shelters and requiring liability insurance harnesses the power of markets on behalf of the environment and the public interest. It will probably protect the public interest and the environment more effectively than any other regulation.