BP and Moral Hazard

Rumors have it that earlier this week President Obama yelled at his aides, "Plug the damn hole!"  It's no wonder that Obama wants the hole in the rig plugged as it is not only expelling oil but also dragging down his poll numbers.  To use Top Kill or not to use Top Kill, to plug the hole or to encass the pipe in cement, to allow BP to fix the problem or nationalize the effort, these questions have been debated nonstop for the last several weeks.  Even if Obama had invented a cure for cancer and instituted Pizza Party Fridays it seems that all the media would talk about would be the leak.

Of course there is good reason to talk about the leak.  Some reports say the damage might exceed that of the Exxon-Valdez.  Many more say that this will destroy most agriculture along the Louisiana shoreline.  You can't watch the evening news without seeing video of an oil soaked bird.  Yes, this will be something that the region will be dealing with for the next few years.

Fortunately for Obama, BP is getting most of the blame.  That blame is rightfully deserved, BP certified that the rig was sound and it was not.  A Plan B was not in place in case something went wrong.  Eleven men died and the Louisiana shoreline will suffer as a result.  BP should make full restitution.

However, because of government, BP does not have to.  The government sets a statutory cap of 75 million dollars on oil spills through the Oil Pollution Act.  BP has said that they will pay more than the cap since not doing so would have huge PR implications on their business.  Also with pundits like James Carville demanding the Department of Justice indict BP representatives on crimes, the oil company is probably more than happy to pony up a few extra dollars.

The media is running with Carville's lines and demanding a criminal investigation be started but isn't this a matter of negligence, not malevalence?  BP had no motive to intentionally cause the spill, and all the reasons in the world not to.  Even if they scaled down safety is that not a result from having their liability capped?  If you have less to lose, you will spend less to avoid losing it.  The negligence is not even merely their own, the Obama administration gave the very same rig that exploded a safety award last year.  The articles goes on to say that even though the government agency responsible for safety requires inspections every month, the agency had "fell well short of its own policy."  The government's statement is proof in action that vagueness rules where specificity fears to tread.

Obama even said he took "full responsibility" for plugging the leak.
The truth of the matter is Obama didn't have anything to do with the leak.  It was an unholy alliance of big government and big business.  When gains are privatized and losses are socialized, it creates a situation known as moral hazard.  Moral hazard prevents the prudence that might normally temper a company's activity and make it act responsibly.  After all, if you keep your winnings and your losses are subsidized, is not the proper route to go for broke?  A free market may not have prevented this accident but we would not have to rely on BP's public relations department to accept financial responsibility for the spill. 

But even after the spill, capitalism works its magic.  BP will pay millions in damages and will probably upgrade their safety.  If they do not, they will fail and the company will go under or be bought out by a larger, safer company.  As for the government agency that failed, it will receive more money and more personnel.  Talk about moral hazard.