The BP and MMS Spill: More of the Story Begins to Emerge

by Mario Rizzo  

Sometimes, amid the yakking and incessant moralization, a fact or two will emerge that is big with meaning. From today’s Wall Street Journal:   

BP has come under heavy fire from Congress and environmental groups for its lack of readiness to handle a worst-case spill. But that criticism has overlooked a key fact: BP was required by federal regulators to base its preparations on Interior Department models that were last updated in 2004.

The government models… assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models, prepared by the Interior Department’s Mineral Management Service, wrong.

The government’s optimistic forecasts reinforced the oil industry’s confidence in its spill-prevention technology, leading to decisions that left both oil companies and the government ill-prepared for the disaster that has unfolded in the Gulf since April 20.

Therefore, it should be clear that this Gulf oil spill is not simply the BP spill but it is the joint result of BP and the Interior Department’s Mineral Management Service’s actions or omissions.

This should also make us think about the relative feasibility of comprehensive regulation and a strict liabilty regime for dealing with this kind of problem. Richard Epstein discussed this recently in the Wall Street Journal.

We want the party with the greater knowledge about the situation to be incentivized to act upon it. The current system opens up all sorts of opportunities to ex ante cozy relationships between regulators and the regulated. Of course, every once in awhile, things don’t work out as expected.

5 thoughts on “The BP and MMS Spill: More of the Story Begins to Emerge

  1. Remarkably, this was not remedied by the Obama administration despite reports on the problems at Mineral Management Service, going back years.

    But it is typical, of course. Regulation is almost always behind the curve.

  2. Why would it matter if BP crafted the models? It appears that the Interior Department endorsed them. At that point, the Interior Department owns them.

    If you act on a friend’s recommendation to buy a stock, who’s at fault if the stock tanks?

  3. Seth: “If you act on a friend’s recommendation to buy a stock, who’s at fault if the stock tanks?”

    Doesn’t that only increase the blame placed upon BP? If the government set the minimum standard, obviously not sufficient, BP was the one who carried the risk…they purchased the stock essentially.

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