The Big sPill

The BP oil spill continues on and it is hard to know when it will stop. This pictorial is what troubles me.

On the one hand, it demonstrates that the amount of oil is very small relative to total consumption. The likely outcome is the equivalent of 2.6 million tanks of petrol ($182m at today’s prices). To put that in context, the US consumes 20 million barrels each day; so we are talking about 13 percent of a day’s consumption. So the despair about the ‘lost precious’ oil seems unfounded.

On the other hand, 13 percent of day’s consumption in the US can cause this environmental damage. Think about it, the total amount of oil produced in the Gulf of Mexico is 1.3 million barrels per day. So this spill will be two days worth of production. But one rig disaster could cause this and there are 717 rigs in the Gulf. So even a very small probability of a BP like disaster for a given rig makes it almost certain we would have seen this type of event.

What I was not aware of was how great the risk of such a disaster was and continues to be. I wasn’t aware of it because I had never thought about it although I am sure others had. Sadly, that did not include the US government — regardless of the side of politics they are on.

This means that safety regulation is coming and will be coming in a big way for all oil producers. One mitigating factor is that the rate of oil production in the Gulf has been dropping dramatically. All the more reason not to risk disaster in the rush to get the oil out.

And how will that safety regulation take place? Well, I can point anyone who is interested to this paper I wrote with Stephen King a few years back on regulation, insurance and catastrophes.

2 thoughts on “The Big sPill”

  1. Hi Joshua,
    I enjoyed reading the paper you co-authored with Stephen. I haven’t thought this through very carefully but is it possible that firms could still under-price risk even with the optimal combination of mandated precautionary activity and public liability? For example the Deep Horizon case seems to demonstrate a situation where BP should have known that they would be left with massive liabilities (at least compared to the cost of safety measures they could have taken) in the event of a disaster but still considered the probability of a disaster too low to worry about.


  2. Indeed it seems that catastrophes such as this pose an existential threat to the company, making it rational to pay very large mitigation costs.


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