Additional Thoughts on BP

When news of the leak at the BP operated Deepwater Horizon broke, many blamed corporate greed as the prime cause of the disaster.  I wrote what I still consider the correct economic response concerning greed: it is a universal constant (see "BP a Bad Corporate Actor?," "Reid on Greed," and "The Oil Spill and the Government).  I also expressed doubt over the government's ability to effectively regulate oil exploration, a doubt that I maintain.  As I continue to read about the accident, I have rethought an initial conclusion. 

First and most importantly, BP does appear to a bad corporate actor, either through incompetence or intentional neglect.  Because BP has always said that they would compensate all legitimate claims, I would tentatively conclude that BP is simply incompetent.  (HT Econbrowser)  The Christian Science Monitor ("Five crucial moves by BP: Did they lead to Gulf oil spill disaster?") list five crucial drilling decisions all made to cut costs that BP made that contributed to the rig failure as determined by the Democrats leadership on the House Energy and Commerce Committee. The steps include

1.  Well design

2.  Insufficient "centralizers"

3.  Failure to run a key test

4.  Improper mud circulation

5.  Failure to secure the wellhead.

James Hamilton at Econbrowser ("More on BP") adds a sixth error, the lack of a standard failsafe device, the acoustic shut-off switch.

If BP is a bad corporate actor rather just the unlucky "victim" of an unforeseeable event then the economic consequences should apply to them and not more efficient corporations.  What type of regulation would punish BP and protect other oil companies, consumers of oil products, and third parties whose livelihoods have been impacted by the spill?  BP's feet should be held to fire to assure that they do pay all legitimate claims through the legal system.  I still believe that further regulation by the federal government would be redundant and perhaps counterproductive.  Elected officials tend to overreact to low probability, high cost events. The government should not decide what constitutes the best practices.  If they do, those practices will be cemented in place in an industry that had previously seen technological advances that have allowed safer drilling at deeper sights.  I would also remove caps on damages.  Although the caps can be exceeded for negligence or misconduct oil companies would have better incentive to internalize societal costs of oil spills if the caps were removed.