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Brooks Wilson's Economics Blog: Oil Spill Risk Analysis

Friday, July 2, 2010

Oil Spill Risk Analysis

Neil King Jr. and Keith Johnson wrote an interesting article about the Mineral Management Service, the regulatory agency charged with overseeing offshore oil drilling (Wall Street Journal, "BP Relied on Faulty U.S. Data").  The Mineral Management Service requires oil companies to file contingency plans (oil spill risk analysis) for oil spills based on the government's models that showed little oil would reach shore even in a worst-case scenario.
BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one.

The government models, which oil companies are required to use but have not been updated since 2004, 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 oil companies may have bought into the competency of the MMS's scientists.
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.
Although the oil companies may have believed the ocean flow models, some other scientists did not.
The government's spill models have been at the center of years of debate among scientists that study oil spills. One study in the late 1990s used satellites to track almost 100 "drifters" set loose in the Gulf of Mexico to mimic floating oil. The paths of the drifting objects were compared with what the model predicted. After 30 days, the average discrepancy was 300 miles. "We have observed differences of some magnitude," a 2003 paper said, summarizing the study.
Scientists at the Mineral Management Services remained confident of their model's prediction even as they accepted other's findings and attempted to update their models.
But the researchers, led by a team of scientists from the Interior Department's MMS, concluded that the results were "neither surprising nor disappointing," and "do not negate the utility" of the model. The scientists said the findings could lead to improvements in oil-spill modeling.
The inaccuracy of the Service's model and their requirement that oil companies use these projections are typical of inefficiencies of regulatory agencies and only add to doubts about the ability of regulation to limit catastrophic events.  They could have required the oil companies to use the MMS's oil flow projections as a base, allowing the companies to offer plans for more costly outcomes than projected by the government.

The oil companies too may have failed to plan for worst-case scenarios.  The fear of losing tens of billions in a worst-case scenario should have prompted them to have internal contingency plans that differed from the government's plans.  Maybe all oil companies with the exception of BP have such plans.  If not, why not?  Several possible explanations come to mind.  They, like many in today's society, could have believed in the omniscience of government and that government scientists had an absolute advantage in measuring the impact of a spill.  I could be persuaded that there are economies of scale and scope in developing the models and that the government, which also studies climate change, fisheries, and other subjects that might benefit from ocean flow models.  They may have believed that their liability was capped at $75 million.  If this is so, bad regulation limiting liability through law is a problem and, given the oil industry's deep pockets to influence legislation, will remain one.  The Deepwater Horizon oil spill is truly tragic and it is not possible to avoid the consequences of the occasional worst-case scenario. 


  1. Developing plans for what may happen is never an easy task, especially without many former experiences from which to draw ideas. This makes me think of the number of hurricanes that cross into the gulf waters, and how we have some very good tracking information from many years of hurricanes. Yet, every new hurricane, has its own path. Similar to validity of ideas on what to do with the economy-- each recession has its own variables.

  2. In a competitive market, such as the oil industry, there are many buyers and sellers. These numerous sellers, with the assistance of the Mineral Management Service, should have been able to develop a realistic emergency plan for possible oil spills. However, when those plans are based on incorrect assumptions and outdated models, the result can be catastrophic, as we have seen. Fortunately, we usually learn from our mistakes. Not that oil spills won’t happen again but that we will know how to better handle the situation if and when it does occur. Perhaps some of the gasoline tax revenue could be used to fund up to date assessments of this spill to assist us in preparing for any future ones.

  3. As I am from Beaumont and grew up on the beaches of Galveston my view of this oil spill is a little biased. I feel as if the oil spills emergency plans were poorly planned before this disaster. As the person above said I do hope BP learns from their mistakes and if something goes wrong again they will be better prepared.