New Working Paper Evaluates Policy Responses to the Deepwater Horizon Oil Spill

by Jenny Li Fowler

The Deepwater Horizon oil spill of 2010 killed 11 men, released about 4.9 million barrels of crude oil, posed near-term economic risks to the Gulf Coast region and raised questions about appropriate policies to mitigate catastrophic oil spill risks.

In his Harvard Kennedy School Faculty Working Paper, “Real-Time Economic Analysis and Policy Development During the BP Deepwater Horizon Oil Spill,” Harvard Kennedy School Assistant Professor Joseph Aldy reviews the Obama Administration’s assessment of the spill’s economic risks, evaluates the policy response to mitigate economic damages and reduce the odds of another catastrophic spill, and provides a number of critical lessons learned for policymakers. He finds that the creation of an independent claims facility backed by a $20 billion escrow account provided reassurance to Gulf Coast residents that they would receive compensation for their spill-related damages while reducing some of the business uncertainty plaguing BP.

Aldy notes that there is “value in tapping the expertise within the industry because the private sector has a significant information advantage over government regulators in offshore drilling…. [T]he government can establish a regulatory environment that maintains government oversight, takes advantage of the industry’s expertise, and shapes the economic incentives to deliver a much safer drilling regime.” In particular, he argues that removing oil industry liability limits would provide "a stronger financial incentive for improved safety and [also increase] the likelihood that liable private firms, as opposed to taxpayers, would compensate those harmed by future spills."

Aldy outlines three lessons learned from the Deepwater Horizon spill to help guide policymakers moving forward:

  • Provide a coherent, comprehensive legal framework for offshore drilling before government and an oil company find themselves in the midst of another spill.
  • Develop incentives for safer drilling systems.
  • Plan for low-probability, catastrophic events to guide the development of necessary policies to mitigate negative impacts.

“The failure to learn lessons from the last spill runs the risk that another major spill could test Americans’ patience for oil and gas development, especially if the industry and the government does not have either the technical means to contain it or the legal and financial means to secure full compensation for those bearing the damages. Indeed, another catastrophic oil spill could result in the public turning against oil and gas as a major part of our energy economy," Aldy concludes. "Thus, we need to design a regime that delivers the right incentives for safety so that we can continue domestic production of hydrocarbons without having people who live in oil and gas intensive regions bear the costs from this activity.”

Joseph Aldy is an assistant professor of public policy at the John F. Kennedy School of Government at Harvard University, a nonresident fellow at Resources for the Future, and a faculty research fellow at the National Bureau of Economic Research. His research focuses on climate change policy, energy policy, and mortality risk valuation.

Assistant Professor Joseph Aldy

Assistant Professor Joseph Aldy

“The failure to learn lessons from the last spill runs the risk that another major spill could test Americans’ patience for oil and gas development...," said Joseph Aldy.

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