Externalities and the oil spill - what future BP?

vivatifosi

I thought I'd post something a bit different from house prices and governmental woes today.

There's a thorny issue in the discipline of economics, that of 'externalities'. In short, an externality could be described as

"a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a or positive externalityexternal benefit, while a cost is called a negative externality or external cost."
http://en.wikipedia.org/wiki/Externality

I've been thinking about this issue for some time. I've moved since, but at the time of the Buncefield Explosion I was living in Hemel Hempstead. Along with many other householders I experienced some damage to my home but it was minor - too minor to claim on insurance without hitting excesses so I didn't bother, I just put it right at a cost to myself and thousands of others around here did the same. Although there is a court case going through at the moment that should see compensation going to those most badly affected and insurance paid out on thousands more cases, there are undoubtedly costs of the explosion that have not been met. My young nephew for example contracted asthma as a result of the incident. Would this have arisen otherwise? Maybe.. It has certainly led me to believe that the polluting companies "owe" the town something under their CSR policy - maybe a new civic venue or something similar.

Anyhow, fast forward four and a half years and we now have what is happening in the Gulf of Mexico. To what extend should, can the cost of the disaster be borne by BP? Another example: Union Carbide in Bhopal, India paid out compensation for the chemical disaster there, but the land is still polluted and people there still suffer medical abnormalities long after the payments dried up.

In the case of BP, some in America are now calling for BP's assets to be seized:
http://www.nbcwashington.com/news/local-beat/Seize-BP-Assets-for-Those-Affected-by-Oil-Spill-Protesters-93635409.html

However in reality BP will have to pay out under US law, at least until the point of bankruptcy as the law changed following the Exxon Valdez disaster.

Pricing in the cost of externalities has always been a thorny issue in economics. If the true cost of externalities were priced into oil production it would cost way more than it does at the moment. As the Economist states:

Existing fuel prices do nowhere near enough to price in the externalities of oil consumption on the environment and human health. (Lisa Margonelli tells Ezra Klein: "The American Lung Association estimated that every gallon of gas costs us 50 cents in the asthma rate for children. You have the greenhouse gas question, leakage, spills, explosion, cancer risk from benzene, economic risk from the volatility of the prices, the military cost, and we do not account for all this.") But one can expect that investors' and insurers' reactions to the discovery that they are effectively on the hook for many billions of dollars in case of a deep-sea blowout will help to price in some of that risk.

The whole article is well worth reading at:
http://www.economist.com/blogs/democracyinamerica/2010/05/gulf_oil_blowout

So what do you think? Should companies be wholly responsible for all costs following a major failure, to the point of bankruptcy? Should the cost of pollution be factored into the cost of oil, even if it could trigger further recession? What about externalities in other markets such as finance - should there be greater regulation?

StevieJ

Interesting case of Dejà vu, courtesy of Wombat42.

http://www.youtube.com/watch?v=GHmhxpQEGPo

Jonbvn

vivatifosi wrote: »

So what do you think? Should companies be wholly responsible for all costs following a major failure, to the point of bankruptcy? Should the cost of pollution be factored into the cost of oil, even if it could trigger further recession? What about externalities in other markets such as finance - should there be greater regulation?

But where does it all end? Perhaps someone could bring a class action suit against all oil companies for the affects of AGW and bankrupt them all. Fine, if you want to live like our ancient ancestors.

vivatifosi

Jonbvn wrote: »

But where does it all end? Perhaps someone could bring a class action suit against all oil companies for the affects of AGW and bankrupt them all. Fine, if you want to live like our ancient ancestors.

The question of where it should all end is exactly the point I'm trying to get to. I don't think that law suits should be bought against oil companies for global warming, but if the sea rises, what will we as humanity do with the millions of displaced people in Bangladesh for example? FWIW I used to take a much more laissez-faire approach to externalities until they blew up in my own back yard. The people of Hemel Hempstead will not know until 7 years+ after Buncefield whether the run off of fire-fighting foam has polluted their fresh water aquifer. However I am emotionally invested in that issue, so I want to know what the lay people here think.

Jonbvn

vivatifosi wrote: »

The question of where it should all end is exactly the point I'm trying to get to. I don't think that law suits should be bought against oil companies for global warming, but if the sea rises, what will we as humanity do with the millions of displaced people in Bangladesh for example?

AFAIK, humanity has never really acted in the majority interest of everyone/thing on the planet. We are mostly motivated by (selfish) short-term self-interest. Simply put, peole are willing contribute collectively up until their quality of life starts to significantly reduce.

amcluesent

It's certainly not looking good for BP. One can only hope that the US operation is legally 'ring fenced' otherwise a lot of British pension funds will be in the toilet, plus a lot of British jobs and a lot of corporation tax lost to the Condem govt.

It seems that Obama is letting his inner-Marxist do the talking as he blusters and spins. You can be sure once it's all sorted it'll have been his doing, yessums!

Everyone conveniently overlooks that the drilling was sub-contracted to a USA concern and the failed blow-out preventer was manufactured by a USA company. Hopefully the liabilities will bring down those companies too.

Talking of externalities, surely the Catholic Church is the worst offender here? Their dogmatic prohibition on birth-control means that population is growing out of control in the third world, causing deforestation, AGW and increasing my taxes to pay for food aid after the usual famines. The Pope owes me big time!

HAMISH_MCTAVISH

amcluesent wrote: »

It's certainly not looking good for BP. One can only hope that the US operation is legally 'ring fenced' otherwise a lot of British pension funds will be in the toilet, plus a lot of British jobs and a lot of corporation tax lost to the Condem govt.
!

I must be feeling unwell, as that's twice today we've been in agreement.

Did you know one seventh of all UK pension fund dividend income is from BP shares?

vivatifosi

HAMISH_MCTAVISH wrote: »

Did you know one seventh of all UK pension fund dividend income is from BP shares?

Precisely, which is why IMO it is such an interesting topic for debate. Its very easy to see the benefits of both sides of the argument and the downsides both ways are very scary indeed. Just thought it made an interesting change from house prices .