The Organizational Economics of the BP Oil Spill
Now that passions are cooling regarding the BP disaster, it’s time to bring organizational issues into the discussion.
1. Everyone knows about the liability caps and the role they may have played in encouraging moral hazard. Just as bank deposits are guaranteed by government deposit insurance, and large banks themselves are probably Too Big to Fail, liability for property damage from oil spills off US waters is limited to $75 million (plus cleanup costs), based on a 1990 law passed after the Exxon Valdiz spill. This presumably mitigates drillers’ incentives to manage environmental risk. Indeed, oil companies enjoy a very cozy relationship with their ostensible guardians; as the NY Times noted, “[d]ecades of law and custom have joined government and the oil industry in the pursuit of petroleum and profit.” The federal agency that oversees drilling, the Minerals Management Service, rakes $13 billion a year in fees in what amounts to a public-private partnership. And does anyone really think the British government would “stand idly by” if BP’s status as an ongoing concern were threatened by criminal or civil penalties?
2. As Bill Shughart points out, BP did not own the Deepwater Horizon platform, but leased it from a company called Transocean. To Bill this suggests “a classic principal-agent problem in which the duties and responsibilities of lessor and lessee undoubtedly were not spelled out fully, especially with respect to maintenance and testing of the rig’s blowout preventer as well as to the advisability of installing a second ‘blind sheer ram,’ which may have been able to plug the well after the first (and only one then in service) failed to do so.” Would BP have paid more attention to safety if it owned, rather than leased, the platform?
3. Jeffrey Stamps and Jessica Lipnack think that BP’s move toward a “flatter” organizational structure, starting in 2007, weakened oversight of its operating units. “The risk an organization faces by eliminating levels — especially when it’s done in a one-size-fits-all way as per BP — is that it will severely damage its capacity to manage complexity. . . . [T]he evidence is in eyewitness reports of management conflicts in the frenzied few hours before the blowout. More proof is in the inept efforts to stanch the flow, the clueless non-mobilization of cleanup resources based on inaccurate information, the convoluted claims process, the lack of sufficient equipment to capture the spewing oil, and finally the finger-pointing and the don’t-blame-me CEO.” Decentralization is usually promoted as a way to improve flexibility and generate faster response times, but it can also cause coordination failure and encourage moral hazard. Is that what happened here?