BP's Macondo: Spill and Response

Posted: 27 Jan 2012

See all articles by Julio J. Rotemberg

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Date Written: January 9, 2012

Abstract

This case starts by reporting various factors that may have contributed to the massive Macondo oil spill, noting that BP, its partners and the government all made decisions that helped cause the accident. It then discusses the response to this spill by BP and the government. This helps provide some context for the decision by the Obama administration to request $20 billion for a fund from BP and for BP's willingness to go along with this request. The case also depicts BP's safety record before this spill, which may also have contributed to the creation of this fund. After this, the case describes the various ways in which the U.S. government is involved in offshore oil, starting from the leasing of tracts, the regulation of drilling and the assessment of fines and damages. To provide a contrast with BP's payments, the case depicts the payments made by Exxon after the Exxon Valdez spill. The U.S. regulatory regime is then briefly compared with regimes in other countries. After a brief description of the way the fund set up by BP sought to distribute funds and of the temporary moratorium that followed the spill, the case ends with discussion of possible regulatory responses.

Learning Objective: Sources of political risk and ways that firms can respond to this risk the regulation of risky economic activities When BP decided to drill, it could imagine a favorable political business environment, with low lease prices, a pliant regulatory agency and tight limits on liability for damages. The U.S. government seems unable to maintain its commitment to this favorable environment and effectively fines BP. The case allows the students to explore the sources of this breakdown in the "rule of law." Among the causes is the public's anger at the oil spill and its desire for restorative and retributive justice. One lesson is that the pursuit of these two forms of justice, which are the specialty of the executive branch can involve some trampling of procedural justice, a specialty of the judicial branch. This still leaves the question of whether BP responded appropriately by agreeing to Obama's request. Another issue is whether BP was in a weaker position because it was a foreign company or whether there are other reasons why Exxon was much more aggressive in using the courts after the Exxon Valdez spill. One approach to controlling environmental externalities is to have polluters pay for the social harm they cause. When damages are inherently uncertain and potentially large, as in the case of offshore drilling, this approach requires drilling companies to have large capital cushions and put these cushions at risk. If it is desirable to have small companies drill also, one must find a different way to control at least these companies behavior. The case permits many alternatives to be discussed incl. whether companies should be forced to use "the best available technology" or whether cost benefit tests should be applied before forcing companies to adopt safer techniques. By showing some differences between the U.S., U.K. and Norwegian approaches to regulation, the case also invites a discussion of how regulatory agencies can be made more effective.

Suggested Citation

Rotemberg, Julio J., BP's Macondo: Spill and Response (January 9, 2012). Harvard Business School BGIE Unit Case No. 711-021. Available at SSRN: https://ssrn.com/abstract=1992569

Julio J. Rotemberg (Contact Author)

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
617-496-5994 (Fax)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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