Should BP Be Liable for Economic Losses Due to the Moratorium on Oil Drilling Imposed after the Deepwater Horizon Accident?

By Shavell, Steven | Vanderbilt Law Review, November 2011 | Go to article overview

Should BP Be Liable for Economic Losses Due to the Moratorium on Oil Drilling Imposed after the Deepwater Horizon Accident?


Shavell, Steven, Vanderbilt Law Review


In the aftermath of the Deepwater Horizon accident and the BP oil spill, the government imposed a moratorium on deepwater oil drilling in the Gulf of Mexico. The issue addressed here is whether, on grounds of policy, BP should be held responsible for moratorium-related economic losses. The answer that is developed is no. The reason, in essence, is that, although the spill caused the moratorium, the moratorium might be viewed as a socially beneficial event on net because its purpose was to avert a significant danger.

I. THE MORATORIUM ON OIL DRILLING ..................................... 1997

II. LEGAL RESPONSIBILITY FOR MORATORIUM-RELATED LOSSES ............................................. 1999

III. THE ECONOMIC POLICY ARGUMENT AGAINST IMPOSITION OF LIABILITY FOR MORATORIUM-RELATED LOSSES ............................................. 2001

A. The General Economic Basis for Setting Damages Equal to Harm .............................. 2001

B. The Benefits and Costs of a Socially Desirable Moratorium ................................................. 2003

C. Why Damages for an Accident Should Not Include Moratorium-Caused Losses if the Moratorium is Socially Desirable ................... 2004

D. Why Damages Should Not Include Moratorium-Caused Losses if the Moratorium is Socially Undesirable ........................ 2005

IV. CONCLUSION ............................................................................... 2006

On April 20, 2010, a catastrophic explosion and fire occurred aboard an oil-drilling platform, the Deepwater Horizon, which was leased by BP and stationed approximately fifty miles off the coast of Louisiana, where the ocean depth is nearly five thousand feet.1 The Deepwater Horizon accident resulted in the largest oil spill in American history.2 Stating his concern about the dangers of future oil spiUs from deepwater drilling, President Obama announced a wideranging moratorium on this practice on May 27, 2010. 3 As will be described, the moratorium has had significant economic repercussions for the Gulf states.

Because the Deepwater Horizon spill ("the BP spill") led to the moratorium and to economic losses, the question arises whether, as a matter of policy, BP (and possibly other firms involved in the spill) should pay for these losses. The Obama Administration apparently believes that the answer to this question is yes. Former White House Press Secretary Robert Gibbs said that "the moratorium is a result of the accident that BP caused" and therefore that demands by deepwater- drilling rig workers for lost wages "are claims that BP should pay."4 The answer to the pohcy question is also of interest because legal arguments exist that could, in principle, result in BP owing damages for some moratorium-related losses. However, BP asserted that it faces no legal obligation to compensate parties for moratorium-caused losses. When BP reached an agreement with President Obama to estabhsh a $20 billion fund to compensate victims of spill-related losses, it claimed that it was not legally responsible for moratorium-associated losses.5 And when BP agreed to contribute to a separate $100 million fund to compensate drilling rig workers for moratorium-related wage losses, it averred that it was doing so only as a voluntary act.6

The main point developed here is that it is undesirable on grounds of social policy7 to hold BP responsible for moratorium-related losses. The nub of the argument is readily summarized. Although BP may be said to have caused the moratorium - I assume that had the spill not occurred, there would have been no moratorium - the moratorium might be viewed as socially beneficial. In particular, the stated justification for the moratorium was that it would reduce the danger of additional oil spills, a danger that seemed more serious in light of the BP spill. If this risk -reduction benefit from the moratorium outweighed the moratorium-related losses, then the moratorium should be seen as socially desirable on balance. …

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