An estimate of the producer cost of liability for oil spills

ABSTRACT

Governments often impose liability for environmental harms on firms when direct monitoring of operations is difficulty or costly. In the case of oil production, little is known about the private cost of liability. This article takes advantage of a natural experiment to estimate the loss in projected future profits of oil and gas production after the Oil Pollution Act of 1990, which imposed liability on some producers and was exogenously timed in response to the Exxon Valdez spill. I find no evidence of economically substantial firm costs of the Oil Pollution Act’s liability rule.

KEYWORDS:

• Oil
• oil spill
• liability

JEL CLASSIFICATION:

• Q48
• Q52

Acknowledgements

The author wishes to acknowledge Brian Murray, Richard Newell, and the Alaska Oil and Gas Conservation Commission.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ I also have data for auctions before 1983. However, from 1979 to 1982 the State of Alaska experimented with alternative auction formats. I omit these auctions to avoid introducing alternative auction designs. Post-1999 data are also available but are omitted to balance the pre- and post-treatment periods. Including post-1999 auctions yields similar results.

² Appendix discusses the assumptions made for using bids instead of bidders’ values. The intuition is that bids increase with values, so a null treatment effect on bids would (under conditions) imply a null treatment effect on values.

³ This assumes there is no reserve price or that it is not binding. Nearly all the bids near the reserve price are from a small group of bidders who do not seem to be bidding based on tract oil and gas deposits; instead they seem to be bidding speculatively with another goal. I remove these bids from my data.

⁴ These implications do not depend on the private values assumption. I could instead consider a common value setting and come to the same conclusion. I use private values merely for its simpler exposition.