The Efficiency of Shipping Precautions and Policy Implementation within the Oil Transportation Industry

Abstract

This study examines the efficiency of two safety precautions meant to reduce the risk of oil spillage when shipping oil by tankers. Specifically, this study uses a cost benefit analysis to determine whether the use of double-hull tankers when shipping oil is more efficient than using single-hull tankers. In the most conservative scenario, the benefits of switching to double-hull tankers are only 79% of the costs. However, in less conservative estimates, the benefits of switching to double-hull tankers are 192% of the costs. Additionally, a cost-benefit analysis is used to determine what effect an increase in crew size must have on the frequency and size of oil spills to be economically efficient. Conservative estimates show that a 5% increase in crew size should decrease the probability of a spill by 5.16% to be economically efficient. Under the less conservative estimates, however, a 5% increase in crew size should decrease the probability of a spill by only 2.88% to be efficient. This study also provides rationale for the inclusion of passive use values in cost benefit analyses. Moreover, the study shows that the contingent valuation survey, when properly designed, may provide an accurate measure of respondents' willingness-to-pay. However, by analyzing previous literature and the cost-benefit analyses in this study, it is recognized that the methods used to interpret the results of contingent valuation surveys have a significant impact on their findings. Further, this study discusses challenges policymakers face when attempting to incentivize firms to take the socially optimum level of safety precautions.