Four cadets majoring in Management were formally recognized by Mr. John Luce, Director of the U.S. Coast Guard National Pollution Funds Center (NPFC), with a Commandant’s Letter of Commendation for their innovative capstone research into the long-term viability of the Oil Spill Liability Trust Fund (OSLTF). The OSLTF is a monetary fund administered by the NPFC and used for, among other things, mounting fast and efficient emergency response operations and damage assessments following marine oil spills.
Because marine oil spill events are difficult to forecast, both in frequency and magnitude, questions always exist about whether the OSLTF has the capital necessary to cover response costs for a catastrophic oil spill. In addition, variability over time in spill characteristics and the response costs themselves raises questions about capitalization needed to ensure the fund is sustainable over the long term.
To understand these risks, 1/c Benjamin Gingrich, 1/c Benjamin Yagey, 1/c Cameron Brown, and 1/c Hunter Jennings undertook a study, Assessing Comprehensive Risk to the Oil Spill Liability Trust Fund: Stochastic Modeling for Policy Decisions. Advised by Dr. Matthew Keblis, the cadets developed a dynamic stochastic model that allows the NPFC to assess the probability that the OSLTF will meet its statutory and regulatory obligations under different taxation and appropriation levels.
The model is exercised using simulation. For any scenario of interest (initial capitalization, tax rates, interest rates, spill event probabilities, and other things) the model is simulated thousands of times, generating as output a probability distribution of fund values. The probability distribution can then be used to determine the likelihood of certain events, like the fund balance dropping below zero.
When presenting the cadets with their awards, Luce highlighted the real-world benefits of their work, recognizing that, for the first time, the model enables the NPFC to provide a risk-based answer to the question of how large the fund should be. In addition, it provides a mechanism for analyzing key policy parameters, such as the interest income generated by investing the OSLTF in Treasury instruments and per barrel tax rates.
