No one knows how much economic damage the Gulf oil spill will inflict on fishing fleets and coastal states: Most observers simply say it will cost "billions" of dollars, and this week President Obama only allowed that the economic consequences will be "substantial" and "ongoing."
But how much of that cost is BP on the hook for? Not much, thanks to a law passed in 1990 that will limit the oil giant's liability for economic damages to a small fraction of the actual economic cost of the disaster.
The Oil Pollution Act of 1990, signed in the wake of the Exxon Valdez oil spill, limits the economic liability a company is responsible for from an oil spill to $75 million -- a fixed number that hasn't risen with inflation over the last 20 years.
Any costs above the $75 million are covered by the Oil Spill Liability Trust Fund, funded by a few sources, but importantly, U.S. taxpayers, which can spend up to $1 billion per incident for oil removal and damages.
For a company like BP, $75 million is truly a drop in the bucket: In 2009, BP's daily profits averaged $93 million a day -- which means they could absorb their entire liability losses in 24 hours and still have $18 million to spare.
BP has said that it will waive the limits on its liability and pay whatever claims come their way, although there's nothing in the law that compels them to do so. And critics say that as long as the law only threatens companies with a financial slap on the wrist, they have no reason to stop risky drilling activities.
In fact, as economist Michael Greenstone of the Brookings Institution wrote last week, this broken system "creates incentives for spills":
[O]il companies make decisions about where to drill, and which safety equipment to use, based on benefit-cost analyses of the impact on their bottom line. For example, in choosing a location, oil companies assess whether the expected value of the oil exceeds the costs.So the [oil spill liability] cap inevitably distorts the way companies evaluate their risk. Locations where damages from a spill may be costly -- for example, places near coasts or in sensitive environmental areas -- seem more attractive for drilling with the cap than if firms actually were responsible for all damages.
The cap effectively subsidizes drilling in the very locations where the damages from spills would be the greatest.
On May 4, Sen. Robert Menendez (D-NJ) introduced a bill to raise the liability cap from oil spills to $10 billion. Other Democrats have pushed to lift it entirely. But these efforts have been repeatedly blocked by Republicans and fiercely opposed by oil lobbyists, who, among other things, argue it will increase the cost of oil (Greenstone says the impact on a global industry like oil would be "imperceptible").
There are some loopholes for those seeking to hold a company like BP liable: The $75 million cap doesn't apply to claims made in state courts, and the limits don't apply if it's proven that the company violated federal safety regulations.
But for today's multi-billion dollar deep water oil drilling industry -- which only took off in earnest in the mid-1990s -- the $75 million cap certainly looks quaint and out of date.
And for BP and other offshore oil giants, it certainly won't do enough to their bottom line to convince them that protecting communities and the environment is a good investment.
Follow Chris Kromm on Twitter: www.twitter.com/chriskromm
As for the incentive to take risks, my car insurance has a very small deductible, still it doesn't give me any less incentive to avoid a car wreck.
Then come back and apologize for insulting the brave servicemen and women who sacrifice for you to be a hypocrite and sit around in a nice, air conditioned or heated home, and blog on a computer using electricity provided to you by oil and gas.
Seriously, does the green/progressive movement not understand what the word hypocrite means? Either that or they have it in their mission statements "to be hypocrites wherever and whenever possible".
Unbelievable. Shame on you.
Oh, and about 15 more countries, because there are some GOOD allegations they MAY have Nuclear weapon & WMD capabilities and MAY attack us. It's the word ' MAY' that's killing me.
Pls, don't even dare telling someone who has lived all over the world, including in the middle east ( and is fluent in 2 of their languages), and is daughter of a diplomat with extensive experience in the field, that you know ANYTHING about US politics, especially regarding the Middle East. I said nothing about the service men. They are doing what they are told so, and in MY opinion, all in vane. Many of us are having jobs that are just waste of our time and talent but we do them because we have to, It's as simple as that.