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Howard Steven Friedman Headshot

Finding The Silver Lining In The $20 Billion Fund

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The news has been abuzz for a couple of days now about the $20 billion escrow account being funded by BP to help with the gulf oil spill. As I combed through the articles, I found myself puzzled by what exactly went into this deal.

My first question is a simple one, what was this number of $20 billion based on? When doing calculations on public health, we start with a reasonably accurate assessment of the current situation. We project what the needs are going to be and then cost those needs. So, our cost estimates for public health are projections based on an understanding of the current situation, grounded on scientific data and we make assumptions when necessary. The most critical assumption in our cost estimates is the scope, what is in and what is not in the costing exercise. In spite of this objective basis, our cost estimates still have large confidence ranges.

The gulf oil spill is a very different situation. This active oil spill is a dynamic situation which, based on the wide ranges of estimates of the flow, lacks an accurate assessment of the current situation. The scope of impact is very unclear, from direct physical impacts (explosion victims), financial impacts (fishermen, tourist industry), short term environmental impacts and long term environmental impacts. I wonder what reasonable assumptions could have been made, what was included or not included in the estimate and, most importantly, how accurate could the gulf oil spill cost estimate possibly be? My understanding is that the amount of this fund could change over time...I certainly hope so since estimates of the impact of the spill are based on a large set of unknowns.

My second question is whether this is really a "done deal"? The media gives the impression that the White House and BP executive sat down and BP was strong-armed into accepting this deal. I suspect that there is some truth to this though it gives me the image of the US government acting like Tony Soprano gathered around a table in a smoky room telling someone they must pay or have their legs broken. What I haven't read so far are actual details on the agreement or if there is even a contract in place. Often pronouncements of an agreement occur far ahead of when anything actually hits the paper and the ink may be very different from the elegant speeches.

My third question is how will this money be administered, both the timing of the money being loaded into the account as well as the timing and allocation of money going out of the account. What basis will be used to decide which people, organizations, locations get paid how much? This will be clarified over time but one can certainly expect that many people will be displeased no matter how it is handled, though that is simply human nature.

The number $20 Billion is large enough to scare other oil companies into taking the safety of their employees and the environment more seriously. Regardless of if this money is collected and dispensed appropriately, my intuition is that making companies actively afraid of causing environmental damage may be the one good thing that can come of this mess.