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BP and the Undercompensation Follies

May 3rd, 2010 1 comment

A television reporter stands beside oil booms at the coast of South Pass, south of Venice, Louisiana, as oil leaking from the Deepwater Horizon wellhead continues to spread in the Gulf of Mexico, May 2, 2010. A huge wind-driven oil slick bore down on the U.S. Gulf coast on Sunday, threatening an environmental catastrophe, and the Obama administration heaped pressure on BP Plc to halt the uncontrolled spill from its ruptured Gulf of Mexico well. Since the explosion and sinking last week of the Deepwater Horizon rig, a disaster scenario has emerged with hundreds of thousands of gallons of crude oil spewing unchecked into the Gulf and moving inexorably northward to the coast.

I was appalled but not shocked to¬†read today that legislation passed in 1990 (that created the “Oil Spill Liability Trust Fund”) limits the liability of BP in connection with this incident to $75 million. That’s right: a tiny fraction of the total amount of damages this disaster, which may prove to be unprecedented, will ultimately cause. In addition, BP is responsible to pay for the cost of containment and clean-up — good, but no help to those economically or physically injured.

That liability limit was part of a 1990 law that created a trust fund to cover more substantial liabilities, and that is funded by a very miniscule tax on each barrel of oil paid by the companies (who will then naturally pass it off to consumers). That tax will fund an additional $1 billion to be used as a compensation fund for each incident, no matter how enormous. And disasters don’t get any more enormous than this one.

Today, NJ Senator Bob Menendez introduced a much-needed bill that would raise the cap on oil companies from $75 million to, oh, $10 billion. Even this might not be enough, given that the sea fishing business is a $6 billion dollar industry per year in the Gulf alone. Menendez intends for his bill, called (I love this) the “Big Oil Bailout Prevention Act” to apply retroactively and thereby force BP to pay. This could be a political fight worth watching. Who’s going to stand up for oil in this case, and what will happen to their careers if they do?

In general, I favor deals limiting liability in exchange to paying into a compensation fund. But this particular fund doesn’t meet my minimum fairness requirements. First, the amount the companies have to pay in is so teensy, and therefore so easy to pass along to the consumer, that it doesn’t seem like much of a fair exchange — and in any case doesn’t force anyone to consider the true environmental costs of oil drilling. Second, if the government is going to get involved in a compensation fund, it has the responsibility to make sure that people are adequately compensated from that fund. The $1 billion dollar limit doesn’t do that.

It’s easy to blame BP for actions that likely could have resulted from any big oil company’s actions. But the company does deserve blame for moving so slowly, for underestimating the extent of the damage, and for trying to shift blame to the contractor that actually operated the rig.(The legal contribution and indemnity issues here are fascinating in a perverse kind of way.) Yet one wouldn’t expect them to win a safety award after this — wait, they might? (The company is a finalist for this award. Apparently, just like baseball’s MVP award, this prize is given so far ahead of time that it can be embarrassing: players can win them even if they fail miserably in the playoffs, and BP could win based on its actions before this gusher started.)

It’s time for someone to stop this and tilt the playing field back towards level. Right now, oil is sitting its heavy butt on one end of the see-saw, and the Gulf Coast, the environment, and the rest of us are flying off the other end.