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20-year-old oil spill liability law creates "incentives for spills"

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bp_oil_slick_fire_vert.jpgYou can also find a version of this story at The Huffington Post here.

No one knows the economic damage the Gulf oil spill will inflict on fishing fleets and coastal communities -- most observers simply say it will cost "billions" of dollars, and today, President Obama only allowed that the economic consequences will be "substantial" and "ongoing."

But not as much for BP, thanks to a law passed in 1990 that will limit its liability for economic damages to a small fraction of the likely cost of the disaster.

The Oil Pollution Act of 1990, signed in the wake of the Exxon Valdez disaster, limits a firms' economic liability from an oil spill to $75 million -- a
fixed number that hasn't been indexed for inflation.

Any costs above that are covered by the Oil Spill Liability Trust Fund
-- funded by U.S. taxpayers -- which can spend up to $1 billion per
incident for oil removal and damages.

And for a company like BP, $75 million is truly a drop in the bucket: In 2009, BP's daily profits average $93 million a day -- which means
they could absorb the loss 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 will compel them to do so. And as long as the law allows companies to carry out drilling projects but not face much economic risk in the case of an accident, critics say it gives a green light to risky behavior.

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.

Greenstone also notes that the cap reduces the incentive to use the safest equipment and drilling methods.

A bill introduced May 4 by Sen. Robert Menendez (D-NJ) to raise the liability cap to $10 billion has been blocked by Republicans and fiercely opposed by oil lobbyists, who argue it will increase the cost of oil (Greenstone says the impact on a global industry like oil would be "imperceptible"). Other Democrats have pushed to lift the liability cap entirely.

It's true, as the New York Times points out today, the law doesn't cap claims in state courts, and the limits don't apply if it's proven that federal safety regulations were violated by the company.

But in the 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 anachronistic.

And for BP and other offshore oil giants, it would have a negligible impact on their bottom line -- quickly absorbed in less than a day's work.

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re: 20-year-old oil spill liability law creates "incentives for

I hope that our 1990 US Congressmen enjoyed the dollars spent on wine, food, women, song, campaign contributions, jobs for their (unemployable) children, and vacations that the oil company paid lobbyists probably paid to entice (bribe) our congressmen to pass that 1990 legislation to burden the government with the costs of damages caused by oil exploration.

Why else would the US congressmen have voted for such legislation?

Without this legislation, would BP have operated that drilling with more safety?

re: 20-year-old oil spill liability law creates "incentives for

Gearld, I think if this law had not been passed there probably would not have been any drilling at all. I would not be surprised to find out the the enormous level of water pressure (around 1 ton per square inch) had quite a bit to do with this disaster. I know if I was an oil company CEO, I would not have drilled on that site at all.

re: 20-year-old oil spill liability law creates "incentives for

BP is such a joke… they should all be arrested along with the US govt. How long ago did they cap the leak? And how many legitimate claims are still “pending” from damages they suffered back in the beginning of the summer? I happen to know three people that were affected directly by BP’s shady PR tactics and manipulation of our laws, one of whom was a journalist who was almost arrested and charged with felonies for taking pictures of oil covered animals near the coast. Not only is it bad enough that thousands of fishers’ lively hoods are ruined for god knows how many years to come, they were paid a pathetic amount of money to clean up BP’s own mess. To add even more insult to injury, BP used Corexit 9527, which contains mainly 2-butoxyethanol, which is very toxic. You wouldn’t have to be a scientist to know that, since in the first week of using it over 70 fisherman ended up at the hospital. Of course if you even inquired about this, I’m sure the govt (which is pretty much owned by oil companies) would deal with you quite quickly, let alone taking pictures of it in an attempt to run a story on it. If you didn’t know already, the govt is doing what they do best… crapping on the 1st amendment: naturalnews.com/029130_Gulf_of_Mexico_censorship.html. My friend who almost got arrested on felony charges simply went out on a boat into about 30 feet of water and used a water proof cam to photograph one of the many oil plumes forming at the bottom of the surface (which BP vehemently denies). Now here comes the hilarious part. He switched the film in his camera with a blank one in the event they were stopped by police, which they were as soon as they got back to shore. They let him go but still took his name down, and what do you know... later that night, 2 guys wearing black hoodies attempted to break into his house. He caught pics of them on his home security system (he saved the pics… adt burglar alarms camera break in photos). Hmm, I wonder who paid these guys to break in and what they were after? Definitely not BP or our govt, that’s for sure!