Making things messier

Several unsuccessful attempts at capping the broken Deepwater Horizon oil well in the Gulf of Mexico have revealed some grave disadvantages to drilling at 5,000 feet below sea level.

And yet, this situation has provided a few advantages as well. For one, the depth and distance from shore have given authorities significant lead time in preparing for impact, if and when the oil slick reaches the Gulf Coast. It also provides plenty of time for political posturing over who’s going to pay for it all.

While it is impossible to tote up the full costs prior to landfall, estimates of the potential environmental and economic damage range from US$3 billion and up. Touring the threatened coastline this week, President Barack Obama was as explicit as possible about the costs: “Let me be clear: BP is responsible for this leak; BP will be paying the bill.” For its part, BP seems to agree. In a statement this week, it said it would “honour every legitimate claim” regarding the spill.

The stock market has chopped US$32 billion off of BP’s market capitalization, suggesting investors expect it to pay. But the law says something quite different. Under the 1990 Oil Pollution Act, BP’s legal liability is capped at US$75 million plus the cost of removing the oil. Written in the aftermath of the Exxon Valdez disaster off Alaska, this legislative saw-off transfers the full cost of future damages from oil companies to government.

The Oil Spill Liability Trust Fund, overseen by the U.S. Coast Guard, is funded by a five-cent-per-barrel oil tax. It currently has about US$1.4 billion on hand to ameliorate spills, but is limited to a maximum payout of US$1 billion per incident. This is not nearly enough to cover a worst-case scenario. U.S. officials are now arguing negligence by BP will void its $75-million cap.

The entire situation is murkier than the oil spill itself. Private companies should properly be expected to pay for the results of their actions. And yet, the U.S. government has bargained away this obligation in order to convince firms to engage in risky offshore drilling. (Recall that Obama recently opened large parts of the U.S. coastline to offshore exploration.) So the liability for cleanup has been transferred from the private to public sector. But now, with the government fund clearly lacking and the public looking for villains, it’s become politically convenient to put the onus back on oil companies.

Further complicating things, in 2008 Obama campaigned on the promise of a windfall profits tax on oil companies. But removing the profits of such firms during good times reduces their ability to pay for their own mistakes when they do occur. Such a tax, if implemented, would further shift the responsibility for disasters onto public shoulders.

With luck, a full-scale disaster can be averted on the Gulf Coast. But conflict over who should be responsible for the bill seems inevitable. And just as messy.