How Limiting Oil Company Liability Causes Spills

How Limiting Oil Company Liability Causes Spills

Robert de Neufville on June 19, 2010, 5:46 PM

On Thursday, Republicans blocked an attempt to lift the liability cap for oil companies for the fourth time. Although BP has agreed to establish a $20 billion fund to pay for damages caused by the Deepwater Horizon spill and has promised to pay “all legitimate claims,” under the Oil Pollution Act of 1990 oil company liability for spills is capped at relatively miniscule $75 million.

Republicans agree that the current cap is too low, but argue that removing the cap completely would make it too expensive for most companies to drill. But Democrats want to remove the cap entirely and make oil companies liable for the complete costs of any spill, on the grounds that companies that can’t afford to pay for insurance shouldn’t be drilling in the first place. “If you or I caused an accident, we would be responsible for all the damages,” Sen. Barbara Boxer (D-CA), who chairs the Environment and Public Works Committee, said recently. “There would be no caps in that case, and there should be no caps in this case.”

Bringing the liability cap issue up over and over again, of course, is a transparent political stunt. Democrats want to make sure everyone knows Republicans oppose removing the cap. They want people to perceive the Republicans as caring more about oil companies than about the people whose lives were hurt by the oil spill. That case is particularly easy to make after Rep. Joe Barton (R-TX) apologized to BP CEO Tony Hayward on Thursday that the White House had pressured BP to set up the $20 billion fund, calling it a “shakedown” (Barton retracted his remarks after the Republican leadership threatened to remove him from his ranking seat on the Energy and Commerce Committee).

If the Democrats are using popular anger with BP to score political points, there is nevertheless a serious political issue here. BP is a fabulously wealthy company, of course, which reported $16.6 billion in profits last year—almost three times what Google made. And it’s responsible for one of the worst environmental disasters in U.S. history. It certainly seems reasonable to ask it to pay for a large part of the costs of the clean up.

But, as Daniel Indiviglio argued in The Atlantic this week, the real issue is that the low liability cap may be partly to blame for the accident. While people tend to underestimate the risk of unusual accidents like this one, BP would almost certainly not have been as negligent or as poorly prepared for a spill if it had been legally required to pay the complete costs of the clean up. Oil companies had little incentive to be appropriately careful. As Michael Greenstone says,

the 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.

By limiting oil company liability, we effectively provided oil companies with enormous amounts of free insurance, allowing them to play with house money—that is, with public money.

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