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Does Unlimited Liability for Offshore Oil Drilling Make Sense?
Posted by Gail the Actuary on August 2, 2010 - 10:35am
Friday evening, the US House of Representatives passed legislation that would remove the $75 million liability cap on economic damages incurred by offshore drilling activities by oil companies. The US Senate is expected to take up legislation in the near future that would include a similar provision.
It seems to me that it would make more sense to raise the cap to, say, $10 billion, than to eliminate it all together. At least part of the issue is that insurance companies don't provide policies with unlimited coverage, but with a limit, even a high one like $10 billion, it is possible to put together an insurance program.
For most buyers of insurance, the lack of unlimited coverage isn't an issue. In part, this is because it is hard for us to do a whole lot of damage. I can run my car into another car, but the damage is pretty much limited to that car and its occupants. Even if I run my car into a school bus, the damage is limited to the school bus and its occupants. But the recent oil spill has indicated that economic damages can in fact be very high.
The likely lack of adequate insurance availability is the major reason we see statements such as this one from Jack Gerard, President of API:
While full details of the Senate bill are not yet available, the liability provision sticks out as a jobs killer. Requiring an unattainable level of insurance coverage for domestic energy producers on the Outer Continental Shelf will force the vast majority of American companies out of U.S. waters, according to insurers. This would cut domestic production, kill American jobs, slow economic growth and cost billions in federal oil and natural gas revenues.
The Price Anderson Act, which limits liability for nuclear power plants, limits liability to $10 billion per claim. At this limit, the nuclear industry set us its own insurance program. It is likely that at a $10 billion limit, the Gulf oil and gas industry could set up its own program, perhaps consisting of a combination of insurance and self-insurance.
If damages are completely unlimited, Jack Gerard has outlined the outcomes he expects. I am not sure if those would entirely be the case. If liability is unlimited, and smaller oil companies operating in the gulf are not able to get insurance, I would expect the stock market valuation of these smaller companies would drop greatly, and the bigger oil companies would find them cheap to buy. So the industry might see great consolidation, with the big companies benefiting. Somehow, I don't think that this is what those drafting the legislation had in mind.
If limits are raised from $$75 million to $10 billion, the higher limits will, to some extent, raise costs for oil companies. This is in a way, a form of decreased of Energy Return on Energy Invested (EROI). More costs are now explicitly being paid for (and more money is going to fund lawyers, and expended self-insurance programs). Raising liability to unlimited would theoretically raise costs more, and have a greater impact of EROI. It might also reduce production because of less available capacity, if smaller companies drop out of the market.
If costs are higher in the Gulf of Mexico (GOM) because of lower EROI, it would seem to me that at given world oil price, less oil will be extracted from the GOM. Furthermore, in total for the world, less oil will be extracted at a given price. How this lesser amount of oil is divided up remains to be seen--it is not clear to me that the US will, in fact, purchase more imports (since it needs to somehow pay for them). The world oil price will likely rise, but oil production may still not rise very much to match the higher price. At a higher price for oil, the financial situation of all countries importing oil will likely continue to deteriorate. I am not sure anything can be done to prevent this--but raising liability to an unlimited level (or even $10 billion) will tend to make the deterioration happen more quickly than otherwise.
One thing that I might point out is that clean-up costs per barrel of oil spilled in the US are significantly higher than in the rest of the world, even with the current law, according to a study called Estimating Costs for Oil Spill Clean-ups.
I am not a great fan of the tort system as a way of compensating people. It is a very inefficient system. Lawyers tend to get a big share of awards. Many people who are injured do not get compensated, because of the effort required to pursue a claim, and because of a lack of records to prove the amount of the injury or the fact that the plaintiff was at fault. If the injury is truly no one's fault, no compensation is available.
Awards for similar injuries can vary greatly, depending on how deep the pockets of the defendant are. For example, average death awards vary greatly depending who caused the injury. If the one causing the injury is a driver of a private passenger auto, the cost will be relatively low. If the injury is caused by a physician through malpractice, the cost will be higher. If the cost of a malpractice injury can be charged back to a hospital, the cost will be higher yet.
For better or worse, the tort system is what we have, though. Reigning in at least a little seems like it is in most everyone's best interests.
I might point out that there are quite a number of other businesses / organizations that can do huge damages. For example:
- Farms, through their runoff, can cause dead zones in the oceans.
- Commercial fishing, through aggressive fishing techniques, can cause fish populations to drop, and average size of fish to become much smaller.
- Government officials can allow food companies to sell over-processed food to millions of people, leading to poor health and weight problems.
- Nuclear power plants can have accidents that result in radiation damages to a large number of people.
The tort system doesn't really correct all ills--it just partially corrects a few of them.
I am also doubtful the deterrent effect of unlimited liability is greater than at a $10 billion limit. An oil company certainly will be motivated to prevent damages at a high insurable limit. The insurance company providing the $10 billion limits (probably set up by the oil industry) may even help with the monitoring of standards.
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You break it, you buy it. That should be the rule of doing business. Any business.
I'll cut to the chase here. This article just shows (yet again) that Gail is just a shill for the industry and has repeatedly undermined the credibility of the Oildrum as an instrument of unbiased information.
Injecting bias is an effective way of stimulating conversation. Perhaps Gail sees herself as a "stimulator" rather than a "moderator" ;->
Attacking the author rather that the content of her post is so.....Tea Partyish.
"Attacking the author rather that the content of her post is so.....Tea Partyish."
You're right, of course. I've observed that others have already critiqued the content quite effectively, but now & then her contributions just come across so blatantly pro-industry that it rankles my senses. I consider the Oildrum to be one of the finest sources of information about critically important issues to be found on the internet. As it develops the reputation of being yet another industry mouthpiece, it becomes much less valuable as a resource.
"As it develops the reputation of being yet another industry mouthpiece, it becomes much less valuable as a resource."
I see just as many comments accusing TOD of having a liberal/environmental/socialist bias. I think that means that someone's doing a pretty good job.
agreed. if i used simple labeling schemas for this site, they would continually oscillate between liberal, conservative, environmentalist, industry, etc... This is a sign of a good job.
dune --I understand your sentiments. OTOH I doubt you're anti-industry, are you? I'm certainly pro-indistry (at least when they aren't screwing up/cheating). Does that make me anti-environment? I doubt you think so. If TOD shouldn't be "another industry mouthpiece" should it not also avoid being another "environmental mouthpiece"? You have a visceral bad feeling about certain aspects of our society. But we all do. Pick your poison. LOL.
You seem to have a sharp mind and, more importantly, an ability to express your self clearly...even if some folks here don't appreciate your expression. I, OTOH, do even though we might not fully agree on any number of issues. I think this diversity is TOD's greatest value. Thus I whole hearted invite you to try to whip Gail's butt. Tear the heck out of her ideas (but not her). I look forward to sitting back and watching the two of you go at it on a factual level. But thicken up your skin a bit. As I mentioned earlier she doesn't need any protection from us good ole boys. She is soft spoken but a vicious tigress none the less.
Rockman, I'm not "anti-industry" per se, but probably am thoroughly "anti-corporation" in the sense of corporations having no innate care for much else except profit. To this end they obfuscate, lie and conceal their methods, actions and goals. When/if the Oildrum gives the appearance of being yet another tool in this, then it makes many folks suspicious of the information offered up here. It takes skill and empathy to avoid this impression while educating the rest of us in the ways that only an "insider" has the ability to do. A counter example: early on in this disaster, that professor who gave extremely high flow rate estimates for the spill, in my mind had less than adequate credibility, due to the perception that he was an "outsider", not necessarily knowing what the hell he was talking about in the real world of oil production. That doesn't mean I had a clue as to the real flow rate.
So you are hugely anti-corporation yet support the creation of legislation that will lead to the inevitable consolidation of the industry? Same type of unintended consequence as the financial reform bill (i.e. increased regulations has made it hard for small companies, making consolidation attractive, and cementing "too big to fail").
I don't love corporations, but if I have to choose between big government or big corporations, I choose big corp. (though ideally I want small gov. and small corp.)
Can I just say, "you're wrong"?
The issues Gail highlights are real. People seem to forget that this is a business, and that the oil businessmen will make judgements on if its worth the risk to drill at all.
I'd suggest what the unconstrained risk legislation and general hostile environment have done is kill future drilling in the US - and with it much of the future domestic production. Strategically this is probably not a good move for the US and its balance of trade.
However recognising this takes articles such as Gail's to highlight the issue; and a willingness on your part to look at the big picture.
"a willingness on your part to look at the big picture."
Agreed. In fact, while we look at limited/unlimited financial liabilities there is an even bigger picture we must look at if we are to be honest with ouselves. The larger environmental, climatological costs of exponential growth, the repercussions of economic and population overshoot, all of the predicaments we are find ourselves in globally (made possible by fossil fuels) must be factored in. Isn't limiting a corporation's liability just another way of kicking these cans farther down the road in order to protect an unsustainable meme for a few more years?
Reality has a "pay me now or pay me later" aspect to it. One way or another, we'll all pay for it. We're being forced by Nature to pay as we go. Better to get on with it.
When the alternative is between the devil and the deep blue sea, the smart move is to avoid having to jump in any direction for as long as possible.
Not only is that the obvious best choice, it also gives the maximum time for adaptation (although we are doing precious little to progress that).
It's society that's polluting, and society that needs to get its head around the changes needed. To focus on oil companies as some big bad is to miss the big picture for the easy target.
As they say "Sh@t rolls down hill". When we start holding iconic megacorporations fully liable, only then will Joe Sixpack feel the pain as the people of the Gulf have. Only then will J6P get his tiny head around this.
Ah! forget I said that. J6P will just blame Obama.
Well, since you are obviously more intelligent than "Joe Six Pack," then you must have the ability to understand math concepts. Concepts such as "inflection points." A quick refresher for you. An inflection point is a point on a curve where the sign of the second derivative changes from positive to negative, or vice versa. Being the slope of the curve, it let's you know that something significant about the curve has changed.
Inflection points are also quite handy for spotting things... such as when an economy goes into the tank.
For example, here we have a plot of the U-3 and the U-6 unemployment rates. You can get the data yourself at http://www.bls.gov if you wish to construct your own plot, (you know, the home game).
Here it is... no fancy markup other than one single label.
Apparently, January 2007 had a significant effect on the unemployment rate.
I wonder what it was that happened... hmm.
Oh yeah, Swamp Witch Nancy and the crew of thieves took over from the Evil Republicans.
Not that I mock the Evil Republican connotation, I really beleive that most of them are in fact evil... just like their brethren, the Democrats.
Was this really the beginning of the Pelosi/Reid nightmare or a lagging indicator of an earlier inflection point? Foreclosures, for instance, bottomed mid '04-'05. Been rising since. Our power company's KwH sales peaked in '04-'05 as well, dropped 12% off of it's '04 peak since. Perhaps unemployment was baked into the cake by the time the Dems took over. No love lost on 'em here, but it appears quite a few things peaked (or bottomed) around 2005. Perhaps the cause was physical (geological) rather than political.
Dunewalker,
THIS site is based on rational and realistic examination of the day in day out , year in year out actual facts of life in respect to energy in general and oil in particular.
Your comment betrays a personal bias indicative of an utter lack of appreciation of what I will describe for the sake of brevity as "the facts of life " in respect to energy, politics, and the economy in general.
I have no love for the oil industry, or any other, except that of small scale farming, but I necessarily have to do business with a lot of various industries in order to survive.So do we all, excepting a very few remmnant hunter gatherers.
Having said this, my personal position is that the company( meaning the stockholders, ultimately) in charge should be liable up to the last dime in the event of a spill,but that there should be a cap on damages nevertheless.With a cap, it is possible to continue to drill,and for the smaller oil companies to more easily buy insurance or band together and form a pool .
People who think a company being liquidated destroys anything of fundamental value are mistaken, excepting in a trivial sense.If GM had been liquidated, the real assets-manufacturing plants and human capital-would have remained, and bought up and put to use by new owners in short order.
"Too big to fail" is just a fig leaf used to cover the instrument used to inflict involuntary sex without benefit of lubricant or shame on the rest of us.
Of course this whole business of caps and liabilities is a gigantic game of whackamole.
A really big company such as BP would spin off financially isolated subsidiaries or totally new companies to do the high risk work, avoiding my proposed "bust'em if they screw up" sentiments.
Smaller companies will indeed be saddled with additional costs that might or might not be justified in terms of the overall health of the country if drilling operations are subjected to draconian new regulations.
There is simply no way to live without running some risks.We are already at the poker table, most of our chips are in the pot, and we've got to play the cards in our hand;history and nature don't do redeals.
Reality will not allow us to walk away from the oil game.
Gail recognizes this reality, and writes accordingly.
My gut feeling is that if we can hang on for another decade or two, there will be progress in renewables, conservation, and efficiency,in terms of technology and scale, such that we JUST MIGHT pull thru without doing the mad max thing.
The odds are not very good probably , but we can always hope for breakthroughs, if not in the fundamental sciences, at least in engineering and manufacture-not to mention will and determination..
If we do things that unnecessarilycontribute to a collapse of the economy,the chances of this renewables revolution becoming a reality are going to be greatly reduced.
The odds of an economic collapse are quite high enough already.
I vent occasionally, like everybody else, but I try to remember to put my brain in gear before revving up my mouth. ;)
Regular readers who notice that I waver from somwhat hopeful to doomer porn in respect to the future please keep in mind that we can't predict the future with certainty, even in very general terms, and that "a foolish consistency is the hobgoblin of small minds". :)
Edit: Of course this has been hashed out while I typed up my response with two fingers.
"Having said this, my personal position is that the company( meaning the stockholders, ultimately) in charge should be liable up to the last dime in the event of a spill,"
Are you saying that I should be prepared to turn over my house because I own 100 shares of Transocean stock? Who would invest in any company if there were unlimited liability?
BTW - I disagree with Gain about the consequences of a liability cap. In stead of drillers consolidating into larger companies I would expect that drillers would become smaller - and instead of owning their assets, they would lease them. This way if something happens, the company declares bankruptcy, folds and the people running it open up a new company a week later. (Think of the way shady contractors operate.)
@farmermac: As usual, you gloss over or minimize the SOCIAL ENGINEERING necessary to accomplish your goals. To wit:
You think will and determination change magically, or are you not capable, like most here, of thinking about the very difficult problem of changing world culture?
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@Activated: Any driller, leased, spinoff, or otherwise, will have to have insurance, the premiums of which will be borne by all in the industry pool. Legislation tracking responsibility is certainly possible.
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Yes, I'm aware that I'm harping on changing culture, especially surreptitiously, since culture drives all actions, especially the voting and consumption patterns of the "democracies" that control co2 production.
If you don't see global warming as existentially serious, we have nothing to talk about. I'm not a believer in facts and figures as weapons against compartmentalization. I think the history of the Non-spread of the Enlightenment through the Internet is proving that. For every DailyKos, there's a RedState, for every PBS, a Fox News.
Ormondotvos,
I am at a loss as to how to interpret your remarks..
I certainly don't think will and determination "change magically".I have posted many comments to the effect that simple cultural inertia will probably prevent us from doing anything adequate to stave off a collapse, and I actually do think the odds of a general collapse are higher than the odds of averting the same.
I am one of the relatively few hard core Darwinians here who pull no punches in respect to culture.I insist on dealing with religion, war, territoriality,ethnicity,, and so forth as a disinterested biologist from another world would,and the overall flavor of all my past commentary, if you read it, will convince you that I have no doubt about the Hercluean difficulties of INTENTIONALLY changing cultures.
But reality changes culture easily, whereas social engineering wannabes such as advertisers and political parties find it difficult or sometimes undesirable to do so.
You can't convince my redneck buddies to give up thier f250 4x4 trucks so long as they have enough money to drive them, butthe reality of a maxed out credit card or a repo man easily accomplishes the job quickly indeed.
The reality of changing incomes, prices, and outright ABSCENCE of some things from the market can change culture in a very substantial way over a couple of decades.
"Will" and "detemination" are the precursors to cultural change.There can be positive feedback between will, determination, and change once the process is started.
In ten years for exampl;e I believe populist rage will make it very dangerous for a politician to support air travel, since most of us won't be able to afford it by then.
And although I have a generally poor opinion of the grasp of the masses of physical and economic reality, most of us will get it after we have been hit with a brick every few weeks over a period of a few years, and start spending more our disposable income on triple glazed windows and insulation and less on fancy dinner wines and flashy clothing and suvs-assuming we still have an income, and the collapse arrives slowly enough.
For what it's worth, I take global warming very seriously indeed, as seriously as a personal heart attack,, but I have serious doubts as to whether we will survive as an industrial civilization long enough to worry too much about it at the moment;if we don't solve the energy crisis, the fallout of an energy driven collapse will solve the population problem, and possibly the issue of further co2 builup as well.
At any rate, culture can change , in historical terms, in the blink of an eye;witness the free fall of birthrates in the developed world, women becoming empowered by work and education,the adoption of the ice and the abandonment of traditional farming and lifestyles where it has become available.
These changes are inadvertent, and not planned or organized and executed by some spefific organization such as a govt-which is what the term "social engineering " means to me.
I gather that you are in favor of an immediate and substantial powering down of bau in hopes of solving our all around environmental crisis;I find the sentiment admirable and the reasoning good, but I am afraid there is absolutely no chance that more than a miniscule and totally insignificant portion of the population even of a very rich and relatively well educated country will go along with you.
I do believe we are at least in the same book-we are in one hxll of a fix,and worried about it.
Two things: thanks for the acknowledgement we're in the same book. Now for the evolutionary psychology and sociology, the meme-step. My references are Susan Blackmore {wiki}
and previously, Richard Dawkins, who seems to have conceded the field to Susan.
Change it predictably, perhaps, but definitely change culture. See adbusters.org et al.
This is my point entire, that almost everyone feels that science has no business in culture, EVEN though the same "enlightened ones" who endlessly discuss the technical solutions (as you did) to our problems, never seem to make that last culturally forbidden step, and hand the cultural problems over to the social engineers. Oh, cultural engineering, EVIL!
Godwin comes into play instantly, and 1984, and Soylent Green. I can't think of a psychological utopia to match these embedded dystopias, though we should, if unbiased, be able to think of at least one, outside of heaven.
What I'm saying is, "Where is the invention, and postulation, and experimentation and discussion of cultural engineering solutions to these problems?"
Sure, you wave vaguely in the direction of dropping birthrates (but only in developed countries) and possible peaceful drops in consumerist living standards (if people are bashed by poverty) but neither of those seem worth "handling for impact" in the same way Gail the Actuary wants to handle the insurance aspect of accountability.
She doesn't talk about changing the culture of accountability, though. I think I know why - it's got a name: polymorphous perversity. George Soros calls it reflexivity, the infinitely unpredictability of the culture of finance to manipulation, and yet he, almost alone in the world, establishes culture-changing structures (see Open Society).
People instinctively react, negatively, to perceived manipulations of their cultural reactions. So, very obviously, they shouldn't perceive the manipulation.
Take BP's ads. We all snipe at them because it's obvious, under great stress, that BP rushed the early ones to market, but now that, through Herculean effort, BP has stopped the oil flow, and erased the visible effects of the oil, the ads seem less obviously manipulative, I think they'll help improve BP's image.
I think the greedy rich are working all the time to manipulate our perceptions of them, and I don't think it's always possible to tease out the path it takes to us. "Greed" the movie, the constant calls to free the market through less government regulation; the obvious, to me, steady balance between Republicans and Democrats, or progressives and reactionaries so that legislation is always heavily compromised and weirdly complicated (Medicare for All, anyone?).
You may feel I'm wandering, but if you aren't holding all these aspects of the cultural situation in your mind, how do you analyze cultural manipulation? It IS about religion, sex, money, status, power, environment, economics, politics both local and global, and it's mainly about where culture impacts decisions in the voting booth, which is not so much affected by statistics and logic and physical laws, or even historical parallels or what your Dutch Uncle said.
It's about changing the impulse in the voting booth, and thus in the legislature. And the work is not being done (see Lakoff) and dismissed as evil or impossible.
We shall see. The world will change when the average person's votes change. Or climate crashes food production. Or the nukes fly. So get to work: learn about emotions that govern actions and rationalizations, and then TALK ABOUT IT.
ormondotvos,
Dawkins is next to a god in my estimation and I have read most of his work, but Blackmore I am not acquainted with.
I am not impressed with the fact that she spent any significant amount of time as a parapsychology researcher,because I have always considered the field to be the exclusive province of quacks-even though I recognize the necessity of covering all the bases.I used to think I would live forever, and that I could read everything that attracted my attention, but age has convinced me otherwise,and I probably won't return to evolutionary psychology unless I hear about about something special from within the ranks of the researchers associated with good universities.
I do recognize that we can be taught to say "Pepsi" or "Budwieser" and to otherwise spend our money foolishly and to listen to certain kinds of music and even not to say certain words,at least in public, and I recognize that this sort of manipulation only represents the very tiniest tip of the iceberg in respect to the totality of the manipulation of all our thoughts and values.
I question whether it is possible to manipulate the broad masses of people to change thier basic beliefs and values on a wholesale basis in specific ways-at least predictably and within a meaningful time frame..
If it is possible,who would we trust with the levers of power?
The results might be even worse than the current mess in which we find ourselves, but I am intrigued with the idea of putting ourselves under the the authority of a sort of captain of spaceship earth.
If it were to be possible to do such a thing, and the captain were to be a truly wise and benelovent dictator, we might come safely into port after sailing thru the storms of overpopulation, resource depletion, and climate change.
But the chances of such a captain being found and put into office are so remote as to be of only academic interest.
@ofmac
Thanks for the response. I've listened to Dawkins live more than once at UC Berkeley, speaking to the cognitive science students' association, and the most salient fact about Dawkins is that he hears the question you meant to ask, and answers it (if he can).
A lot of that applies to Blackmore. Essentialy, Dawkins seems to have ceded memes to Blackmore, writing the intro to her meme book(qv). I also have her book on Consciousness, which is a beaut, since she canvasses the field through submitted essays, and then concludes we're a long way from having any real sense of what consciousness is given our current way of looking at things. I like that in a researcher!
It reminds me of "The Adapted Mind", one of the ur-texts of cognitive science, also constructed that way, although with more results.
The impression I get is that memes worm their way into various compartments (term of art) of the mind, where they don't communicate with each other, thus enabling us to construct counterfactual scenarios, but but also enabling (term of art) some of our bad habits of inconsistency.
"The mark of a fully developed mind is to be able to hold in view two or more conflicting theories about the world at once." Sometimes attributed to GB Shaw, Aldous Huxley, George Orwell, or Albert Einstein. Doesn't really matter who said it first. It's the basis of understanding propaganda.
Humans have no need to be logical in their daily life, only rational.
May I recommend the book by B. Alan Wallace titled Hidden Dimensions: The Unification of Physics and Consciousness.
http://www.amazon.com/Hidden-Dimensions-Unification-Consciousness-Columb...
Not to be a Neanderthal, I always thought of combat as the unification of physics and consciousness. Maybe I can find some fair and free excerpts and find out more.
To paraphrase J.B.S. Haldane, ‘things are not stranger than you imagine, they are stranger than you can imagine’.
That was not my intention-I meant that you should loose 100 percent of the value of your stock.You are after all going to collect 100 percent of any after tax profits-which are occasionally huge-I don't like the use of words such as obscene, as they reveal an antibusiness mindset rather than rational thinking.
I just don't believe in bailouts- businesses should simply change hands, and the owners and employees should be required to take thier chances of loss along with thier chances of gain.
I have held membership in unions,as a result of being an opportunistic rolling stone craftsman; and my Daddy was a life Teamster while doing his part time forty in town;but the UAW took the big money and the big benefits negotiated by GM.I don't have a whit of sympathy for either, as an institution or organization,although I feel some sense of concern for the people involved as individuals.
But perhaps the concept of extending the liability to the other assets of investors should be explored more fully.
I can't see any way this idea could be made to work , however, within the context of our current legal and financial systems.
But we could throw a few executives and managers in jail occasionally. ;)
@Dunewalker
Your comment represents the woefully misinformed sentiment that most people here in the U.S. have towards the industry. This is an objective analysis based on how the insurance industry reacts to UNLIMITED RISK. They do so by NOT insuring the practice of drilling offshore. As a result the cost of drilling offshore becomes a risk the oil companies can no longer afford at any price (yes big oil companies have financial limits too)so they pack up their bags and go home.
Now, you might say hooray to that right? But there again lies your misunderstanding of your complete and utter dependence on the continued and abundant supply of oil not only for your comfort but to maintain your employment (assuming you are in the workforce) and stocked food shelves at the local grocery store.
You don't understand that we are at a crossroads and it is NOT choosing oil or some magic path to a renewable energy future where there is a an electric car in every driveway and a whole foods on every corner. That future is a hopeless energy intensive lie that many of the greens like to sell. The reality is we can choose either continuing our unsustainble and destructive pursuit of fossil fuel energy to maintain our lifestyles or we can choose to live with less and by that I mean A LOT less.
Very few will voluntarily choose this step down in standard of living over the coming years so the energy recession will choose it for us as it is doing now.
This should be posted at the top of every forum and news article every day, until it's part of the background, accepted without doubt:
Actually, I find her comments to be quite rational and intelligent, and without the industry bias you accuse her of.
It's a fact that no industry operates without insurance, because of the litigation/tort aspect to our business system. It's also a fact that insurance companies will either be totally unwilling, or will charge extremely high premiums, for an industry with no limits to damages, and with such an exaggerated risk at incurring them. (As an example, I don't know if there's a limit to damages for airlines, but then again, even a 747 crashing fully loaded wouldn't incur damage on the scale of the Deepwater Horizon.)
Applying some intelligence to the problem--is it better to have any kind of cap, or not? There are consequences to either possibility, and it's the rational thing to explore both. I see nothing subversive or dishonest in Gail's essay, dune.
There's a whole new field, born within the last 20 years, known as environmental resource economics, devoted to precisely the task of finding hard dollar costs to environmental consequences to doing business. That's the field which addresses questions like, what is a reasonable liability to assign to the probability of an oil spill? The answer, if any cap is to be assigned at all, could be a function of several factors, including well depth and duration of spill. But it's the reasonable thing, to explore the consequences of assigning a liability cap versus not.
Those who advocate for a cap because of insurability are making an unfounded assumption. There is no liability cap (in most states) for malpractice. There is no liability cap for auto accidents. The defendant in a suit can still take the tortfeasor for every dime they have. It's just unlikely in many situations because the tortfeasor either hasn't done so much damage that it's past the policy limits, or the tortfeasor doesn't have any money to pay up with beyond the policy.
How many incidents are likely to result in damages beyond $10 billion? Very few. If insurance companies want to write policies only up to $10 billion or some other number, that's their choice. Energy companies can still have no limits to their liability beyond what the policy will cover.
It would cost no more to buy a $10 billion insurance policy if there was a liability cap as well, than if there wasn't, as the risk to the insurer is the same. If anything, it might be cheaper because insurance actuaries might take the additional deterrent effect into account in determining price.
There is no "public good" argument that would limit the actual liability.
dune - Curious: what particular statement do you disagree with? I've disagreed with Gail on a number of issues in the past but directed my replies towards a particular point and not the person.
Rockman, I'm not advocating any of the solutions presented and/or discussed---this is one of many vital issues. It was just the sense of bias in my ears to the way the topic was presented, partly due to my increased sensitivity from previous more blatant examples over the past few years. A more neutral approach, providing pretty much the identical information to promote discussion, would have preserved the perceived neutrality of the Oildrum to many folks like me not directly involved in the oilpatch. Btw, you're an example of someone heavily involved in the oil industry who yet is able to present your expertise to the rest of us while acknowledging the importance of factors like environmental damage, health, safety, etc, things other than the bottom line of making a living. I certainly appreciate that.
I think as many real costs of oil production as possible ought to be included in the cost of oil, including environmental degradation. The public pays these financial costs ultimately anyway--better that we get to choose by buying less gasoline if we object to ruining the gulf to get it, rather than paying the same amount in hidden form through taxes from the dollars we saved at the pump.
I apologize to Gail for the personal attack, it was not appropriate.
dune - No problamo. I did find it charming how so many TODers jumped to Gail's defense like she was some weak little sister. I've seen Gail debate many before and she's far from a weak sister. LOL. I think some folks take bias as a loaded word in and of itself. I'm not sure it is. Are you biased towards protecting the environment? Seems so. But is that bias a bad thing? I don't think so. To me not being biased is pretty close to not having an opinon. And would that make for a very boring TOD: nothing to do but tell our favorite Blue Bell ice cream stories.
I second your comments on bias. Back when I was mapping subsurface horizons from sparse data I eagerly imposed a bias on my interpretation ("i'll bet this is shoreline sequence, so lets push that line over there..."). If I did not, and rigorously and unemotionally used only the data present, I would make a map that was basically worthless. When you can't wait for the truth to reveal itself, imposing an informed bias is the only way to make sense of things.
Thing is, I don't believe this is bias in terms of being an 'industry shrill', whether you consider that to be positive or negative.
It's more to do with not driving headlong off the cliff and imposing some strategic thought on the issue. Making it more difficult to drill through regulation just when practical geology is making it harder isn't a rational idea. Sure you need sensible and realistic regulation (which was the main thing missing), but casting around to find 'solutions' without a sober head on your shoulders only makes things worse - and that's what the witchhunt and shakedown of BP has been.
Mind you, in the end I think the future belongs to national oil companies and production in the interests of society, not making someone rich. If US politicians had taken that path as a result of the spill, I'd have been heartened.
If this bill adopted by the senate and becomes law it will undoubtedly be detrimental to GOM operators. What effects can be expected by small onshore independents?
None.
Nonsense
The House bill included a whole lot of provisions that would affect onshore drilling. A few:
A)designating EPA as a lead agency for authority of the bill;
B)covering all onshore and offshore wells, by way of the proposed definition;
C)removing States' regulatory authority over onshore and state water drilling;
D)calling for chemical disclosure related to hydraulic fracturing on federal lands.
The fact of the matter is that it's NOT going to be adopted by the Senate. There are plenty of reasons, not only the fact that the moderates (Brown, Snow) wouldn't vote for it but the Republican has a filibuster. Anyways it would only be temporary wouldn't it? Would they not replace the cap with a higher one as earlier suggested ($ 10 Billion?)
jeff - speaking for all the small onshore independents nothing would financially benefit us more than a complete ban of all offshore drilling. Anything that raises the future potential value of our production is a good thing for us obviously. Not so good for the country, of course.
I'll also take the opportunity to expose another dirty little secret about offshore liability that few in the public are aware of. After the last two hurricanes and the subsequent damages the insurance industry made huge changes to offshore liability protection. And I'm talking about more than drilling a well. With so much damage done to producing facilities and existing wells the underwriters have greatly reduced their exposure. The biggest change is they now cap an event. A hurricane blows in and knocks over 50 producing platforms and we see another spill of 100,000 bopd or more than once the costs exceed $x millions there is no more coverage. It's all on the operators at that point. So in essence there a huge uninsured liability out there right now that I've not seen quantified. A small operator might have a $2 billion coverage. But if a big storm hits and their converge gets capped by the event max their actual coverage could be far less. Just a WAG on my part but given a worst case scenario the tax payers might be looking at billions of $'s of liability that could bankrupt small companies and leave the bill to the govt.
OTOH, the tax payer isn't an innocent bystander in all this. The American people, through their govt, are partners in offshore oil/NG development. They are the mineral owners. They are partners with the oil companies. They offer those rights to companies and have collected 100's of billions of $'s in lease bonuses and royalties over the years. As someone said: if you play you pay. And the public, thru its gov't, has been a very big player in the offshore drilling game. In fact, it's their ball, bat and glove. It's their game 100%. No company has the right to drill on federal lands. It's the govt that solicits this activity. Doesn't matter how stupidly/carelessly BP acted: there would never had been a spill if the govt didn't lease the block. And the govt makes and enforces all the game rules. If the govt can't do that properly then maybe they shouldn't have started the game the first place.
This is why the liability cap is not as important as it seems, at least for companies that have deep pockets. The effective cap is the value to the company of the continuation of this partnership. That's why BP was willing to promise to put $20 billion into escrow even though the statutory liability cap is $75 million.
A big part of the issue is that there aren't insurance companies that provide unlimited coverage. Usually this isn't an issue, but it the amount of damages is very high, it can be. If it were as simple as paying a higher price for a higher policy limit, there would be much less problem. That is why I mentioned the possibility of a $10 billion economic loss limit. At this limit, an insurance program could likely be put in place. Optionally, the government can provide limits about this, as it does with the nuclear program.
Insurance companies wouldn't have to provide unlimited coverage, an oil company would simply buy coverage up to a certain point (say, $10 billion) and absorb the risk on the rest. BP didn't even have insurance in this area.
I don't buy the argument that high liability will drive out the small independent drillers. If one of them makes the same (or similar) mistake as BP and doesn't have the financial reserve to fork over $30+ billion in damages, then the US taxpayer would have to fork over that which is necessary to make up the difference, which is totally unacceptable. It's very similar to a roofer being bonded before he is allowed to climb on and fix your roof.
If this drives up the cost of drilling, so be it. We need to 'get off' oil anyway...
I would go so far as to say that "drives up the cost of drilling" is an inaccurate description. To me it is more like, "brings the paid cost of drilling closer in line with the actual cost of drilling."
If the costs of deepwater drilling (with all enviornmental damage to other industries) exceed the benefits, then we shouldn't do it. That seems to me what the market is trying to tell us.
I expect that some day, when oil is in short enough supply and not frittered away in SUV tanks, the benefit to GOM drilling will raise to exceed the costs.
Bingo!
Bringing the cost of oil back in line with its true cost, as opposed to its massively subsidized "cost" should be a genuine objective in any rational society. Only then can clear assessments be made of the cost of oil versus the benefits. Only then can clear comparisons be made between oil and other energy sources. Otherwise shills for any subsidized industry will cite the subsidized costs in order to confuse the issue.
By the way, I oppose Price-Anderson for the same reason. If that nuke plant is as safe as claimed, let the company operating it take full responsibility for it.
The True Costs of the Macondo well blowout are not yet determined. BP evidently expects to spend 10 billion and has agreed to pay an additional 20 billion into the Obama hijack fund. They got what subsidy, exactly?
Hard to say, as the negotiations were private? But perhaps a promise not to pursue criminal liability or sanctions?
This is a false argument. No liability cap doesn't mean that insurers have to provide unlimited coverage. In just about every type of liability insurance (professional liability, car, etc.) there are no caps for damages but insurers set various limits for coverage. If the damages exceed the coverage limits, the insured tortfeasor is still responsible even if it means they lose everything.
It's no problem for the major insurers to set a $5, $10, $20 billion, or any other, limit on their coverage. The vast majority of incidents would be covered by the insurance policies. The rest - such as BP - would have their policy limits paid out and then would have to face paying for the rest. That's both good economic policy and justice.
The liability should equal the damage done to the environment as well other natural resources including all life forms.
If the cost of doing business makes this unreasonable, then the business itself is unreasonable.
Unlimited liability does sound such a great idea on the surface, but as soon as you dig deeper into the repercussions then you start to realise what implications this has. For a start as pointed out in the article that started this debate no insurance policy will cover unlimited liability, so where does that leave us? As a company involved in a risk prone business do you even bother taking out any insurance cover such as BP have done for their operations? The more you push towards unlimited liabilities the less chance as a business you will get any cover for risky operations at a sustainable price. Is BP the only company that has failed to take out cover and chosen to self insure? Far, far from it, in fact smaller and smaller companies are doing the same thing as the costs of taking out insurance rise due to the perceived increase in risk. Following this disaster it is going to become more and more difficult to acquire cover at a reasonable cost, especially for the minor oil companies out there. That doesn’t mean they can’t purchase limited cover just that the costs of cover will break any business model to compete with the majors who can swallow 20 – 30 or even 40bn in costs.
This means reduced competition and reduced competition even on a small scale always results in increased costs for the end user. Do you try to force companies in risky market sectors to take out cover? The costs have to be passed on somewhere and again it is the consumer that will pay but not once but twice why? Risk has to be passed on somehow, AIG bailout 2, 3, 4? Most insurers re-insure their risk in various markets the biggest being Lloyds of London, but start to look where the tendrils of this diversified risk spread too you start to see that companies and individuals already exposed to this risk are not in the greatest shape anyway namely banks and names (see Wikipedia for an explanation of what or who a Lloyds names are). Once you fully start to appreciate this you realise that it is the government and through the government you and I that are the insurers of last resort.
So what is the answer? Accept that you and I as tax payers are the insurers of last resort? Or encourage industry to self insure by joint acceptance of risk, effectively insuring each other?
If you accept all the risk as a tax payer directly of any and all associated clean up costs of an Oil or Nuclear spill does this seem fair? Said company makes all the profits while you pay the costs of an accident? Hardly.. I don’t see tax payers accepting that solution; do you enforce insurance requirements and accept that indirectly you as a tax payer will still end up paying for the costs of a major incident? Also the higher prices at the pump and in everyday commodities you need to live, food, clothes, power and those nice to have luxuries, tv, holidays. Because companies will pass on that cost to you.
Or do we consider a joint acceptance of risk, self insurance to risk based industries with high but not unlimited liabilities and accept as a tax payer that we will probably end up paying a proportion of the costs.
The last option is go for unlimited liabilities massive fines and accept that accidents happen whether though direct criminal negligence or just Murphy’s law where you push the limits of technology and human knowledge so far that something is going to go wrong eventually. You also push for massive fines and costs that the company just closes its doors and the good parts bought up by a competitor for $1 and liabilities are left to who? Ah yes you and me Mr tax payer.. Think it will happen like that? Take a look at the Banking sector and who is picking up the liabilities there...
Will we get off our dependence on Oil? No not in this lifetime, why? Because not enough people will, willingly give up the lifestyle they have grown accustom too. Do we need to give up Oil altogether? No but massively reducing dependence on Oil is a good thing, but that will only happen when self interest becomes less important.
I guess its a knee jerk reaction - do you want the oil or not ?
how about coal and greeenhouse gases - yet alone tailings and water course pollution
all forms of energy , including wind ( mind those birds ! ) will die with unlimited liability
back to burning dung I guess ( no , wait , sue the camel owner .... :) )
Forbin
This is a silly remark, wind and solar have nowhere near the potential for damage that oil and nuclear have.
And nowhere near the EROI. Useless for aircraft and heavy equipment.
"And nowhere near the EROI. Useless for aircraft and heavy equipment."
So we'll have to adapt to limits. How unamerican, how inhuman!
EROI and energy density are two completely different topics. Wind and solar have very attractive EROI, though are not as relatively energy dense as coal and oil, though exactness depends on how one measures the density of electricity vs a fuel.
no its not silly - unlimited liability for wind and solar will damaged their ability to provide energy for us - think of how they are made for a start - one example processing silicon
once made yes, solar cells are going to be just sitting around producing energy - prob. the best answer but we aint getting there
wind- hmm birds as I said and other things roads lorries infrastructure
and I agree that are are better than oil and nuclear , or coal or gas
but will they save us , no , not really and not just BAU here
Forbin
PS: point is everything has a price - and isn't just you an' me making the choice .....
Forbin has described the situation very well.
There is not a bite of food on anyone's plate that does not come from some environmental disturbance.
If there is a belief that burning natural fall tree branches in cave homes will deliver longer life spans, I can assert that it is terribly incorrect.
Just a couple questions -- if we limit liability to 10 billion dollars, who picks up the tab for the next 50 billion dollar accident?
Why shouldn't the oil industry be liable in full for damages it causes?
Liability caps like the one you propose are in part what has led to the current situation, where market-distorting subsidies of all kinds have led our society to be even MORE dependent on oil than it would otherwise be.
This also retards the growth of alternative energy, as oil is being kept unrealistically cheap in comparison.
With respect to very high limits, a lot of the issue is the practicalities of the matter. How does one structure a plan that provides $60 billion limits? How does one fund it? The insurance industry is not capable of such a program. Perhaps the oil industry is, but it would take quite a bit of work (and elapsed time) to set such a program up, and there may very well be unintended consequences. For example, many smaller companies may not be able to fund their fair share, and will be forced to stop drilling in the Gulf or sell out to a major oil company. Even companies who can afford to participate may be forced to sell assets to raise enough capital. And who is to say $60 billion is the right limit?
The government is the insurer of last resort, in some sense, with respect to a lot of bad events that happen--hurricanes, earthquakes, floods, attacks by foreign countries. If the oil industry is taking greater precautions, and regulation is better, the chance of a very bad outcome is very low, but it doesn't disappear all together. It may make sense for the government to provide some backup, for oil and gas companies as well, especially if the likelihood of the event is very low.
sell out to a major oil company
I doubt that this is an option. Shell is cutting staff and selling assets. Chevron, Shell, Exxon are investing in big NW Shelf Australia gas projects. Petrobras can't fund their domestic deepwater. Statoil sold its GOM leases. BP is probably going to be banned by legislation or regulatory action.
Mass merger of minnows achieves nothing. Zero plus zero is zero.
Exactly the same people who have to pay now or if the limit is 0 or if the limit is $100 billion. The only change is the route the money goes through.
NAOM
Instead of the API using the tired old “It will cost jobs” scare, I think they would be better off assuring the public that they have gotten together and developed a workable and pre-funded plan to take care of the next spill so that we don’t have to worry about it again.
If they could do that, I would bet you that Congress would not act in such an extreme manner as public outcry now supports.
What we need, now, is a better state of preparedness by the drillers, explorers, leaseholders. I think it goes without saying or justification that all of the current leases could realistically be pulled. The responsible parties have each assured the govenment that they could handle even greater releases, but they just lied. This was fraud and provides sound basis for canceling all current leases. Mind you, I don’t want the government to cancel all leases – just one or two to drive the point home that we need better emergency response.
How could this be achieved? What effects would it have?
The US government should select one or more target leases and pull them. Obviously, there are a large number where there was fraud in the procurement. We [they] pull out the stops and win these cases – showing that it can be done. This should have a positive effect on behavior; and, by the way, should create more jobs.
The owner of the canceled lease would then have to guarantee [trust but verify] that they can deal with a release of 100,000 bpd for a time extending for twice the time necessary to drill a relief well. Rules would then be simultaneously published laying out the new standards for all wells similarly situated. Look, they did guarantee that they could clean up any spill. They lied. They will, then, not be able to say that the “spill response capability was never designed to handle what's going on in the GOM right now” and was approved before the lease with the government knowing that. This was fraud on an industry-wide scale. We get to keep the license fees and any royalties.
But, we get the industry and all of its members, jointly and severally, to become responsible citizens. They will never again be caught with their pants down.
We will get, in addition to a fairly valuable guarantee that we can handle the next one, with a great number of jobs paid for out of the oil profits. The jobs would come in two waves – the first to make more booms, skimmers and the like; and the second would come with more downstream jobs.
Who will pay? We all will by slightly higher oil prices, but the increased cost of oil will maintain incentives for more of that Green technology and the jobs that could go with it. That should replace every lost oil job with at least one non-oil job.
The API uses scare tactics based on economic considerations without any rational justification. I would like to see someone handle the analysis fairly and fully – after the government cancels at least one lease.
Can we afford it? Can we not afford it?
One more comment on this:
If we get less oil from the GOM, peak oil's effects will be felt a little sooner.
I thought most of us agree that would be a good thing?
So we have to face up to the situation we're in a little bit sooner, before we've COMPLETELY destroyed the biosphere and used up ALL the oil?
This is our only hope, it seems to me.
Based on the cost of cleanup, they should have an unlimited cap.
It's incredibly cheap to 'clean up' a
spill in Africa.
Let the rigs float off to cheaper shores.
The only reason for keeping GOM open is the money the oil leases(given away by Bush-Cheney Inc.)generate for the US treasury.
It will also hurt the US trade deficit but remember,
'Reagan proved deficits don't matter"-DICK Cheney
maj -- Not that it refutes your main sentiment but Bill Clinton ownes the record for recieving more OCS lease bonus money than any other president in our history. He was also the one who approved the "no lease royalty" plan (without any max oil price cap) for Deep Water drilling that so many folks were upset about.
I'll take you word for that, ROCKMAN.
Both parties are highly contaminated by their 'influence'.
People have no idea how powerful corporate America is in
influencing our elected officials who have limited time, experience,intelligence and scruples.
There are 26100 lobbyists in Washington versus 435 Congressmen and 100 Senators, whose job is to pass legislation on behalf of the American people.
http://wallstreetwarzone.com/invest-heavily-in-lobbyists-political-campa...
'Powerful' doesn't do it justice. They are subtle, writing thousand page bills, relying on the legal system to obstruct or the electoral system to intimidate or the media to distract.
They are experts at shielding their activities and intentions from public view.
It's an impressive machine in operation but a shame on our country.
Lifting the $75 million was a definite. $75 million is way too low a cap for such a high risk. Nevertheless, unlimited liabilities has bankruptcy written all over it. My assumption is that Congress lifted the cap for BP purposes but plans to put another one on soon. The problem with this is Congress is officially out for a month in a week and after that who knows when a new cap will be ready.
I agree with TangoJulietCharlie, I think companies should be more concerned about their affect on the public rather than it's going cost jobs. Jobs we don't even have. First, there are benefits of being in US water, it will not force everyone to leave. Secondly, an ounce of protection versus a pound of cure. While the novelty of BP will wear off, this is just another incentive for big companies to come prepared and pay the initial cost rather than skipping out and facing the consequences. This will allow companies to think twice about whose life they're putting in danger.
Lastly, high prices of oil might encourage constituents to light a fire under their representative. If you're feeling the price of oil, maybe you should ask your representatives to focus on greener energy rather than wasting time with subsidy band-aids.
Raising the liability cap will clearly and directly push small oil and gas companies out of the Gulf. Simply put, there is no way that a small company can obtain insurance on a $10 billion potential liability. This bill is a job killer that could likely put 200,000 people out of work.
The only way I can see that a small company could get such limits would be if the oil companies set a program, specifically for this purpose. But I expect that the cost might very well be too much for the smaller companies, even if it existed.
If a company cannot afford to clean up its messes then they should not be making messes.
What if society can't afford that companies don't operate due to the risk (however remote) of making messes? For instance, what if the insurance industry isn't large enough to foot the bill for a nuclear disaster and so won't/can't take on unlimited insurance, but nuclear power is the only means with which we can save our civilisation from an energy crunch?
Can you provide more info on your 200,000 people out of work statistic? That seems like a very big number to be employed (directly and indirectly) by the GOM deep water drilling industry.
I have a friend who works on a deep water drill ship. His ship will probably leave the GOM, which will increase his commute depending on where the ship goes (Africa, South America), but his job is secure.
Supply boats, service company staff, helicopters, food service, shore support, roughnecks who won't "commute," pipe suppliers, machinists, etc
So if the leases become available to other larger companies who move forward with them, they'll need roughly the same number and type of people mentioned above. Only the larger company isn't going to declare bankruptcy when they cause a major spill and leave US taxpayers to "bail them out" with cleanup costs.
I don't think you understand. The small operators will go away, and large companies won't pick up their leases. I doubt there's much interest in buying production, either, because of decline and abandonment cost.
If the majors didn't see value in picking up the independents' wells, then market forces at that time would be low. However, the price is substantially higher now that 5 years ago when most of these wells were drilling or already in operation, so most if not all will be picked up (if they have good maintenance logs).
Thanks. Actually I was curious where the 200,000 number came from? It is significantly larger than the politicians have quoted - and they tend to over-exaggerate.
If JOBS are the only thing we're worried about, then let's start drilling and even create a couple more blow-outs! Just consider how many jobs have been created with the beach clean-ups! Those are net new jobs. If the gushers continue, those will become permanent jobs. The boom and dispersant suppliers probably added extra shifts to meet the increased demand. Maybe the next gushers can be off the Florida coast, and in the loop current to spread the spill further - more beach clean-up jobs! And there's the possibility that exposure to the oil and dispersant is hazardous - medical jobs to take care of the sick people! Add in the pharma reps, medical device suppliers, etc. Maybe some new hospitals and clinics will need to be constructed to care for the sick folks - construction jobs!
So a couple well placed deep water gushers and increased drilling will be a job creation engine!
By all means in this discussion let's IGNORE the fact that there were over 43,000 deepwater wells drilled that did NOT blow out. Compare this to your friendly neighborhood surgeon's record. My guess is he'd be THRILLED to do as many as 430 surgeries without losing a patient. Was the industry complacent? At least we know BP was. Does success breed complacency? Obviously.
Should the entire industry be destroyed because of the mistakes of ONE company? According to the peasants on this site carrying torches and pitchforks this can't happen soon enough. Good luck with your energy-less future, which will revert to being nasty, brutish and short.
"...over 43,000 deepwater wells drilled that did NOT blow out."
I agree on one hand, but wonder whether it'll be another 43,000 deepwater projects before the next major incident? Are another 43,000 such endeavors even possible? Or are we getting into "ultra" territory there? Anyone nervous about this next frontier, BTW?
Regards, Matthew Blain
Melbourne, Australia (down here, we don't seem to worry about such stuff)
IMHO, no. Modern-day capitalism requires that the risks are calculable for a company's stakeholders. Also, the risk of abuse is very high with an unlimited cap. It's obvious that direct costs should be met, but what about the (sometimes very) indirect ones? With an unlimited liability, the temptation is to just charge everything to the account, regardless of how far removed in the cause-and-effect chain the "damages" are from the original incident. Such practices, superficially intended to penalize a company's actions for its detrimental effects on a nation's economy, also often overlook the fact that, no matter how bad a catastrophe is, there will be not just losers, but beneficiaries. For example, I guess that Nalco (manufacturer of Corexit) is laughing all the way to the bank since April 20, and it wasn't exactly all bad news for Kevin Costner, either ;-).
Even a fixed limit of $10 billion is not without its problems. For example, supposing it could be shown that this accident was substantially attributable to Halliburton (for the cement job) or Transocean (for switching off the alarms on the rig, etc.), the strong temptation would still be to single out BP for the damages for the simple reason that it has enough money to foot the enormous bill where the others don't. There must be a system of fines such that even the not-so-huge companies take their share of the burden and also have a strong financial motivation for adhering to safe operating practices.
Haliburton and Transocean are BPs problem. They hired them.
Not so simple. As has already happened with Andarko, BP can assert its right to share penalties with other parties, and they can defend themselves in court. Possibly these issues would be resolved in the larger criminal culpability trial which is almost assuredly going to happen, but possibly not. BP has already billed Andarko and Andarko is already building its legal defense. BP will have to assert its own rights as a client, so in that respect you're right, but they'll be able to make use of the US legal system in the effort.
Depending on whom the Dept of Justice suit names, Halliburton and Transocean might be defending themselves before the federal government exactly like BP would.
Ghung, I see by your bio that you design energy efficient homes. What if some horrible event were to happen in one of those homes, through no fault of your own? Would you be happy that you were crushed by an ambulance chasing lawyer because he determined that it was REALLY because of your high efficiency design that a family of seven died in their sleep? He doesn't even have to be right, he just has to convince a jury of your peers in some tort friendly state and you're up $hit creek without a paddle. Perhaps when you consider the other side of the coin you won't be quite so sanguine about the liability equation. Or perhaps not.
First of all, I consider the entire tort situation as far into overshoot as the rest of our conundrum ridden society. I've never been sued, but came close once. The sueing lawyer dropped the whole mess for lack of merit (and I don't think he liked the look in my eyes much. He was a fearful little wuss). It seems to me that everyone is either a plaintif, a defendent, or an "officer of the court". What a country!
I also consider this whole thread a bit moot, except that it is a good example of how screwed we really are. The entire discussion hinges on BAU continuing, which my limited intellect and considerable intuition both tell me is impossible. It's just one more attempt to solve a problem by adding one more layer of complexity.
I don't design or build anymore for folks I don't know very well, and am in the process of "dropping out" of what I consider the insanity of our current society as much as possible. I'm sanguine about the whole mess.
That said, comparing me to BP isn't really productive. Unlike the Supreme Court, I don't consider BP a person and I never will.
HEAR! HEAR!
HEAR, HEAR!!!
Craig
Perhaps the converse question. Why should there be a cap? The 75M$ cap was all about encouraging deep water exploration, as was the (now gone) lack of a percentage take on oil recovered. It is clear that when the cap was first put on there was an implicit understanding that the USA benefited as a whole from the oil recovered, and by implication, should share the risk. What was clear however was that the risk was woefully misunderstood. As has been observed earlier, is seems that most of the risk was thought to be surrounding tankers, pipelines and production facilities. So 75M$ was thought to be not all that low. But it was.
So, if it is about mutual benefit - the USA has oil, it wants the oil to lubricate the wheels of industry and the economy, it does a deal with companies good at getting that oil. If the USA was a corporation it would be a partner in the oil wells, and liable for a share of the damage done. But it is a sovereign nation, makes the laws, and can duck any responsibility it wants to. In some ways this makes it ethically a worse participant in the situation than the corporations. So, as a beneficiary of the oil, how much of the risk should the US shoulder?
If the US government rises above petty politics, how might it tweak the laws to maximise benefit to itself? Gail essentially shows one axis. It isn't an exact science, but clearly the answer is yet another risk benefit trade-off. To get the most oil, at the cheapest price, the US shoulders all the risk. But this will increase the risk - no penalty for bad behaviour, risky practices, etc., and the chance of another bad accident goes up. So there is a tradeoff. The question isn't just about caps. It is about the right mix of sticks and carrots.
I have no idea however. But it is crucial to realise that it isn't a simple moral issue. The second order effects dominate. An unlimited cap may be functionally identical to the US government legislating to shut down all deep water exploration. If that is what it wants to do, well fine. But it is naive in the extreme to imagine that these issues can be decided on a simple moral basis.
What I would find interesting is to see the voting on this issue. Which state representatives vote which way. I will bet the oil states will vote against an unlimited cap, whilst those states with no stake in it, will vote for it. There is an old saying from US politics. "They don't make cars in California."(*)
(*) Or words to that effect.
The alternative to a cap is heavy regulation. Do everything by the book and there is no liability if things go wrong. Then you have to start asking what are the penalties for violating the regulations? Unlimited liability?
Along those lines, I read somewhere that the existing cap is really pretty moot, as it doesn't apply to criminal negligence, and the criminal statutes are such that it's hard to mess up really bad without violating them.
Someone must be responsible for picking up the tab from $10 billion to infinity. If it's not the folks with the knowledge and skills and doing the work - who should it be? The taxpayers?
BP has set aside, what - $20 or $30 Billion so far for this gusher? Seems like that will set an expectation for the range of an upper limit. From an insurance perspective, is there much of a difference between $30 Billion and uncapped? Would a small independent operator be able to afford the insurance either way?
I like the idea of companies that risk doing great damage also risk having their companies going out of business when they mess up big time. Executive bonuses, stock options, stocks, etc. with zero value. How's that for an incentive to make sure that safety is really, truly, absolutely job one? Mutual fund managers may even start asking about safety programs, and buying and selling stocks based on safety records. Golly, that almost sounds like a "free market" with internalized costs.
As the oil prices continue their inevitable rise, drillers will return to GOM. The oil will still be there. If we need it badly enough then, congress can always lower the liability cap.
Very definitely, yes. Insurance operations depend on fixed limits -- usually ones chosen to be sufficiently high enough. Try going to an insurance agent, and buying unlimited insurance coverage for anything. Such doesn't exist. You almost have to work in the insurance industry for a while to see this problem.
As a practical matter, the largest oil companies are larger than the largest insurance companies. In order to have a very high limit program, oil companies that will need to be the ones to set up such a program--but even here contracts will have to have maximum limits, in order for participants in the program to reasonably evaluate whether they can afford the maximum assessments.
Sorry, I didn't do a good job of expressing my thoughts. What I was referring to was the cost of premiums rather than getting any insurance product at all.
My point is that the insurance cost is probably beyond what is economically viable for the drillers. I can't even hazard a guess at what the premium would be for a $30 Billion liability policy - $300 million (1% of value)? That's probably equal to all of the other costs of drilling a well. So if the $30 Billion policy is unaffordable then any policy amount between $30 Billion and infinity will still be unaffordable.
Gail this is your space, but isn't it true that there is no cap on a cat5 hurricane coming into Florida for any of the insurance companies whether they be auto, home, business, or all of the above? They simply have statistical models, and reserves that correlate in some manner to those models and of course Bermudian re-insurance companies. I just sold my company that (among other things), took all the storm damaged cars from the major auto insurers stabilized them and auctioned them off, i simply don't remember them saying - "we're upto 3000 cars for this storm, we're done". Outside of oil's embarassingly small number (they must have great lobbiests) are there other "incident" caps in other industries other than nuclear's?
I started out life as a NukeE (my life is pretty odd i admit), but did the $10B nuke incident cap come from a report and then law from the 60's? And has it been static this whole time? My remembrance of this number was that it was to encourage the building of nuclear plants, which has essentially failed post TMI (my neighbor 15 miles away, and which i helped clean up way back in 79). Furthermore wasn't the justification this level of support (cap) because they were utilities, and we couldn't afford to have a utility bankrupt itself due to its essential life support to its customers....
Bottom line is that I don't think there is an easy equivalence here, my guess is that BP went bankrupt (i'm betting on that eventuality) that its assets will be sold off and little will change for the good or bad (minus the pension portfolios especially in England). Few would want to make that case for a utility I believe.
The American Petroleum Institute is a very aggressive and effective oil industry advocate and lobbying group. During my environmental consulting days I did some work with them on several occasions. They have many competent people, and they know what they are doing.
Since the early 1970s they have fought almost any and all environmental regulations affecting the oil and gas industry. A favorite tactic of their has been to raise the fear that such regulations will i) destroy jobs, ii) put companies out of business, and iii) raise the cost of petroleum products. Well, here we are some 40 years later, and the US petroleum industry seems to be doing just fine, thank you, despite all those needless environmental regulations that they cried were going to destroy their industry and the economy in general.
Now, on the subject of insurance, it appears to me that once something gets past a certain size, insurance becomes a rather dubious concept. (If Noah took out flood insurance, who would pay the claim?) Getting back to basics, the whole idea of insurance is to pool risks, or perhaps more accurately, pooling the cost of losses from events out of one's control, e.g., a car accident, a building collapse, one's death.
The trouble is: insurance turns into a gambling operation, as evidenced by this whole business with credit default swaps and the related trouble AIG found itself in. Loss of business insurance starts to get into this questionable area, particularly when the businesses are global, multi-billion dollar operations. So, when the potential losses exceed the ability of any single entity to pay, then how can insurance still function as a protective measure? As I see it, the total cost of a catastrophic event will eventually be borne in one way or another. No way around it. But what insurance does is give the illusion that one can fully protect oneself from the vagaries of nature and human folly. You can't.
That is why I think it far more productive to focus on putting in far more effective preventative measures, both physical and regulatory, than to figure out how to divvy up all the claims after the fact. The threat of severe punishment (and I'm talking about real hard prison time here, not just fines) would also wonderfully focus the attention of oil industry management. (As would public disembowelment, but perhaps that might be going a bit overboard.)
"The trouble is: insurance turns into a gambling operation, as evidenced by this whole business with credit default swaps"
And let us not forget that it was the Exxon Valdez mess that gave us the modern CDS:
http://en.wikipedia.org/wiki/Exxon_Valdez_oil_spill
Funny how things work........
I do a lot of work for the environmental industry, and I can share several things that I have learned over the years -- 25+.
First, things don't get cleaned up without laws and regulations.
Second, every time environmental laws are enforced, there are commercial benefits that create jobs. Many of them. And, if the industry being regulated is paying attention and has a fully-funded research department, production efficiencies are typically achieved.
On the subject of insurance, if there were a requirment for insurance, the industry could set up a fund and all participants would have to pay in. That is a much better idea than leaving the taxpayer on the hook.
TJC, I'm glad you work for the environmental industry for 25+ years. Perhaps you can explain to me, why I live within 60 miles of a Superfund site (supposedly one of the first) and 30 years later and BILLIONS of dollars later they have done ABSOLUTELY NOTHING WHATSOEVER!!! They haven't turned so much as a shovelful of dirt. People here talk like the taxpayer is footing the bill for (potential) cleanup, when in fact the taxpayer just foots the bill while the environmental lobby continues on its merry way doing nothing at all. If in your specific instance you can point to something that was actually ACCOMPLISHED rather than just shuffling paper around or keeping someone productive from doing their job, I'd be thrilled to hear it. I've seen dozens of companies bankrupted by the environmental lobby, but haven't seen the environmental lobby doing anything at all about cleaning up the mess. Kind of a black hole operation.
WR,
I have followed many of your comments over the last several months, and I am surprised by your strong reaction to the mere mention of "environmental".
I am neither a policy maker nor an implementer, but I do believe what I said. It is based on experience. As to your specific problems, there are channels -- many easily accessed by individuals. Have you ever just called into the EPA for information. Find a name of an expert and give him a call. My experience is that they are very helpful. If the issue is not theirs, they unfailingly pass you on to someone better suited to help you.
If I can help in a particular area, don't hesitate to write. I did not write the laws or regulations, but I think the ones we have provide a good foundation for the future.
You can check the general status of superfund sites online:
http://www.epa.gov/superfund/sites/index.htm
The regional contact information, including that for regional ombudsmen, is available here:
http://www.epa.gov/superfund/contacts/regions/index.htm
I guess I didn't make my point clearly enough. TJC (possibly an attorney?) and Kalliergo (certainly an attorney) both have a different world view than I do. I have a neighbor who is a trial lawyer. He makes about $2M per year suing doctors and hospitals. He wins a big suit, collects his money, shares it with the victim and is on his way, "problem solved". But for the person who has a lifetime of pain, or a shortened lifespan or both, is the problem really "solved"? Does money fix anything? This article is about money, but not about fixing problems IMHO.
My complaint about EPA superfund sites. The EPA can spend decades deciding WHAT to do, and then decades more deciding WHETHER to do it. They are spending money every minute of every one of those decades, but they are completely non productive. They make the same salaries either way.
TJC said, "First, things don't get cleaned up without laws and regulations. That may or may not be true, but as far as MY experience with the EPA is concerned, they can threaten a company with fines and economic destruction, but they can't clean up a coffee spill themselves. The EPA to me is like so many other big bloated bureaucracies with hundreds of thousands of employees and contractors doing as little as possible each and every day. The only time we see any action is when the cameras are rolling. Politically suspect new superfund sites get created every day, but the will to do something substantive about them is weak to nonexistent. Meantime my favorite bakery was driven out of business because they couldn't afford the "air pollution" equipment mandated by the EPA, you know that wonderful smell of bread baking? Apparently the EPA considers it poisonous, so now I make my own bread at home.
Am I personally harmed? Who knows? Do I believe the EPA is the guardian of my health and well-being? Not for a nanosecond.
One public policy argument says that simply requiring the oil companies to have, say, $10B in liability coverage provided by an outside firm would be sufficient to get the necessary focus. Serious insurance companies enforce standards effectively: if you're not in compliance, you can't get insurance, and if insurance is required to operate, you're out of business. Serious insurance companies inspect and audit rigorously, especially in places where they might experience large claims.
How many ways did BP cut corners on known industry best practice in this case? Would they have done so if they knew that their records would be audited, and that violations would shut them down in the US (or at least the Gulf) as soon as the insurer found them? My father was a safety engineer for a liability insurance company in a state that required businesses to have certain kinds of insurance. His enforcement of safety standards was much more effective than OSHA's enforcement. OSHA could say, for a first offense, "Here's a violation, the fine is this much, you know the administrative procedures that allow you to appeal and drag things out." My father got to say, "Here's a bad practice, fix it this week or your policy gets canceled, we notify the state, and the sheriff shows up to put chains on the front door."
I am altoigether in favor of the idea of mandatory long term hard prison time for executive and supervisory types who are found to have negligently allowed practices that result in loss of life , injury, or livelihood.
If it is fair to put some poor jerk in jail for robbing a convenience store or breaking into a house,or driving drunk, it is certainly fair to hold corporate honchos, and corporations, similarly responsible for harm to the body politic.
One thing not considered yet, unless I overlooked it, is that we the public, thru our representative the govt, are indeed defacto partners in deep water oil.
We sell the drilling rights. We collect a very substantial portion of the revenue if oil is found-I believe fifteen percent was mentioned here a few days ago.
I beg the pardon of all the left leaning tyupes in advance, but once the amount of taxes collected cumulatively from and industry and it's employees is totaled up, including income taxes, revenue taxes, property taxes,and taxes withheld from employees salaries,I suspect that govt in total collects more from most industries than the owners.
Looking at this thing from the viewpoint of a little green man sent in a flying saucer to observe and report, it might just be reasonable to say that, well, maybe the govt indeed should be expected to share in cleanup costs.
I'm not actually advocating this position, but lets see how it might work-in the future.
A new lease goes up for sale;the sale revenues are first set aside to start building up a cleanup fund, until an amount determined as sensible by an acturial analysis is accumulated.The rest, if any is left, could go into the revenue stream.
Since lease sales won't be enough,the royalty rate can be increased somewhat and some or all of the royalty money similarly set aside;my guess is that in this way an adequate cleanup fund could be created, to pick up the costs involved after insurance claims are exhausted and bankruptcy proceedings have run thier course.
We simply can't maintain that we aren't accessories to the fact of spills without making hypocrites of ourselves.
And in the short to medium term, we simply gotta have oil.
mac -- here's a number I doubt anyone will believe. I still find it hard to accept but understand how it could be true. This is from report I read about 15 years ago. I doubt the numbers have changed much. Total offshore revenue = lease bonus monies paid to the govt + royalty monies paid to the govt + revenue earned by the oil companies. What percentage would you guess of that big pile of money has gone to the feds? Drum roll.....93%. I wish I still had that reference but I recall it seemed valid. And I do understand it could be correct. Consider the Destin Dome lease sale some 25 or so years ago. A little over $1 billion was collected by the feds for lease bonuses. And that was back when $1 billion was a lot of money. And how much revenue did the oil companies make from the DD leases: exactly $0. I can't offer a number but while a lot of companies have made a good profit in the OCS many have failed and lost billions in the process. remember how it works in the oil patch: Company A can spend $500 million to develop a field. The govt might have gotten a $100 million for the lease bonus originally and then $200 million in royalty. But if Company A only nets $400 million then they lose. But the govt still got a $1/4 billion out of the deal.
Next time I'm sitting on a rig at 2 AM waiting for something to happen I'll try to search for that report.
ALL liability is limited by:
1. Ability to pay. Can't get blood out a turnip.
2. The desire pay. Screw it, sue me.
3. Use of methods to reduce risk.
4. Use of methods to reduce loss.
Liability insurance for a large scale capital driven organization makes little sense to me. I would instead:
1. Subcontract out the exploration and transportation. After Valdez, no more tankers for Exxon. No BP company man ANYWHERE except for accounting.
2. Make sure everything is hocked to the gills. If you have a zero balance sheet, it is like having insurance. Get in line suckers.
3. Have government set up some sort of bogus fund, transferring some of the costs to industry.
4. Manipulate and secretly drive up the price of oil, driving up profits.
5. Sell my services to government as oil spill mitigation experts. Forget that I keep causing them myself.
6. Lobby government for protection such as the 75 million limit.
Bottom line on this issue is simple. Either the Oil Co.s insure against catastrophic loss, or we do. The issue is, how is the premium paid? Right now it is the taxpayers of the individual nations that are footing the bill, while oil co.s take their profits to the bank. They cry when we tax them, and they cry when we ask them to be responsible. Frankly, if we cannot afford the tax or the insurance, then we cannot afford the damned oil! That is part of what Peak Oil is about. It eventually becomes so expensive that, except for crucial items, no one can afford it.
And, I don't give a good flying frig about the profits of any oil company, or any investor who might either lose or get less. Tuff stuff. IMO, we tax the bejesus out of them, starting today. If they have to go elsewhere, well then the other countries can tax them. Otherwise, if it is less expensive to buy foreign oil, based on real costs (including environmental costs, insurance, taxes, etc.), then that is what we should do.
All those oil companies were not crying for the US industry that was outsourced. Now, all of a sudden, it is, "boo hoo, there will be fewer oil jobs." Hypocrites!
Craig
Oil companies are not the fed. They pass along liabilities to their customers or they cease to exist.
Shouldn't the government also share in the risks? After all they are making a lot of money off of leases, taxes and royalties.
Isn't it equitable for all of those who are profiting from any economic enterprise - to also share the risks?
No, liabilities need to apply to the operator. Only the operator can properly manage and minimize the risk.
That's a cop-out, Nick. You see what my old law partner does, the Operator is a LLC, operating as general partner in a limited partnership. Bad stuff happens, and he files Ch-7; the Ltd poartners lose only their investment, and the taxpayers socialize the risk. That sucks.
If you really want to be an entrepeneur, you assume the risk and the cost of your venture. And, for some ventures it should be no-fault - no need to show negligence, just that there was a risk, and it materialized. You pay.
Or are you really a facist? Those are the capitalists who want the government to socialize all risk, and allow the capitalists to keep the profit. That is highly irresponsible. It is also one reason that we are in the predicament we find ourselves today. Those capitalists won't pay to redefine the infrastructure, and they won't pay to clean up their messes. Like I said. Hypocrites.
Craig
@craig
Would you be willing to think about the concept that the government is supposed to already be acting as the Noble Insurance Company that we want to enable superior monitoring?
Do we not already have unfollowed and unenforced regulations, non-inspections, rules written by the regulated?
Perhaps part of the problem is the total obfuscation of the profits and damages of letting legislators be elected by corporate contributions, under the totally phony rubric of Freedom of Speech of corporations.
I don't accept the argument that we need corporations to garner capital. I think, rather, that the establishment of these huge corporations has been the essential infecting virus that generates growth at any cost, to cover interest.
Capital Corporatism is not the only way to raise capital.
We need to rethink the idea of corporations. And limited liability.
Maybe establish joint and several liability between shareholders and corporations... that would sure make the shareholder meetings a bit more interesting, I'd say.
"You want to do what?? Do you realize that, if you screw up I will have to pay?!"
Yeah...
;>)
Craig
If the rules are clear from the beginning, then the Lessor (the US) will get lower payments for leases, in return for the increased cost of cleaner, less risky operations.
Now, if you're asking if the corporate veil of liability protection should be pierced somehow - yes, I suspect it would be a good idea. OTOH, there are lots of alternatives that might be easier to implement, including better regulations; better oversight by insurers (encouraged by higher liability caps; criminal liability for corporate officers. None of these are mutually exclusive.
What I am thinking is more like - establish a trust fund to cover any potential future accidents. The money is collected based on royalties with both the US government and the driller/producer kicking in 50%. (I feel that since the US government is an active partner and regulator - they should shoulder some of the risk - maybe this will get competent people at MMS.) Additionally, we create a standards orginization to establish formal 'best practice' standards for the industry (funded by part of the interest generated by the trust fund).
Now here is the trick. A set time after ending operations (to ensure the wells were abandoned properly) the operater gets their money back along with any interest earned on their portion of the money. Additionally the government's share is also returned.
Now - here comes the interesting part. If there is a spill the money from this fund is depleted for everybody. It dosen't matter if your company ran a perfect operation and the blowout was from somebody you never heard of - your money is used for the cleanup alongside theirs.
Under accounting rules - the companies will book the monies placed into the trust fund as assets (since they hope to get it back in the future). Now they will recognise the threat that poor practices from another company can pose to their asset - and go back to this standards orginization and advocate for better safety standards.
The dirty trick here is that we just did two things - gave every company an tangible reason to be concerned about how their industry operates and given them an enforcement tool to protect this investment. In effect - we cause the oil patch to become self-policing.
Would you agree that we need to do the same thing for the entities that are polluting the Mississippi river and causing the dead zone(s) in the Gulf? I would hope so. Hopefully, This blow-out would cause focus on that issue also. Before, it seems like the dead zone(s) were a problem that was noticed, but never mitigated.
I do not feel that I know enough about all the issues involved to make an informed opinion on this.
Unlimited liabilities does not mean an infinite amount can be paid. If an infinite award was attributed, it would just mean that, in a bankruptcy proceeding, all shareholders and bondholders would be wiped out and replaced by victims. An industry that feels itself at existential risk because of operational hazard with either be atomized (a compartmental approach) or on the contrary monopolized (too big to fail approach).
An area where there could be improvement is through a generalization of cat bonds where the collateral is invested in short term t-bills. It is better than insurance because the insurance company can always make a mess of its investments (invest in subprime for instance).That would be a good solution for nuclear or oil. I would certainly buy some !
Nice straw man. There is no infinite (one of the problems with fossil fuels, ya know); if the risk is not acceptable, don't take it. Period. Otherwise, you want to profit, you take the risk. If you win, fine. If you lose, you cannot lose an infinite amount... up to a point you file bankruptcy (another way to socialize risk, and why there should be mandatory insurance). Point is, why should I pay your debt when you fail, yet you don't pay me when you succeed? Otherewise, you're just another hypocrite.
I get so tired of hearing the greed is good bunch, parroting Saint Ronnie the Wrong and Milt the Misanthrope, claiming that the 'poor' have an entitlement mentality and are not responsible. I say, look in the mirror. The rich have a greater entitlement mentality than the poor any day, and are less responsible!
BTW, my 'word of the day' starts with an "h" and end with "ypocrite."
Craig
You're on a roll!
I generally agree with your post, but I do take issue with you singling out individuals such as Ronnie and Milt. I agree the rich have just as big a sense of entitlement, but this is part of the human condition regardless of status and also goes across party lines. Your point could just as easily be used against government bailouts of car companies (socializing debt, privatizing profits), which the Republicans were against.
True believers in capitalism (aka "greed") would agree with your post. The market has to reflect risks so as to avoid the scenario you describe. However, there IS such a thing as overpricing the downside. If we made liability too high, we would reduce the amount of players in the market, which could lead to excessively high prices via oligopoly/monopoly.
Does Unlimited Liability for Offshore Oil Drilling Make Sense?
Two things to note.
First, the liability limits are on incidental economic damage, such as lost wages for those unemployed due to a spill. Liability for cleanup costs is already unlimited.
Second, "unlimited liability" is an oxymoron unless you're willing to do away with the concept of a limited-liability corporation. At some point, all of the assets of the corporation have been sold to pay for the liabilities, and there's nothing more than can be extracted. Raising the limit for incidental liabilities could, particularly in the case of small companies, have the unintended consequence that the taxpayers would be stuck with an even greater share of the cleanup costs, since more of the liquidated assets might go towards incidental liabilities rather than cleanup liabilities.
Oil companies operating in OCS have two sources of capital, investors and lenders. HR3534 will put drillers out of business because they won't be able to fund new projects. Insurance isn't the problem.
It remains to be seen how many production platforms will pass inspection.
I tend to lean in the direction of those who favor a cap. The legislation so close to the Gulf catastrophe suggests a knee-jerk response by Congress. The result is that fewer companies will drill in the Gulf, America relies even more on the Arabs causing further loss in America's worldwide strength, and prices go up for everyone.
I would, of course, like to see oil not being used, but the reality is that wont happen overnight. In fact, it will probably never happen since crude is a feedstock/component of the vast majority of all products today.
Unlimited liability makes sense morally and that should be enough reason.
For materialists, some economic judgements are listed below:
1) When companies worth tens, even hundreds of billions of dollars, they have enough strength to cover even a 100 billion dollars damage.
2) Govt has no job to pay for any losses made by a private company.
3) Companies have become way too big. For greater good they must decrease in size to give room to small businesses to grow.
4) It force companies to not involve in risky projects like deep water oil exploration, in which maximum attainable benefits are like $10 billion and concentrated to a wealthy few and damages that may occur are like trillions of dollars and very wide spread and wide spread to poor and middle class.
1. Just because a company is worth tens or hundreds of billions does not mean they have that much in cash or readily accessible.
2. And Govt has no business doing 90% of the things it's currently sticking it's nose in...your point?
3. So you want to promote legislation that is only going to lead to bigger companies (you even allude to this in point 1)
4. Agreed. But if this is what you want, you basically have to concede points 1 through 3. The end result has to be mega corporations and big government.
Is the status quo so horrible? This is a non-issue IMO. The limitation is on incidental damages, not clean-up, and I think is more applicable to drillers, not E&P. The law as is generally works. Last I checked BP is going to pay tens of billions to various parties. Maybe it's not "enough", but some of these numbers are pretty arbitrary. Who said $1K to $4K per barrel spilled is the correct figure?
All of you complaining that society is not capturing the correct "cost" are not taking a look at the most important factor -iIt's not so much the cap, but rather how liabilities are calculated. Should BP pay me money because my energy stocks went down? What about to those who suffered emotionally from the oil spill but have no economic interest whatsoever, does that have a cost? How much is a sea turtle or pelican worth, by the way?
I think the fact that this is up for discussion is a sad indictment of our addiction to oil. Go ahead . . . pollute our waters . . . just give us that oil.
And this is an epic race to the bottom world-wide. A competition to see who has oil and will have the weakest environmental laws thus allowing it to be exploited cheaply. In the end, we all lose since it makes a mess of our environment, it prevents us from developing alternatives, and it just makes us more addicted than ever.
This discussion is yet another indicator of the monkey trap we humans find ourselves in, our utter reliance on oil.
I think rather than focus on the size of liability - it would have made more sense to provide greater clarity on the nature of the liability e.g. would BP be responsible for the incremental damage caused by a Hurricane because the marsh that would have reduced the impact of the hurricane was destroyed by the oil spill. What is BP liability of birds and sea life particularly those that are covered by the ESA.
I believe that deep water oil drilling helps keep the price of oil down for all of us. If the incremental safety and liability measure increase the break even price of oil to $100 from $80 then all of us will be paying for it and the key beneficiaries will be the owners of existing production. The alternative is to charge a tax on oil used and use those funds to clean up and provide the incremental safety measures. e.g. $5/barrel tax would generate enough money to cover the costs of clean up but if as result it allowed the break even price level to stay at $80 we would all benefit since out net cost would be $85 rather than $100. At some point we have to acknowledge that both the oil companies and the consumers benefit from deep water drilling. ( I am sure that comment will make me a shill for the oil industry in eyes of some who have nothing more to offer than name calling).
One issue with the overall tax you propose is that it basically leads to a subsidy of deepwater offshore by onshore and shallow-water producers.
I think what people want is for the true cost of deepwater to be captured in the "cost" paid by the producer. By taxing the non deepwater producers, you are artificially lowering this cost (which is why you get $85 instead of $100, in real life the numbers are almost certainly different, but just so it matches your post). Maybe that's better, but you are still using a subsidy to make the true cost opaque.
I agree with speculawyer. It seems that our desperation for oil is so loud that we don't care what the cost is anymore, or what it does to our land and water, just give us the oil! It sounds like a drug addiction, which it probably is. Nevertheless, a cap is reasonable and in terms of negotiation, it is necessary. While we need to work towards a more sustainable future as a country it is necessary we do so moderately and not throwing everything to the wind.
Yeah, I agree with this. We are in the terrible position of having to lower our standards or else end up increasing our oil imports to 90% (and just export our environmental disasters as we do with Nigeria today). So we will have to allow our standards to be low. But in the meantime, we need to do what we can to get off oil. And the DoE battery & EV programs are really doing a good job of this. (At least better than has ever been done before in our history.)
It is insane to engage in an activity whose possible outcomes are catastrophic beyond your ability to cope with. Here possible does not mean theoretically possible in some vague sense, it means an outcome that has actually happened in the past.
The cost of catastrophic accidents should be part of the oil companies cost of doing business. If they cannot cover these costs, then developing these sources of oil is not truly economically reasonable.
But then how do you deal with the problem of the fact that other countries will allow drilling with very low standards? Ban oil imports from countries that do not have high environment standards? Could you even do that w/o violating WTO trade rules?
Globalization has presented vexing issues.
The oil companies are not the only actors here, the other involved parties are the US government and consumers. The US directly benefits from oil companies as they produce the energy we need, and will continue to need until a replacement has been implemented. We need oil, they produce oil, its an agreement of sorts between all the parties, so I dont understand why the oil companies should hold all of the risk.
Yes the limit should be raised from the current 75m cap. Yes regulations need to be improved.
From my understanding a big problem with this spill was the assumption by regulatory bodies & oil companies (globally, not just US) that a deep water blow out can never happen. That assumption has changed forever. A lot has been learnt (the hard way) on how to deal with a deep water blowout. If a similar situation happens in 2-3 years time then I would expect a very different (and quicker) response.
But then looking at it from a different angle, corporations have demanded that they have the same constitutional rights as citizens and have a disproportional say in how government works. But citizens also have a responsibility to society and if you break those rules the ultimate penalty is death, or life imprisonment. When a corporation has to sell all its assets and become bankrupt to pay for its damages, could that be viewed the same as sentencing a mass murderer to the death penalty?
And how far back do you push the damages? Would you make shareholders liable as well? So if a company cannot cover the costs, the shareholders then shoulder the rest of the costs? Shareholders are part owners of a company, they do have a say in how a company is run, should they also be held accountable?
Hummm, well I've just talked myself round in a circle, so i've no idea!
If people truly need this oil, then it will be economically possible to have investors or insurance companies contribute to a fund to cover possible liabilities. But it won't be cheap. If people truly need this oil, then it will sell for the $150 a barrel it might cost. Maybe if the cost of the oil is not disguised or subsidized, people will dump their SUV's for hybrids, electrics, and so forth.
This thread is so full of garbage speak it is ridiculous. It is meant to continue a policy of folly that has existed since Jimmy Carter. It is time to start the real solution now.
Usually I'm not a crazy liberal. But this Soviet era style destruction of the gulf of mexico is just past what people should have to put up with for a future.
I agree we need a real long term replacement for oil, but we cannot ignore the fact that we are completely dependent on oil currently AND we need oil while we transition to the replacement(s).
FIne, then lets get started on a real long term solution, and not try to live in the past for 20 more years. Car mpg's should rise dramatically, public transportation should be greatly improved. It is just crazy to have 10 million SUVs in souther california. Literally crazy.
It is pretty straight forward . . . the hold the risk because they collect the reward of big profits. If they feel the risk is too great then they should do things like reduce the risk by spending more on safety systems like better blow-out preventers. If that costs too much then they should not drill until the price of oil rises high enough to pay for the better safety equipment.
Look at the converse . . . if we don't put the risk on the oil companies then what incentive will they have to do the job right? Little to none. If they spend as little as possible and it works out great . . . they profit like crazy. If things don't go well and there is a massive spill . . . well too bad for you fishermen, Gulf states, birds, etc. No our problem. That is subsidizing the rich!
As it is, they already do not cover the risk. There are incalculable losses that will never be compensated for. What is the price of a dead dolphin? What is the cost of all that methane leaked into the atmosphere and accelerating climate change? What about all the royalty payments to the state for the all the oil that leaked into the gulf? Why make them pay for even less?
To say that an incorporated entity has unlimited liability is a contradiction in terms. A defining feature of a corporation is limited liability. Through the legal lens, we collectively pretend that the only liabilities that exist are financial liabilities.
Shareholders wager that the directors and executives of the corporation will make favorable risk/reward analyses and take actions resulting in profit. The decision makers bare the liability of their decisions only to the extent that they are also shareholders.
The reason this works at all is that the risk/reward ratio constrains the risk the decision makers are willing to take on behalf of the shareholders.
When the liability to the shareholders of a corporation is shifted to other parties, the number of risks the decision makers are willing to take increases. The legal system cannot reduce the amount of risk any decision carries. Risk is determined by limits that have been confirmed to exist independent of imagination, like physical laws. The legal system can only shift risk from one party to another.
Extremely high risk/low probability possibilities seem to be difficult for the average lawmaker to understand. Accurate assessment is further complicated when the potential reward is astronomical. Clear headed assessment is generally lost when a lawmaker is offered a piece of the action.
In Nigeria, the "small people" and the ecosystem bare almost the entire risk of the petroleum industry. The risk/reward ratio and the profit potential to share holders is very attractive.
In the USA, the burden of risk taken on by incorporated entities has tended to be borne by the shareholders, though this has been eroding since the late 19th century. Increasingly, the burden of risk has been shifted to the citizens and the ecosystem. Although this enhances the profits to shareholders, it also distorts the risk/reward analysis and makes extremely high risk/low probability actions more likely.
The problem with the distortion is that collectively, we are over looking better options for meeting our needs and wants. It is difficult for children to come to terms with the limits that reality imposes. It is difficult for adults to come to terms with limits when those limits are unrecognizable through the distortion.
Once upon a time, when kings were the creators of incorporated entities, kings who were smart enough to maintain their sovereignty were also smart enough to recognize the threat that a group of men with unlimited liability represented to that sovereignty. For that reason, the incorporated entities created by kings were established with finite lifetimes and other limits.
Edit: made a couple of small edits for clarity
I think the real issue is that deep water drilling needs to stop and stay stopped. Oil is depleting and the oil age is coming to end, so why continue destroying ecosystems that will be our sole resource in order to continue the oil age a few years longer?
We need to focus on retrenchment, and retrench as rapidly as needed to stay abreast of the depletion curve. The real cost of oil, if one included externalities, would already be, well ... I don't know that it is meaningful to put a number on it. How much are our children worth?
Obviously already drilled and operating wells should be exploited to get us through the transition, but deep water, tar sands, shale gas, and all else that threatens the ecosystem should be stopped. We are junkies, ripping out the beams of our own house to continue the high a few minutes longer. All the money should be funneled into preparing for a future with less and less oil, and less and less energy.
I do not understand how we can continue talking about economics in a situation like this.
It is really not necessary. I just got into a long discussion why Americans should spend mega billions to restore Louisiana Coast. Restored to what? Spend the billions on buyouts and relocation costs. If Gulf Shores lost 500 feet of beach tomorrow, I would not expect any help from anybody. In fact, I would just have ride my bike 500 closer. If New York City started to get flooded, should Alabamians pay for a seawall? After all New York probably touches all of our lives in some significant economic way. I say no, MOVE. Infrastructure as is relates to transportation or irrigation is one thing. To try to keep the map looking the same on my dollar is something else. The rich beach owners should pay their own way or forget about it. I say the same to all.
in a litigation system like the US one, were damage compensations are awarded not according to the damage done but to the depth of the pockets of the damager, without a cap on liability the industry will just evaporate. the problem is not the liability cap, which is a BAD remedy for a VERY BAD mistake: litigation
America now has a debt burden, public and personal, that is unsustainable. The debate in economic circles currently is how, and whether, the US can avoid suffering a decade of Japanese-style stagnation. If you add into the equation policies that will tend to raise energy costs and limit the exploitation of US domestic oil resources, the economic consequences in such an environment outlined above could be pretty deadly.
Would anyone buy a policy with a 10 billion dollar limit? The premiums could well be too high.
The liability cap should be lifted in full. The major arguments against it hold no water, and serve only the interests of the financial world.
1. "It's too risky for the industry!"
Who is really at risk? The public. The public is at risk of everything from destroyed communities and environment, to other lost industries (as in gulf fishing), to lost jobs and lost homes. The public is also at risk of higher oil and other energy prices.
The industry doesn't matter. It was artificially created by members of the public to get materials to produce energy. It incidentally creates jobs. Even more artificially, it has become a source of revenue for Wall Street gamblers. If the industry takes a fall, a number of individuals' fortunes will be lost. I can't cry for them, when they have not been running their artificial constructs responsibly. Some jobs will be lost temporarily. However, a reshaped industry will take its place because the need for energy will not go away. It may be much more regulated, with different players and a different mix of energy sources, and with jobs restored but perhaps in a different mix, but that's fine.
Major disasters like Chernobyl, the BP spill, etc. will cost far more than $10 billion to deal with. Who should pay for them? The public? Does the U.S. (or other nations') government have so much more money to throw around than corporations? When these companies were chartered, they agreed to function legally and responsibly. There is no question that the government will wind up paying some, maybe much, of the costs for BP's malfeasance for the next decades. However, BP broke it, and to the extent of its coffers, BP should pay for it. This goes for any corporation.
The only reason that corporations are given any kind of break on liability (aside from the lies of their lobbyists) is that some are expected to be providing products that are in the public good. When they do so much harm instead, thanks to having more interest in their financial bottom line than in getting the job done right, they deserve to lose their protections.
2. "But it'll cost jobs!"
This is the constant scare tactic, and it's nauseating. How many fishermen have lost not only their jobs but their entire businesses? How many people working in seafood cleaning, packing, and distribution? What about the tourist industry? What about all the people whose livelihoods depend on the former having money to buy their goods and services? BP (and others) have devastated an entire region's economy and jobs. The industry has to expect some consequences for that. This includes workers in the industry, who are in part victims but who also have partial responsibility for accidents and disasters.
The reality is that the oil and gas industry is not going to end if there is no liability cap. It may be smaller, or reorganized, but we are not going to stop drilling for oil and gas. The jobs will still be there. And, longer term, they will eventually be lost as gas and oil reserves are depleted and by necessity other energy sources will take their place.
3. "But some companies can't afford it!"
A cap like $10 billion is pocket change to an major oil company. If minor players can't come up with that money, or get coverage, so be it. It's basic common sense - if you are going to be in an industry where your company can destroy an entire ecosystem and regional economy, you'd better have enough money to cover the damage if you do it.
3. "But it won't deter corporations any better than a cap!"
Oh, fiddlesticks. A $10 billion cap is chump change for the big players. I live in a state with "tort reform." What that has created are a slew of people crippled by doctors and medical facilities who are utterly unafraid of the consequence of their actions. When it comes to megacorporations that kill (remember Bhopal?) or devastate millions of lives (BP), the risk they face has to be commensurate with the risk they create for others. For example, BP's quartely profits in 1st quarter 2009 were $6.08 billion. A corporation like that will feel some pain from losing $10 billion, but it will still be profitable. An effective corporate death sentence is definitely a deterrent. Pocket change is not.
The tort system is there for good reason - to require those who screw up others' lives to get those lives back in order again to the extent possible. Nothing will fix the Gulf ecosystem or the economic devastation to communities, but BP had better expect to spend every last dime it has to do so. One of its competitors will be happy to take over its work and properties (and workers) if it were to fold.
Good reply. A+
Craig
I don't like liability caps, as they are a subsidy of the true cost of an activity and can be a perverse incentive. [I really don't like rare extreme events: we don't estimate tail probabilities well. Part of my dissertation in evolutionary biology would require thousands of years of rainfall data to estimate and test whether plants are doing the "right" thing. They almost certainly are not doing the right thing, and after a string of rare events I expect many local extinctions, although climate change is changing all of the probabilities out from under them, so the question is somewhat moot.]
I accept liability limits as a matter of public policy when we have some estimate of the expectation (a crude estimate of tail probabilities, and probabilities of extreme events that decrease faster than costs increase so there is a finite integral). The federal Government can be the only entity large enough to average across multiple very large, very rare events. I would prefer that the covered industries (e.g., Nuclear power) pay a "premium" based on the rough expectation, but politically that won't always happen.
However, while the Price-Anderson Act backdropping nuclear power beyond $10B liability is a subsidy to the nuclear industry, it comes with substantial, intrusive, costly government regulation to greatly reduce the risk of catastrophic failure: expensive permitting, frequent inspections & tests with shutdowns for failures, redundant safety systems, etc.. This regulation reduces the probabilities of rare, extreme events, and is the flip side of government acceptance of the risk beyond $10B (plus pretty good public policy given how many of us live near nuclear plants).
If we're going to have government/taxpayer subsidy of liability limits for oil (or just a risk pool where oil companies contribute based on the expectation of loss), is the oil industry willing to accept equivalent expensive extreme regulations, even though they may double or triple the cost of exploration and production?
According to the Republican mantra, the market is magic. Therefore, unlimited liability, logically, should be something that the Republicans should push.
In fact, let us remove the Price Anderson Act too.
Limited liability IS a subsidy, period.
How we determine liability, is IMHO, yes, a good point of discussion, and I agree that the tort system is less than perfect.
Thank you for your insightful post.
Nice article. Gail’s thesis is that there should be a $10 billion cap rather than unlimited liability for offshore drilling activities. While she makes good arguments for the cap, I do not agree. The offshore industry can do just fine with unlimited liability. I have no grand scheme of things to expound upon; only some small and narrowly focused (and maybe a bit too long) comments about how the industry can live ok with unlimited liability.
Others have mentioned that unlimited liability in the strictest sense does not exist. So, a company that wants to do a thing that has potential liability must evaluate the risk of incurring that liability and how much they could actually be on the hook for if things go badly. The bigger the potential liability the harder they must look at it. Some of the evaluations can be quantified and discussed, but ultimately somebody getting paid the big bucks must make a judgment call on whether the reward is worth the risk.
I believe in private industry—in this case the drilling industry and the liability insurance industry—and its ability to evolve profitably around just about any definable obstacle. Others have already pointed out that no insurance company is going to write an unlimited liability policy, but that they will sell however much coverage a company wants to buy. A company wanting to operate in the deepwater GOM evaluates the risk and potential liability, looks at their balance sheet and has the option to buy a policy whose coverage and cost make the most sense. They should do that, i.e. buy at least a base policy if they want to play.
They still are not fully covered because liability is still unlimited. I propose that another tier of coverage can be added to eat up a huge chunk of that unlimited component. Remember that Exxon, Shell, Conoco and some other majors are planning to form a consolidated association focused on deepwater emergency response. They will have on standby vessels, containment devices, pumps and everything else needed to immediately respond to an accident even much worse than DWH; and, as I recall, in waters up to 10,000 ft. deep. The founding members will accept new member companies who need the service and can pay the fees. They could add a huge pooled liability insurance benefit at an affordable cost. I am guessing here, but if it was set up so that it did not pay out a dime until the first $1 billion was paid, it could offer a new cap of maybe $20 billion. Beyond the association’s cap the insured is on his own. But, I think that at some point the “act of God” defense begins to come into play. To get the insurance and keep it in force a company must comply with rigorous and verifiable safe operating practices at all times. Can you imagine a daily meeting at an offshore rig with the company man sitting beside the insurance man? And the insurance man has the final say on the safety aspect of all operations.
Back to risk management: companies must make their own decisions about how much they are willing to be self-insured for. If they can reasonably define that risk and its associated potential liability, can buy enough affordable coverage such that the odds of the uninsured component of the defined risk kicking in is low enough, then I think they will keep on drilling. If in spite of everything it does kick in, their liability exceeds their ability to pay and they can’t blame it on God…well, the devil will in fact have his due from time to time.
KarmaDave
An interesting point.
I strongly recommend carefully reading this with respect to the nuclear power industry.
http://www.world-nuclear.org/info/inf67.html
Thanks for this site!
Thanks for the link. I am not surprised that what I suggest is hardly new. It just seems common sense to me. I did not address it, but if the worst happens and everybody has gone belly up and God denies liability, the government must step in. The reason this plan still works is because if GOM operations are required to follow best practices, then the odds of the government ever having to step in should be extremely low. I don't know the exact number but million to one odds sound pretty good!
KarmaDave
The gulf will never be the same. States bordering the gulf will never be the same. You can't put a price tag on this level of destruction. There are massive sections of the sea floor that are covered with that stuff. The carcinogens released into the gulf are now a part of the food chain. The dispersant hasn't been adequately studied and very probably is as worse as the oil itself. We don't know how much damage has & will occur because of this spill. I think 10 billion is on the low end. And, we're not hearing the whole story either. Main-stream media is being filtered by the government & the corporations who have been in bed together for many years now. Personally, I'd like to see BP go out of business for what they've done but it won't happen.
I hope you are wrong about your assertions, you certainly don't really know.
However the wish that BP go out of business is not necessary, what you really want is management to change and they have and they will.
The record shows that BP was in the process of changing from a cowboy mentality to a serious player long before this spill occurred. Perhaps it is justice that they finally had the failure that they have been betting against for so long. But a corporation does not need to go out of business to become a different corporation altogether. Also perhaps the more responsible companies will benefit, also would be justice.
KRC
If the legal liability of an activity is made too large then even if there are a few firms that can afford to pay, a few of them might instead choose to pursue some course of action that frees them from the law. How much would a private enterprise nuclear weapon capability cost? I don't know but surely less than a trillion, probably much less than a trillion. Do we really want to go the route of making it cheaper to nuke Washington than to obey the law? People, what are you thinking? No limit means no limit on what you pay also means no limit on what someone is willing to do to avoid paying. I think this is a step towards the collapse of civilization.
If the goal is to punish, why not mandate that the government nuke the headquarters of the offending firm? (without warning, of course, so that lots of innocent people are caught in the environs)
A much more measured approach is the one taken by China --- capital punishment for perpetrators of economic crimes. But I really don't recommend any of these wildly over the top ideas.
Personally the thought of Big Oil getting even bigger after legislation like this is a terrifying thought to me. Well intentioned though this legislation might be, making it impossible for the small to mid market producers able to compete from an insurance cost perspective is a sobering thought. Having said that I do believe that there ought to be some sort of mechanism in place for disasters of this magnitude but I'm not a lawyer, don't really like lawyers and therefore would probably not be a good advocate for any kind of system reform that makes them even more money than they already do.
What am I missing here?
BP is paying for this spill...not their insurance company.
Why would another spill be different?
BP is paying? With their looks or profits past and present. Where do these profits come from? It is all a vicious circle winding to us.
I'll rephrase the title: "Does forcing the taxpayer to subsidize the offshore oil industry's risk-taking make sense?"
I don't think it 'makes sense' anymore than the Federal liability limitation on nuclear plants. Removing these subsidies forces the industries to fund their own 'true cost' liabilities or close down. There would be no nuclear industry in the USA without liability limitation by the government because no private insurer will insure a nuclear plant.
Price–Anderson Nuclear Industries Indemnity Act
Juicy quote from the above:
In return for having to fork over $60 million of their own money for insurance, the companies receive up to $500 million of taxpayer dough to cover any 'further claims' and are also "relieved of any liability beyond the insured amount for any incident involving radiation or radioactive releases regardless of fault or cause".
Pretty sweet deal, eh? You taxpayers are paying for it after all.
As for the oil companies, they are very profitable and can fund their own insurance without taxpayer help. Problem is, they own the politicians and legislators, so - just like the nuclear industry - they bought themselves a safety line hooked to your wallet.
You left off the level of licensing, regulation, inspection, etc. that goes with the liability cap. How much more money would PG&E be making if San Onofre didn't keep getting shut down due to pesky violations and required maintenance?
My question above (that I buried in too much text) is whether an oil industry that needs liability limits would accept that level of regulation and added cost of drilling & production, on the order of a doubling or tripling of costs?
Absolutely ludicrous to think that the oil or nuclear industries should pay for their own messes.
That's what we have tax-payers for, that can be jailed if they refuse to pay, right? Make 'em pay for the losses, or go to jail.
Let the big corporations get the profits. None of the risk.
That's why we have tax-payers.
To pick up the bill for private corporations losses, and to directly fund one war of choice after another.
Ludicrous to imagine it any other way.
Gail. You nailed it.
The reason unlimited liability is not fair is that it makes the industry entirely liable for the consequences of actions that we, as a nation, encourage them to take, and participate in. We regulate it. We inspect it. We charge royalties etc. etc. Yes, the industry is doing this to make money, but we want and need them to do it. We are equal parties in this exercise and therefore we need to accept this responsibility and burden when things go wrong.
We all agree 75 million is a joke. But unlimited is also a joke. In my opinion.
That said, I do not know how to set the proper limit. Higher on deepwater wells. Lesser in shallower water. Maybe 100X the well cost, or something...
Per one of the posts above, Insurance companies for hurricane damage have a catastrophic insurance pool that all companies participate in funding, and it pays when the losses rise above a determined level. No reason that cannot be done with oil, except the owners are greedy. And, the administration is stuck in BAU mode, trying to keep this turkey flying after its head is gone.
Proper limit: Whatever the loss is. It should be, if you own stock you are responsible! Makes me sick, the sheer hypocricy of it all.
Craig
Another reason unlimited is a joke is that its....well, unlimited. How do you place a value on some of these things? How to you decide when it is "all fixed"? How can you plan if the liability of your actions is potentially infinite? Why would you ever do something with potentially infinite liability if you could invest that money somewhere else and not face that issue? At least with 10 billion or what ever the number is, you can at least have SOMETHING to work against? I hope suggesting a 10 billion dollar liability limit does not brand me some heartless capitalist or something, it just seems to me to be reasonable, fair, and practical.
The thing about oil in the Gulf of Mexico is that they don't have to operate here. They do because they have a business model that makes sense. It is hard to make sense of any formula when you have one of those sideways eights in there....
What is the liability of situation in the airline industry? What is the agreed upon value on 350 souls? This is not a rhetorical question, I am actually curious how it works in that industry, where mistakes also have devastating consequences.
Think for a minute, Eric. First of all, there is no such thing as unlimited... or, if the damage is unlimited, you deserve whatever that means! In airline cases, the value is strangely determined by the economic value of the deceased to his or her family, first. Then, some value is assessed to what comfort, guidance and leadership that person provides. In the case of a child, often it depends on whether parents survived. In each case, the final arbiter of value is a jury. And, it is very arbitrary.
In the case of environmental damage, we are talking about economic losses that can be ascertained by cost of repair, loss of value of an ecosystem, determined by what it produced before and after. Cost of repair or remediation is easy to assess, at least as compared to the value of a human life. Of course, the oil barons will throw their attorneys into the fray, bandying their 'expert,' and paying off state court judges with election funds, or Federal Judges by greasing their nominations and confirmations through the political process. All very legal. All very disgusting.
And, again, if the risk is too much, take your money and go away. Eventually we have to decide, do we, as taxpayers, pay the bill, or do we insist on personal responsibility by the investors. I think the investors!
So, removing the cap on liability does not mean infinite anything. All losses would stop when resources also ended (bankruptcy by the corporation, insurance company, and investors). Think that is a hard choice? I don't! You capitalists are all facists at heart. Private profit, public loss.
Hyprocrites.
Craig
Think for a minute? Gee, I wouldn't know how to do that! :) If I did, I certainly wouldn't make the mistake of conflating two very different concepts such as "unlimited" with "infinite"... Anyway, one who throws around "fascist" to someone that suggests multi-billion dollar liabilities doesn't really deserve a reply - but what the hey....
You, Craig, miss my original argument. You and I are most certainly "investors" in this business. We are the owners of the property. We encourage companies to come and do this work and we take a royalty for it. We also take a cut on the proceeds, decide what equipment must be used, and how. Therefore, "we the people" are full partners in this business, like it or not. I guess you are not aware of the "profit" that the government and thereby the people make on this activity. Perhaps you could take a "minute" and look it up just what the government does with this money...
EricNPA brings up a very good point.
There was a bill to sue OPEC because they restricted supply. It died, but not before getting a whole lot of chatter.
So, the deal is that IF energy suppliers do not deliver the fuel at the pump for a "happy" price they should be sued for that. If they make a profit doing it, they pay 1/3 in tax to keep the pols in handouts. But if they make a pollution mistake they will be put out of business and lose all of the assets employed to keep from being sued in the first place. that is sure to generate investment in supplying energy.
Why a fixed sum? Make the maximum fine one years net revenue as reported on the 10Q. That way the little companies are not any more crushed than usual. And the big companies don't just consider the fine a minor cost of doing business.
Comments:
• The tort system isn't perfect and can be inefficient, as you note. It does, however, provide an avenue for (putative) injuried parties to seek redress. Yep, lawyers get a chunk of the recovery, and yep, if there's nobody at fault, there's no payoff to redress damages, but it's better than having no avenue through which to seek compensation. No-fault mechanisms don't scale well to the size of potential damages presented in this instance.
• I'm fine with unlimited liability for offshore drilling operations. This will facilitate the following salutary trends: a) it will put the fear of $ in petrocompanies and their drilling operators, making it more likely they'll follow safety regulations, thereby reducing the likelihood of death/injury among their employees; b) it will put the fear of $ in petrocompanies and their drilling operators, making it more likely they'll follow best practices in their work, reducing the chances of destructive, costly events like the BP Macondo blowout; c) because safety and best practices are costly, the price of produced oil will necessarily rise nearer its real, unsubsidized costs, accelerating development and use of renewable sources.
• $10 billion is not a high enough damage limit to change behavior of the majors. Remember that losses are (for the most part) tax-deductible, which means that taxpayers eventually subsidize uninsured losses. This in turn means that losses from negligent operations have to be scaled up to get the operators' attention. The price of the clue stick to get BP's attention is more like $100B, IMHO.
If there's no liability limit, and if as a result, the professionals won't drill offshore for oil, that's a pretty good real-world assessment of the actual risk, wouldn't you agree? And it's also another indicator that oil has run its course as civilization's energy source. We need to think (and do) different(ly).
I think of it all like the 'cloud' or Internet. Is this discussion about what path we want this money to take going into and out of the cloud that is the national debt, or will we be able to avoid having to borrow to handle this? I think I can argue that we have already started adding to the debt even faster post 4/20. Is Obama going send BP a bill for his work 'hours'? Think about it. How much is the POTUS worth per hour. If he works on just spill related issues? How about Allen? Does Biden get to bill for his visit? Surely not, but he is a high level professional. He is working. Interesting argument.
What is overlooked in the discussion, including the mentions of royalties, is that the taxpayers are somewhat partners for 1/3 of the profits, after royalties and severance taxes, and cost recovery. All without one dime of investment. Taxpayers do not subsidize anything, they never have to write a check for the losses. Only geo and wind get checks for production of non economic energy. I am not aware of the US taxpayer ever writing a check for a dry hole. However, I can give instances of how the taxpayers got a great benefit from the profits from development of deepwater oil fields, up to 35% of those profits.
Which of the environmental groups will sue to get the dead wind floggers removed from Altamont Pass. What an eyesore and a better monument to wasted government subsidies.
Taxpayers in fact do subsidize tax-deductible business losses.
When a business has an uninsured loss, it is (usually, under US law) deductible from the business' profits. The business therefore pays a reduced amount of tax to the US. Reduced revenue to the government is compensated for by any of several means: a) increased taxation in other areas (e.g., imposition of user fees for heretofore free services, etc.); b) reduction of services in accord with reduction of revenue (which means that those losing said services have to pay for their substitutes or go without, which is an economic cost); c) printing additional money, which devalues the currency, affecting all holders of US currency - that would be most US taxpayers.
There are reasonable arguments why business losses should/shouldn't be tax deductible. I'm not addressing that here. I am pointing out that to whatever extent BP's losses are deductible from taxes they would have paid to the US, it costs all US taxpayers. (Not picking on BP here: choose your player...Lockheed-Martin? Intel? Minnie's 24-hr Grocery?...it's all the same.)
The fact that the US shares in revenue from production doesn't affect my point, it only tilts the scale a little.
There's no free lunch. Tax-deductibility always costs somebody, somewhere, somehow.
Is calling it the debt 'cloud' an oversimplification. Is the debt number itself an oversimplification?
Ahem...
"...The deduction stems from a pre-tax charge of $32.2 billion that BP is taking, which covers spill response costs of almost $3 billion thus far and more than $29 billion in future costs, including the $20 billion escrow fund for spill victims’ claims.
...BP announced the financial plan Tuesday....
The letter says the probe should explore several questions, such as “How would BP be able to generate $10 billion in tax savings, when $12.2 billion of BP’s $32.2 billion charge on its financial results appears to be for nondeductible statutory penalties and fines?”..."
http://thehill.com/blogs/e2-wire/677-e2-wire/111509-nelson-wants-finance...
First of all, Sen. Bill Nelson is a toad, you can't change that.
The charge off is part of normal business when you incur a non-recoverable loss, like mortgage accounts that don't pay. It's part of tax law. you don't generally pay taxes on money you lost, only on money you made. In the outrage against BP, how do you rectify that? Should you, personally, be liable for taxes on investments that you make that don't pay out? You paid taxes on the money when you first earned it. Why would you pay taxes on it when you loose it?
Stuff for pondering... enjoy.
Yes, unlimited liability makes sense.
If private corporations don't want to assume that risk, then it's time for a national, not-for-profit energy production enterprise.
In fact, it's that time anyway. Why should we continue buying yachts and mansions for the Tony Haywards of the world as they play vampire with our embattled future?
SOEs are the future.
Gail makes a comparison to the Price Anderson Act in arguing for a similar cap.
I think that Act did real damage to the nuclear power industry. It allowed and encouraged the construction and operation of reactors that were not safe enough to be insured. Absent the act nuclear energy would have remained in the laboratory until it was safe enough to be insurable, and we might now have such reactors coming online. So long as the Act remains in place I'll object to nuclear power, as I don't trust businesses or the NRC to assure safety. (I was in Harrisburg the day they lost control of TMI.)
Similarly, if drillers had needed to face full liability for their messes they would have refrained from drilling until they could avoid and/or clean up those messes. So long as their liability is limited I'll object to deepwater drilling, as I don't trust businesses or the MMS to assure safety.
I think there is enough statistics to say nuclear power does more good than bad even though there is the occasional accident. This doesn't mean they can get unlimited insurance, though. If coal's externalities were taxed, and nuclear power were deregulated, the nuclear industry should soon be able to self-insure.
I see the Price-Anderson of today, and many other laws, as an attempt to fix symptoms of other government laws and regulations.
What statistics do you have in mind? Seems you have to multiply the uncertain costs of worst case accidents (including acts of war and terror?) against their uncertain probability, add the unknown cost of dealing with present and future wastes, and balance that against net energy returned.
Price-Anderson wasn't a fix for a law so much as a fix for the refusal of insurers to indemnify utilities against possibly taking out entire states, and the refusal of utilities to build uninsurable power plants. Better we had waited for intrinsically safe reactor designs. Those might be (self-)insurable. But the current reactors and fuel cycle remain capable of doing much more damage than can be insured against.
Well, it is estimated that coal particulates alone kill about 24,000 on US soil annually. That would be another 10,000 per year if nuclear was replaced with coal. Chernobyl MAY cause that many deaths, in total, by pessimistic estimates. And as you probably know, western plants, for several reasons, cannot fail that badly.
So, hundreds of thousands Americans have already been saved with nuclear power - and with current US readiness to pay for saving a year of someones life (about 14 years lost per coal death), that's worth some $500 billion. And then we haven't even included other problems with coal, such as global warming, mining accidents, the environmental impact of mountaintop removal and so on. Yes, with nuclear power a bit of land may become off limits in the event of an accident. But isn't that a feature, compared to coal's effects that are so widespread that we cannot evacuate, but have to live in it and hope that we aren't the ones who'll die.
Btw, nuclear waste costs are choosen by politicians. Technically, it's easy to get rid of and could thus be very cheap. But politicians use the waste as a useful token in the political game of power, and scientists and contractors alike always want more (unnecessary) security added, because that benefits them and their work.
The ultimate Chernobyl death toll remains highly contentious, and probably ultimately unknowable. And death isn't the only untoward health effect - cancers and birth defects are up in exposed areas, some 2,000 square miles of land are closed off, millions of people live on land contaminated by the accident, and I'm reading now that the current fires are in danger of spreading the contamination again.
Yes, Western reactors are supposed to be safer, but I'm sure the worst case accident would ruin more than "a bit of land," especially if an act of war or terror took out a reactor and its associated waste storage.
And I don't buy that waste disposal is "technically easy" when the waste is so very toxic for so very long.
And yes, coal should be burned more cleanly, if at all.
So I still say that until you can convince insurance underwriters that nuclear power is a good bet I won't be convinced either.
And I remain even more convinced of my initial point -- that providing a liability cap (government interference!) for nuclear power caused it to be brought to market prematurely. The money spent would have better gone to research on safer designs, and those designs wouldn't now be up against the fear caused by events like Three Mile Island.
That could be said of anything with a political dimension, but there is a physical reality here, and I believe experts can do good estimates of it.
Of course, coal cause much, much more birth defects and cancers. Yet it's nuclear we're talking about in these terms. Why? Simply because nuclear accidents are more concentrated in space and time, and such events promote media drama and public fear. But the concentration is a FEATURE! It facilitates both prevention and responses.
2,000 square miles is 0.3% of the average area of a US state. If a foreign power sends strategic bombers on successful raids on US nuclear plants, I think you have bigger war-related problems than the radioactivity. And I think you have too high expectations on contamination in the event of terrorism attacks on nuclear plants.
It's more radioactive than uranium ore for a very short duration of time, geologically speaking.
Perhaps we disagree on alternatives. I say it's a choice between coal and nuclear, short term, but long term there is only nuclear. You probably say renewables should do the trick, or that we're doomed anyway, so you don't care?
I shall be very, very happy to collect 0.1 US cents per kWh from nuclear plants to provide insurance without limit. I'll take full personal responsibility - if I can't cover damages in the event of an accident I'll go bankrupt. (I don't think it's about "good bet" or not, I think it's about size. Are you even allowed to insure if you can't guarantee that you can cover damages? And how could anyone ever guarantee something that is "unlimited"?)
Perhaps, but I also remain convinced that government safety regulations, as well as the failure to internalize the external costs of coal, has hampered the development and deployment of nuclear power. This has cost hundreds of thousands of lives, untold suffering and enormous environmental damage. And when you require one aspect of pro-nuclear regulation to go away but don't balance that with other actions that would be necessary to get a level playing field, you are, in effect, promoting the continuation of the coal death.