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Why BP should pay spill’s full cost

Terence Corcoran, National Post, 4 May 2010

By some merciful force or just good luck, the giant BP oil slick in the Gulf of Mexico yesterday remained the greatest environmental disaster that hasn’t happened.

For more than three days, news reports have been filled with alarming tales of imminent disaster, but then the wind direction shifted and the worst failed to materialize.

"But environmental disasters, no matter what their origin, are always completely unacceptable. And they will always happen, no matter what the rhetoric about absolute prevention, zero tolerance and triple fail-safe regulation."

Maybe millions of gallons of oil will eventually crash onto the shores of the U.S. gulf states, creating untold damage to the environment and the lives of millions of people.

Or maybe fate will push the oil on a course that will avoid an unprecedented catastrophe. If the worst does happen, let’s hope the full cost of the affair is borne by the perpetrators. That would be BP.

A lot of gun ships are riding this oil slick with other agendas — environmental, political and economic. Environmentalists aren’t waiting; they want U.S. offshore oil exploration and development halted. The World Socialist called the still-pending Gulf Coast event “an American Chernobyl.” Paul Krugman, the Nobel economist, warned President Barack Obama to take on the “Drill, baby, drill” crowd and predicted a reversal of what he called a long slide in the influence of environmentalism.
Arnold Schwarzenegger, governor of California, withdrew support for drilling off the coast of California.

On the other side, economic nationalists say offshore oil is a national imperative and America’s only hope for energy independence. A spill is a price to be paid. As a British company, BP is being painted as an unworthy foreign operator, while the Obama administration is accused of tardy action. On the far right, the rig explosion that triggered the oil spill is said to be the work of saboteurs of various origin.

Politicians all over, meanwhile, are coming forward to guarantee the impossible, that nothing like this should ever happen again.

In Canada, Prime Minister Stephen Harper joined leaders from Newfoundland and British Columbia in issuing assurances that Canada’s offshore energy sector is solid and at no risk.

“The behaviour of the companies in question is completely unacceptable,”
said Mr. Harper, “and would be completely unacceptable in this country.”

But environmental disasters, no matter what their origin, are always completely unacceptable. And they will always happen, no matter what the rhetoric about absolute prevention, zero tolerance and triple fail-safe regulation. Risk is always there.

Short of outright prohibition, the most effective accident-prevention mechanism is to enforce property rights and make sure that companies know in advance and under law that they are fully and directly responsible for whatever havoc their activities cause.

As a company that has long claimed to be the world’s greenest oil corporation, BP has so far assured Americans that it will pay the full clean-up cost, a bill that could run to tens of billions of dollars, depending on where the oil spill goes next.

But it is not clear whether BP would pick up all the costs, including damages.

“We will absolutely be paying for the cleanup operation,” said BP CEO Tony Hayward, appearing to leave open the issue of damages, the losses to the livelihoods of people working in coastal fishing and tourism industries.

Environmentalists are skeptical that BP will live up to the pledge, which was offered by Mr. Hayward during U.S. television interviews.

Under U.S. law, however, the direct liability of oil companies for environmental damages appears limited.

According to the U.S. 1990 Oil Pollution Act, the liability of individual companies is set at a maximum of $75-million, the result of past compromises between politicians and the oil industry over who will cover pollution risks. Yesterday, some U.S. Democratic Senators scrambled to retroactively change the law by introducing the “Big Oil Bailout Prevention Act” to raise the liability limit to $10-billion.

This is classic political ass-covering. How did the original act get through Congress? The oil industry has often sought limited liability protection.

The act itself is a shambles of unfulfilled promises and commitments. It set up an Oil Spill Liability Trust, a fund to be built up by a tax on oil production. But the fund has never been maintained properly and, thanks to Congressional fiddling, is not equipped to handle a disaster.

In its latest report, with $1.5-billion in assets, the Oil Spill Trust said it “will be able to cover its projected non-catastrophic liabilities”
for years to come, leaving catastrophic events to fate.

For years there have been warnings that the Trust’s funding is inadequate.
In 2004, the fund was heading to a zero balance and a Homeland Security report said, “A single major or catastrophic oil spill could have a significant impact” on the fund’s projections.

Now that the worst catastrophe threatens, the politicians are scrambling to cover up something that should never have been established. Some call it the polluter-pays principle.

In law, it is simply a matter of enforcing property rights. In oil drilling, those rights are taken away and operators have less interest in avoiding disaster.

There are 3,500 oil production platforms in the Gulf of Mexico alone, operating under a law that limits their responsibility to protect the property of others.

BP, in the Gulf of Mexico, appears, to its credit, to be ready to stand behind property rights rather than its legal rights.


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