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Obama Admin Raises Liability Cap for Oil Spills

By Nick Cunningham | Tue, 25 February 2014 21:18 | 0

On February 21, the U.S. Department of Interior proposed raising the cap on liabilities that oil companies are forced to pay in the event of an oil spill. The Bureau of Ocean Energy Management (BOEM) – the environmental regulator for offshore oil and gas drilling – moved to raise the oil spill liability cap from $75 million to $134 million.

Under the U.S. Oil Pollution Act of 1990, companies responsible for an oil spill only have to pay up to $75 million in damages for economic losses resulting from the incident. That cap is waved if there is proof of gross negligence. The company still would have to pay for the cleanup and liabilities for violations of environmental laws.  

BOEM Director Tommy Boudreau argues that raising the cap is necessary to merely keep up with inflation. “This proposed change is the first administrative increase to the liability cap since the Oil Pollution Act came into effect twenty-four years ago and is necessary to keep pace with the 78 percent increase in inflation since 1990,” he said in a press release. “This adjustment helps to preserve the deterrent effect and the ‘polluter pays’ principle embodied in the law.”

The cap is absurdly low given that economic damages stemming from an oil spill can reach many multiples of even the higher BOEM figure. BP is still sorting out its liabilities from the 2010 Macondo well blow out, which could eventually reach a cumulative total of $70 billion. That figure includes other penalties, but the economic damages alone are billions of dollars.

Related Article: Is it Time to Let BP back in the U.S. Oil Game?

There was some political movement to raise the cap following the BP disaster in 2010. Senators Bill Nelson (D-FL), Robert Menendez (D-NJ), and the late Frank Lautenberg (D-NJ) cosponsored legislation that would have raised the liability cap to $10 billion. Even some oil industry allies supported some sort of reform, but disagreement over how high to raise the cap led to inaction. After months of haggling, nothing was passed and momentum flamed out. The political winds shifted from calling for tough action against BP to criticizing the government’s moratorium on drilling. So nothing changed despite the worst environmental disaster in the nation’s history.

The oil and gas industry warned against the latest move by BOEM to raise the liability cap, arguing that raising the cap would lead to higher insurance premiums, a cost that small companies cannot bear. Still, the reaction was pretty muted from the industry, and the move by BOEM to raise the cap didn’t exactly make front page headlines. And BOEM knew it wasn’t making a huge move – it only allowed the public comment period to be 30 days because didn’t anticipate much opposition. But BOEM couldn’t raise the cap any further than the $134 million level without further action from Congress.

So, make no mistake – this is a small move. It does highlight a pretty absurd policy though. The National Commission on the BP Deepwater Horizon Spill argued for “significantly increasing the liability cap” to not only make sure offenders adequately compensate victims, but also to preserve the right safety incentives. Companies may be less inclined to invest in safety equipment and procedures if their ultimate liability has a ceiling.

To take the point further, why is it that the damages of an oil spill are socialized and picked up by taxpayers, as they are under a liability cap? The industry argues insurance rates would be too high. But if a company cannot afford to pay the insurance, maybe they should not be operating in the Gulf of Mexico anyways. Or put another way, if the entire business of offshore oil drilling is so risky as to be privately uninsurable, then there is something wrong with the way the business is being conducted.

By Nicholas Cunningham of Oilprice.com

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