Matthew Wald of The New York Times reports the details of the previously obscure Oil Spill Liability Trust Fund, a $1.6 billion fund financed by a minuscule tax on oil -- eight cents per barrel, which Wald says is roughly 0.1%. According to Wald, the fund is designed to pay damage claims resulting from oil spills, though not cleanup and containment costs. But that's not all it does. It also limits the liability of oil companies like BP.
Under the law that established the reserve, called the Oil Spill Liability Trust Fund, the operators of the offshore rig face no more than $75 million in liability for the damages that might be claimed by individuals, companies or the government, although they are responsible for the cost of containing and cleaning up the spill.
The fund was set up by Congress in 1986 but not financed until after the Exxon Valdez ran aground in Alaska in 1989. In exchange for the limits on liability, the Oil Pollution Act of 1990 imposed a tax on oil companies, currently 8 cents for every barrel they produce in this country or import.
The tax adds roughly one tenth of a percent to the price of oil. Another source of revenue is fines and civil penalties from companies that spill oil.
According to Wald's report, there have been 51 instances in which damages under the $75 million liability cap has been exceeded. That figure will certainly be exceeded with BP's Deepwater Horizon spill. Up to $1 billion from the fund can be used for any single accident, but in this case, $1 billion is likely to be peanuts.
In other words, it was a pretty sweet deal for oil companies: they agreed to a tiny tax which they can pass on to consumers, and in exchange their liability is limited to $75 million. Because they can pass the oil tax along to consumers, it's like they got the liability caps for free.
If this law does indeed carry the final word, and there isn't another way to hold BP accountable for the damage it has caused, then you can chalk up another victory for corporate socialism. And you can bet your bottom dollar that the right won't shed a tear over it.
Update (6:56AM): Today's NYT reports that there is a push to amend the law:
Mr. Obama met with Governor Bobby Jindal of Louisiana upon the arrival of Air Force One in New Orleans. Then he went to Venice for two hours — by road, rather than helicopter, because of inclement weather — to look at the response.
He stopped to speak to several fishermen, assuring them that BP would reimburse them for lost earnings. But reimbursement may be one of the largest battles to come, given that federal law sets a limit of $75 million on BP’s liability for damages, apart from the cleanup costs.
“It’s going to be extremely tricky” to reimburse fishermen and others if economic damages tally above $75 million, said Stuart Smith, a New Orleans-based lawyer who is pushing for Congressional action to amend the law. “They may not be obligated to pay more than that unless they agree to do it.”
There is a federal fund, generated from a tax on oil, that may cover as much as $1 billion in damages.
Obviously, at the moment, much of the focus on the ground is stopping the spill and cleaning it up, but dealing the economic damages resulting from it will be a huge deal. And it's enormously important that the administration and Congress do everything within their power to ensure that BP is held accountable. It's not just politics, though the politics of this are obvious. It's also policy: if oil firms can 'earn' unlimited profits without accepting responsibility for the damages caused by their operations, there will be an endless cycle of environmental disasters like the one unfolding in the Gulf.
