This article is from the July/August 2010 issue of Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the July/August 2010 issue of Dollars & Sense magazine.
A Tale of Two Spills
To make BP pay, Obama must learn from his predecessors’ mistakes.
On March 24, 1989, the supertanker Exxon Valdez spilled more than 11 million gallons of crude oil into Prince William Sound, Alaska, in what was until recently the largest oil spill in U.S. history.
More than 26,600 gallons of oil remain from the spill, readily oozing up on beaches. For its part, Exxon emerged virtually unscathed from the incident and is, today, the most profitable corporation the world has ever known.
In 1990, the George H.W. Bush administration indicted Exxon on five criminal charges, with potential penalties totaling $5 billion. It then gave Exxon a “get out of jail free” card: Exxon pled guilty to just three counts and agreed to a fine of a mere $25 million, or less than 1% of the total potential criminal fine, plus $900 million in civil fines to be paid over a 10-year period.
Exxon was made to spend a mere $2.1 billion on cleanup, recovering just 14% of the spilled oil. A couple hundred million dollars was also paid to fishermen for one summer’s missed catch. In total, Exxon paid $3.4 billion—equivalent to approximately 68% of its 1989 profits.
Alaskan birds during the Exxon Valdez clean-up (credit: Exxon Valdez Oil Spill Trustee Council). Twenty years later, oil still readily oozes up on the beaches of Prince William Sound.
Legal suits began immediately and in 1994 were combined into one class action representing nearly 33,000 community members affected by the spill.
In 1994, a court ruled in the class action case that punitive damages “necessary in this case to achieve punishment and deterrence” should be imposed against Exxon in the amount of $5 billion, a year’s average profits. Exxon appealed.
In the midst of Exxon’s legal battles, the Clinton administration permitted the company to acquire Mobil in 1999—the largest merger in U.S. history at the time.
In 2008, after nearly 20 years during which time more than 3,000 of the claimants died, the U.S. Supreme Court ruled in Exxon’s favor and imposed a highly restrictive limit on putative damages—a one-to-one ratio—yielding damages for Exxon of a measly $507.5 million. Exxon’s total Valdez payouts were therefore less than $3.5 billion (about $4.5 billion in today’s dollars).
The BP disaster has dumped an estimated 60,000 barrels of oil per day into the Gulf of Mexico, the equivalent of one Exxon Valdez-sized spill every four days, for a total of 3.25 million barrels since the Deepwater Horizon exploded on April 20, 2010. If all goes according to plan (a highly unlikely scenario) and BP succeeds in capping the well in August, another 1 million barrels of oil will yet be spilled.
The Economist recently provided a breakdown of potential damages BP could face, totalling $43.2 billion. BP is reportedly seeking to raise $50 billion for clean-up costs. I estimate that the costs could be closer to $90 billion. The following estimates are from The Economist and other sources:
- $16–30 billion in direct costs for plugging the well and clean-up efforts. Under the 1990 Oil Pollution Act, these costs must be borne by the company. This amount could rise significantly if BP loses any of the many suits launched against it for negligence by companies such as Halliburton and Transocean.
- $17–30 billion in criminal fines. Penalties under the Clean Water Act are based on the number of barrels spilled. If BP is found willfully negligent, it will face fines of $4,300 per barrel. On June 18, in the largest citizen enforcement action ever taken under the Clean Water Act, the Center for Biological Diversity sued BP in federal court in New Orleans for $19 billion.
- $10–30 billion in compensation for lost economic activity. Lost federal, state, and local taxes and damages to the environment are currently capped under the OPA at $75 million, unless BP is found negligent. The company has said it would waive the cap and “honor all legitimate claims.” This amount could be as high as $30 billion—the annual revenue of tourism and fishing from the four impacted states.
The $20 billion that the Obama administration has thus far secured from BP has little more than symbolic significance—it is equivalent to one year’s profits for the corporation. It is, of course, not nearly enough.
Among the many lessons that the Obama administration must take from its predecessors’ failures is that if BP is not forced to pay fully for its crimes, not only will the Gulf remain polluted, communities defeated, and economies shattered—but the industry will remain undeterred.