This page has been archived and commenting is disabled.
Oil Drilling Liability Cap Led To The Gulf Spill
From The Daily Capitalist
I never ever thought I would agree with Nancy Pelosi on anything, yet here it is:
U.S. House Speaker Nancy Pelosi said Congress should consider eliminating any cap on the damages a company such as BP Plc might have to pay for harm caused by oil spills.
“There is a movement afoot in Congress for that. Why have a cap?” Pelosi said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” to air this weekend.
Pelosi had previously voiced support for a proposal under consideration to raise the existing $75 million cap to $10 billion for economic damages caused by each environmental disaster. After being thwarted March 13 in the Senate, backers of that legislation have vowed to renew efforts to win passage.
“You would hope that there would not be more than $10 billion of damage, but understand it is for each episode,” she said. Asked about eliminating the cap altogether, Pelosi said: “I think it’s worthy of looking at.”
I'm not against Big Oil, Little Oil, or anyone in the Oil Patch, but the liability cap is just another example of how industry uses the government to gain market advantages at the expense of someone else. In this case it is the Gulf Coast inhabitants and those that live off of that huge resource.
As I understand the law, BP is responsible to pay 100% of the cost of the clean-up. What the liability cap does is to cap economic damages to $75 million. What that means is if anyone suffers a loss of income or property as a result of a spill, BP is only obligated to pay $75 million even though the losses may be in the billions. That is not right.
Businesses seeking advantages from legislators is not news. While lobbying is often a proper and necessary response of business to legislation that would be harmful to them, it is a two-edged sword when they try to gain economic or competitive advantage. Our history is full of examples, most recently, tire import tariffs. While it is right to condemn business for this we should blame legislators who have the primary duty to act in the best interests of all the people. At least one could say that we understand that business is motivated by self-interest, but Congress is held to a higher ideal. While politicians preach this principle they rarely live up to it.
In free market capitalism, no one has a legal or a coercive advantage over anyone else. If I commit a civil wrong, in this case the tort of property damage and the resulting economic loss, I should be fully liable for it. That is, I should pay the cost. If I go broke, so be it. If I do something with willful, wanton disregard for safety I may be grossly negligent which may allow a court to impose punitive damages.
In my view, the liability cap was a major cause of this environmental disaster.
Assume for a minute that there was no liability cap in place. BP was engaged in very risky drilling activity that posed potentially huge losses if they acted negligently. Drilling at 5,000', I am informed, is not like drilling at 500'. Like all businesses, BP must weigh the potential risks against the potential gain of any enterprise. Like most businesses, they lay off as much risk as they can by buying insurance. If they didn't buy insurance then they weighed the risk against their assets and net worth.
I am going to guess here that the economic loss of the BP spill will be far more than the cost of the clean-up. I assume that is always the case or otherwise oil companies would not have sought a liability cap. When they evaluate the risk of such risky activity, then they know that whatever damage they cause, their liability will not exceed $75 million. That is a drop in the bucket for a company whose after-tax earnings were $6.1 billion in Q1.
Thus I believe that liability is a significant deterrent to companies involved in risky activities. Their response to such liability could be:
1. Determination to not undertake a risky project because of the potential liability.
This happens all the time in industry. Projects such as chemical plants, nuclear research, nuclear energy, may be too risky in light of the potential reward. It may be beyond the company's ability to respond in damages, thus risking the company's future. It may be impossible or prohibitively expensive to get insurance.
2. Determination to engage in the project but with added safety protocols.
This is certainly possible with a large company such as BP. They may evaluate the risk and decide they can safely undertake the project. Obviously this was BP's choice here. But they were negligent and they should pay all damages they cause. If they go broke, they understood the risks going in.
3. Determination to engage in the project but with additional insurance to cover potential losses.
If the project is undertaken because it is risky but determined to be within their ability to manage the risk but not to withstand damages, they could obtain insurance. If the insurance company determined that the risk was too high and refused coverage, the company would most likely decide to not undertake the project.
Insurance companies have a lot at stake because they bear much of the risk involved in such projects. They exercise great care by investigating their underwriting risk and require companies to satisfy many conditions related to safety. The breach of any policy safety condition may invalidate the insurance. Thus there are market forces that try to eliminate risky projects.
4. Determine to engage in the project but with no insurance or other risk-related safety protocols.
This would be foolish business behavior by any company. Assume rational players in the industry, the project would not be undertaken. Most oil companies have risk-reward protocols to minimize risk because, as public companies, no one would invest in them since risky projects would jeopardize investors' capital much less the future of their company.
I think it will be shown that BP was not only negligent, but perhaps grossly negligent and there is no way to punish them for their behavior. I understand that they may voluntarily agree to compensate people with economic losses. To not do so would effectively end any future drilling in U.S. waters or perhaps worldwide. But that was not a sufficient deterrent to prevent them from entering into such projects.
Let the lawyers have at them.
»
- advertisements -
THE OBAMINO THEORY:
http://williambanzai7.blogspot.com/2010/05/obamino-theory.html
You nutter butter. Creative as always...
If you think this idea has any merit, please send it to someone, anyone, who can get our government or BP to implement it. Then we can turn our energies to sucking 40 million gallons of oil out of the gulf, using tankers.
Please don't let them blow up the riser, then they won't be able to work with it anymore if that doesn't work, and we will be waiting until August...
As the BP oil spill continues, the Gulf Coast’s fishermen, tourism industries, small businesses, and local governments are being threatened with serious economic costs. While the total economic impact of the spill remains to be seen, it is clear that the damages will be significant, given that the tourism and fishing industries alone generate billions of dollars each year.
Here are just a few examples of the value of the industries to the Gulf Coast.
Tourism—Gulf Coast
1. The value of the Gulf Coast’s tourism industry [EPA; Last Accessed 5.18.10]:
$20 billion
Tourism—Florida
2. The value of Florida’s tourism industry [Miami Herald; Last Accessed 5.18.10]:
$60 Billion
3. The percentage reductions in hotel occupancy rates between Pensacola and Panama City [Wall Street Journal; Last Accessed 5.18.10]:
30 Percent
4. The estimated percentage reductions in hotel occupancy rates during Memorial Day along the Florida panhandle[1] [Wall Street Journal; Last Accessed 5.18.10]:
70 Percent
Tourism—Alabama
5. The amount of money spent by tourists on Alabama’s beaches in 2008 [Reuters; Last Accessed 5.18.08]
$2.3 Billion
6. The number of workers supported by tourists on Alabama’s beaches in 2008 [Reuters; Last Accessed 5.18.08]
41,000
7. Percentage of cancellations already being recorded on Dauphin Island where the first tar balls came ashore [Wall Street Journal; Last Accessed 5.18.08]:
50 Percent
Tourism—Louisiana
8. The amount of money domestic travelers spent in Louisiana in 2008 [Louisiana Office of Tourism; Last Accessed 5.18.10]:
$9.3 Billion
9. The amount of tax revenue for generated by domestic travel in Louisiana for federal, state, and local governments in 2008 [Louisiana Office of Tourism; Last Accessed 5.18.10]:
$1.1 Billion
10. Number of Louisiana’s 64 parishes that received over $100 million in travel expenditures in 2008 [Louisiana Office of Tourism; Last Accessed 5.18.10]:
15
Commercial Fishing—Louisiana
11. The value of the commercial seafood industry in Louisiana [The Economist; Last Accessed 5.18.08]:
$2.4 Billion
12. The percentage amount of seafood that Louisiana catches in the continental U.S. [Wall Street Journal; Last Accessed 5.18.08]:
40 Percent
Commercial Fishing—Gulf Coast
13. The size of the area in the Gulf of Mexico currently closed to fishing [Associated Press; Last Accessed 5.18.10]:
46,000 square miles
14. The value of the commercial seafood harvest that was to begin on May 15th [Wall Street Journal; Last Accessed 5.18.10]:
$21 Billion
15. The percentage amount of total U.S. seafood production coming from the Gulf Coast [Wall Street Journal; Last Accessed 5.18.10]:
20 Percent
Recreational Fishing—Louisiana
16. The value of the recreational fishing industry in Louisiana [The Economist; Last Accessed 5.18.08]:
$1 Billion
http://dpc.senate.gov/docs/fs-111-2-93.html
All the tourist activities would be falling regardless- we're in an economic contraction (and general paradigm shift, one which WON'T be heavy on tourism and "serivces").
Nice post.
There is a lot of talk here about terrible punishments that should be inflicted on BP and anyone else complicit in this catastrophe. I'm not here to argue about that. In fact I would feel some satisfaction if those organizations did not survive.
But there is a distinction that I think has been largely overlooked, between punishment for irresponsibly risky behavior that results in great damage to others vs. identical behavior that cause no damage at all. The consequences in the second case, if any, will be trivial: in the case of an oil driller that cuts corners, the worst outcome might be a small fine. Of course massive monetary penalties after disaster occurs will make everyone involved wish they had been more careful but by then it's too late. The remote possibility of such an outcome will not affect how others calculate risk vs cost equations in the future. It is human nature to expect to get away with something that one has always gotten away with before.
My point is that irresponsibly risky behaviour must itself be penalized severely, regardless of outcome, or these things will just keep happening.
Updated DOW charts :
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Let me preface this by saying I in no way shape or form approve of oil companies, the oil industry, nor their lobbying efforts.
First, are we certain that BP has no private insurance policy to cover this? In all likelihood, there are few companies who could back such a thing (few $b)... just curious. It is my bet that BP does have private insurance and that they had the ability to be on site and otherwise supervise BP's efforts...
Second, individuals, every day, are given practical liability caps. Let's say I am a general surgeon, cutting out moles and what not. I have a 5 million dollar insurance policy. I cut up some woman's face accidentally and disfigure her. Are the damages likely less than my policy limits? Almost certainly... and in essence, I have capped my liability to my insurance premium. Do I go around trying to disfigure women as a result? I'd say most people try and avoid problems...
Third, the liability cap is not the issue, it's the balance of the oil spill trust fund. An interesting corollary are underground storage tank trust funds set up by (most?) states. Generally, convenience store operators are required to conduct certain minimum safety standards and if those are performed, then the c-store has an entrance ticket into the fund. The fund then comes in, picks up the tab, generally covering all the cost, and the parties are made whole. The c-store operator pays a small fee ($7,000.00 in my state), and life goes on.
The issue isn't the liability cap, the issue is the risk metrics used to determine the fees paid for the trust fund. *channeling taleb's insane ghost* We just always naively optimistically assess risk... too many variables... too many things to go wrong. In short, the trust fund should be sufficient to knock out the lion's share of all damages. At this juncture, I think it has $2.xx b. Well, that's a drop in the bucket on this deal. I think we're looking at multiple $t here. This issue shows the fundamental problem with insurance...
Fourth, the company is liable for compensatory damages in regards to the cost of cleanup, which will be vastly larger than the assets of the company and all insurance policies in place. In this sense, the company does have unlimited liability because the cap is larger than the value of the company.
Last, I propose that it was peak easy oil that lead to the gulf spill... If our established infrastructure is aging and no longer capable of peak production and we limit the other available drilling to out in the middle of the ocean, then we inevitably push the boundaries of our technology. When we're willing to send our sons and daughters to go fight wars over oil, it can be hardly said it isn't an important and vital mission to keep drilling. It will be done.
In the end, we will find that this spill was the act of several concerted idiots, but it was not limited liability that fueled their decisions, it was simply profit motive. Every day, we toss out liability in search of profit motive... without the slightest responsibility... happens in every industry. These guys got too long of a leash and hung themselves. Unfortunately they've screwed the rest of us (think wall st). It may be found that this paradigm was prevalent throughout the company, but I doubt we'll ever get that far. We've got plenty of oil wells that don't kill off humanity... they've got limited liability too... but I'm sure that's just a coincidence.
P.S. *for "conspiracy" nutters* any thoughts the whole thing might be an oil grab by us.gov in an effort to have some reasonable basis for pulling out of the middle east? Or as a hedge if future war causes decrease in middle east oil production/availability?
very good points, don't agree with all your conclusions, but do think limited liability does not produce all bad behavior nor will unlimited liability correct all bad behavior.
Really, no tool will be prefect in stopping wrong, risky, or harmful behavior, so its a question of determining the most effective policies that produce best desired result while not weighing too heavily on economic production or being too costly. Its bit like the tension between tyranny and safe streets, in free society, some people will have freedom to do bad.
You know its interesting, I heard one good, financial regulator say that even when all businesses knew that no regulations on the books were going to be enforced, by neither the market nor the govt, most still did not engage in fraud. I think he said something like only 20 percent, when unfettered, behaved really badly. So I think our tools to deal with big eff-ups should keep this in mind, most are trying to do right and will think about potential problems and try to limit them but a few will always be stupid or evil.
Yes. It's an issue that really does not get much attention. How do we justify punishing citizens for performing illegal acts?
I'll break out the ol' civ pro book, but as I recall, there was little justifiable reason for punishment outside of retribution and incapacitation. Deterrance, as a basis for punishment, simply does not work... or only has very specific application.
I would say that we should all want the government to play objective and effective referee, however I am not sure that is possible. There will need to be many other variables eliminated before this would inevitably lead to unintended consequences, e.g. campaign contribution reform, self appointment of representatives, regulatory capture, deep capture, etc. Otherwise, we end up with too bigger to fail.
I agree that we have to devise a way to create incentives for private actors that corrales them into behaving in a compatible fashion to society's values. If we are successful enough, we don't even need policemen... or far fewer anyway. Unfortunately, one of the best mechanisms humans have devised for this self regulation is the unfettered market... and, I'll be damned if that shit works as intended.
My basic overarching thesis for all of society's madness is that it is simply too complicated for most people to live or function at some remotely reasonable level. It is too complex to succeed, too complex to regulate, too complex to reform, too complex to understand, too complex to develop adequate risk matrices, too complex to survive. The political winds in this country are all blowing towards a reduction of the system's complexity (which in large part is directly a function of the availability of credit).
But, one thing is for certain, nothing will be reformed until there is some punishment for failure. We will simply continue to fail... and fail... and be incentivized to fail and fail some more. This is why companies have become too bigger to fail.
all good points, you give good reasons for something I have often thought, we spend too little time thinking about what are effective systems for our markets, politics. I know this seems an odd thing to say when there are whole segments of population obsessed by partisan politics, or by making businesses work better etc...but we do little deep thinking, researching, data collecting, comparing and we also spend little energy caring about others, whole picture, we are just busy trying to make it work for ourselves and our immediate community.
I think really, we are enough a like and there is enough good in us, if you put ordinary people in a room to try to find a solution to some problem, big or small, and fed them all the info avialable on any angle of the problem, they would find practical, smart solutions and agree fairly well on most of them. But that's not a process that is practical, although citizen juries are a bit like that.
I think the complexity you mention is a way for us to disconnect, emotionally and intellectually.
If the US make a retractive law and carry it out, this will be the end for democracy.
I'm shorting BP right now, but doing this has much worse implications to our justice system then just recovering 10 billion.
This will only suit a taranic government. Not a demcracy.
If there was any way to connect Al Quada to this thing we would be carpet-bombing AfPak tribal regions, legality be damned.
I believe that an ex post facto (after the fact) law is unconstitutional. Therefore, there is nothing legally that could be done about the GoM BP spill just as there was nothing that could be done about the outrageous 2008 Wall Street bonuses once they were paid. Laws can only be forward-looking. And with good reason. The government is confiscatory and powerful enough as it is. Regardless of the abortion the GoM situation is.
BTW, there is also a cap on nuclear power generators called the Price-Anderson law.
I think the idea of democracy is to that the strong hand is the will of the people...now of course, democracy can devolve into mob rule...but I think effective democracy is a good hedge against outright populist revolution...such as French Revolution head chopping.
Sure democracy may err in being too retributional or have their rule of law be lost to latest whims of congress (see reasons against bills of attainder such as what congress did to Acorn) but better to let people do it and see they got carried away than wait to things beyond hope for people and they replace checks and balances of democracy with mob rule or soviet style peoples party
Basic Physiological Effects
Crude oil is a complex mixture of chemicals that have varying abilities to be absorbed into the body through the skin, lungs, and during digestion of food and water. Most components of crude oil enter the bloodstream rapidly when they are inhaled or swallowed. Crude oil contains chemicals that readily penetrate cell walls, damage cell structures, including DNA, and alter the function of the cells and the organs where they are located. Crude oil is toxic, and ingredients can damage every system in the body:
respiratory nervous system, including the brain
liver reproductive/urogenital system
kidneys endocrine system
circulatory system gastrointestinal system
immune system sensory systems
musculoskeletal system
Damaging or altering these systems causes a wide range of diseases and conditions. In addition, interference with normal growth and development through endocrine disruption and direct damage to fetal tissue is caused by many crude oil ingredients (CDC, 1999). DNA damage can cause cancer and multi-generational birth defects.
Acute Exposure Hazards - brief exposure at relatively high levels[1]
Crude oil contains many chemicals that can irritate the skin and mucous membranes on contact. Irritant effects can range from slight reddening to burning, swelling (edema), pain,and permanent skin damage. Commonly reported effects of acute exposure to crude oil through inhalation or ingestion include difficulty breathing, headaches, dizziness, nausea, confusion, and other central nervous system effects. These are more likely to be noticed than potentially more serious effects that don't have obvious signs and symptoms: lung, liver and kidney damage, infertility, immune system suppression, disruption of hormone levels, blood disorders, mutations, and cancer.
Chronic Exposure Hazards - long-term exposure at relatively low levels
This type of exposure should be avoided, if at all possible, because the potential for serious health damage is substantial. Chronic health effects are typically evaluated for specific crude oil components (see CDC, 1999), and vary from cancer to permanent neurological damage. They cover a range of diseases affecting all the organ systems listed above.
http://www.sciencecorps.org/crudeoilhazards.htm
The whole article is very interesting for those who have the time to read
Another great success by the corporatists and the corporations which control them-with corporatist(Pelosi this time) acting like they are going to change something to tranquilize the enraged masses . These f#ckers had all the time in the world to do the right thing yet they never seem to and even after it is still too late and the 2 parties falsely debate changes the song remains the same . Wait til they have to evacuate people from the area so they don't get sick in the coming months or every child in the area dies at the age of 18 because they didnt have enough boom to contain the leak (not that the boom they used was used correctly anyway). If one kid gets hospitalized because of this spill I dont think the only military down there will be the coast guard but the national guard as well .The Exxon valdez was not in a densly populated area, this is and it is going to make a lot of people very ill in my opinion . Forget the environment for a minute and think about the possibility that children may become violently ill because of this in the near future .
Rant over
good rant...
Ya know, I have a feeling that your neighborhood BP station is about to see a slight drop off in bidness.
Yes We Can. But...
Good. Then they will drop prices to become competitive. Then I will buy my gas at their new much lower price.
Any money that you save will be shelled out in tax dollars for the (continuing) cleanup... and, I can assure you, that the cleanup costs will be far less than what will later be realized (you may be forced to move etc.) Yeah, cheap is good, until, well, until it isn't.
Here is a comment I received on my blog, The Daily Capitalist. Below it is my response. Does anyone have any thoughts on this?
Here is my response:
What does the fight club think?
Econophile
You can't plan for everything. If the odds are most wells have relatively minor problems then those are planned for.
They envisioned a worst case scenario, but never practiced for it.
I read that most criminals fail because they plan up to the event but never after. No idea how to get away after robbing the liquor store.
Another example. While researching smoke detectors I stumbled across ones that detect Carbon Monoxide.I was reading the recommendations and one man commented his went off. He prepared his family. But when the CM detector part went off he assumed it was a flaw. Luckily his daughter forced him to follow his plans. Turns out the hot water heater had some kind of leak.
If it were not for his dogmatist daughter the whole family would have gone back to bed.
Unless you expect the worst case every single time it will always catch you unprepared.
What do you expect. He's an engineer.
Dude, what can happen dude/1 Totally dude, there's almost no risk dude. Only pansy liberals don't take risk dude! Ha ha, and we're not pansy liberals ! No way dude, we're, like - dude - we're real men dude, we make our own reality dude. Dude, we need to drill dude to show those pansies who the real men are. Dude, like you are So totally - like - dude. (hi five).
Econophile, I liked and agreed with your response.
Personally, I think Black Swan=Red Herring.
It was not difficult on day one to predict that the govt and BP would be saying "we never saw this coming, who could of predicted this..." just like they always do when something, somewhat rare but reasonably likely over time, occurs. I generally agree with Econophile with the caveat of my previous post, that is that big failures often happen because people or business culture can get complacent, regardless their own companies self-interest, and that in such a culture, people simply do not think about something that can very likely happen.
As you say Econophile, most smart business people operating in US are very wary and on guard about liability issues, even when the odds are low, because they know, that while some problems are fairly unlikely, if they happen, the liability costs and associated legal costs could crush them. But we can see from J&J's excellent performance on original Tylenol scare and recent botching, even the same company,within a few decades, can go from having a smart culture of risk aversion to a stupid culture of thinking that covering up and avoiding will make problem go away.
The fact that the commenter said he was a Petro Engineer AND considers this a "Black Swan" easily makes the point. If your Daily Capitalist commenter thinks this event is a Black Swan, this attitude is evidence to me that he comes from a business culture that has commonly ignored lower probability but extremely high risk aspects of their activity. By his logic, then I guess our military should only prepare for small regional skirmishes because the frequency of World Wars in the past century would make them Black Swans.
How is this a "Black Swan" when Mexico, our neighbor, had a well-reported similar nightmare in 1979, in shallow water. And while safety technology has apparently advanced some, the challenges seem to have increased even more, as Econophile points, drilling at 5000 ft vs 500 feet etc...And all the things that BP has tried in deepwater as fix, were already shown as unsuccessful in shallow water spill case.
Sure there are thousands of wells that have been put in successfully and don't blow, and I'm sure there are ones that, once they did, the BOPs etc. did their job. I don't know, but does, say, 1-in-5000 seem like such long odds that they are worthy of being ignored, especially if that means something this bad happens every 20 or 30 years? What is the frequency of total loss of one's home? My insurance guy says its pretty rare....but do you know a lot of people that would willingly go uncovered for a total loss?
While I didn't agree with Econophile's whole point, because I think no amount of money or damage concern will work on complete idiots, short of enforcement (see prisons), I do think the lliability limits may have likely played into their lack of preparation for protect land and water, if worst happened. The most egregious part of BPs behavior in my mind is they appeared to have practically zero REAL preparation for a spill.
They could have had more booms available, they could have had more research on, and inventory of, less toxic dispersant options or even research that showed at depth, maybe best thing to do was not to disperse but the concentrate and collect. They could have had built and tested various "top hat" devices and had some sitting around. They created a big metal box in a week and and they knew in a few hours it was failing, at depth. Why wait a week in the middle of disaster to figure this out, when you could have been easily playing around with this stuff on the side all along. They could have had a small department of military type thinkers and engineers in a bunker developing plans and option should something so bad happened.
BP work was not just endangering a few hundred peoples exposure to E Coli that would be stopped immediately upon a recall, or just limiting the design life of a traffic barrier on a highway that one or two cars would crash through. Mexico's shallow water drill spill clearly showed that once a drill site failed and started spilling, there could be a long, long period of horrible damages. BP was engaged in activities that if they went awry, they could wipe out a whole regional economy and toxify a major fishery for decades (area of Exx Valdez spill still has not recovered its fishery). BP is no small spinach farmer or small business making guard rails for one state's highways. Such preparation efforts by BP would have been minor costs to such a big organization and would be quite affordable and practical for an industry involved such profitable and potentially dangerous activities. Here, I think, the limit to how bad economic damages may be, might have helped them minimize their concern about worst case scenario, because they were clearly not preparing well for it.
Good points. Didn't recall the Mexico spill.
big failures often happen because people or business culture can get complacent
AND... ALL SYSTEMS _WILL_ FAIL. Because, eventually the energy imputs will become so great that they overwhelm profits.
We've gone from this:
http://media.photobucket.com/image/picture%20pennsylvania%20oil%20ground...
to this:
http://www.csmonitor.com/var/ezflow_site/storage/images/media/images/042...
Howard Beale agrees with Econophile, but I cannot speak for all of Fight Club. I think you made an excellent response to your commenter. You have this thing nailed without the anger in your writing. Thank you since I am so angry I cannot write that intelligently tonight.
And by the way, in response to the original post, agreeing with Pelosi is really hard...what a brave statement.
I won't go further with my feelings about her...or Harry Reid. I will just say, as I have through this entire thread, I am non-partisan. I do not believe in either party, or the Tea party. I believe in truth, transparency, government by the people and for the people.
Corporate Farscism must end.
The name shopuld be Nancy Fallaci not Nancy Pellosi
Agree somewhat with Econophile and Pelosi...but really, if you are a right thinking BP exec, you know you are not based in US, and don't you realize there is a high political risk that US will simply change their minds and uncap liabilities by congressional vote, or otherwise take the damages out of your hide via taxation, criminal prosecution, any other tool the state has available. If they were relying on cap to think they could be risky without repercussion, then they were incredibly stupid. Sure, oil companies have had their way with our politicians, but how hard is it to imagine that could turn on a dime in right conditions...
From what I see in failures in construction, I suspect the main reason this was allowed to happened was the company had little hurtful failures for a long time so they became way too complacent and people in key decision making points simply did not allow the worst case scenario enter their mind. I have had many contractors say to me confidently what is required to make structure safe is not necessary...based on nothing...or based on the fact they had cheated before and nothing bad had happen. Most failures seem to occur because they don't imagine what a failure will look like, feel like, don't imagine it is even possible...the worst kind of engineer is a confident engineer...so its not that they thought, hey if this goes wrong, it won't cost much, they JUST DIDN'T THINK.
Best contractors are the ones that are natural worry warts or contractors that have had a failure early in their career...they understand how bad a failure can be and are on guard for it...but still figure ways to be efficient and competitive, and can compete because they don't get call-backs.
I don't know how you legislate or sue idiocy out of people, other than school of hard knocks, unfortunately...and some are more thick-headed than others. That is why people will go to war without considering worst possible outcomes, why they will think price of housing never goes down, or US econ can never crash...they haven't seen it, thus can't be imagined.
That is, by the way, why I think we should have checks and balances of regulators. Like military commanders in peace time, the regulators should be the type to wake up every morning worrying about what could go wrong and going about to stop it. Hopefully if you have a whole orgs whose job is to worry, it does a slightly better job than business, whose money incentives cloud them. But of course, regulation is nothing if it is corrupt. In many countries regulators do a decent job in other countries they are totally corrupted or just plain weak, underfunded against giant profitable machines, they can work and we should how best to make them work and keep proper checks and balances.
Good one MM....+10000 for your post.
This is what Tyler Durden was against when it comes to "big corporate america" and the shams they pull when it comes to honouring their liabilities & coming clean. Tyler needed to distract himself and started Fight Club:
#1 - The first rule of Fight Club is, you do not talk about Fight Club.
#2 - The second rule of Fight Club is, you DO NOT talk about Fight Club.
#3 - If someone says stop, goes limp, taps out, the fight is over.
#4 - Two guys to a fight.
#5 - One fight at a time.
#6 - No shirts, no shoes.
#7 - Fights will go on as long as they have to.
#8 - If this is your first night at Fight Club, you have to fight.
The US government must take action and take over the situation as BP is probably out of solutions. If BP were at least honest and reveals the facts publicly, at least some scientist would attempt to help this company if they were aware of the true facts.
With the NBA playoffs happening, did you really expect Obama to spend any time on this crisis?
Or the average dumbass peasant to even notice?
peasant here. There is a soul, presence in every one of those peasants.
Just like you. Perhaps you could help enlighten us and put your misplaced anger to good use. Yes there are many sheep, but they are we. And if you be wiser, take the lead and if your path is true we may follow as sheep do.
BaHh BaA
Ps am totally freaked out as a man on the planet,two many bad things at once. As the soul within the man i see the need for our demise, the humility wont come till many suffer and humility in man is sorely lacking. With humility may come love, even for another without need of reward. Today everyone wants the rewards without the pain or the giving.
I look forward to suffering with you all.
http://en.wikipedia.org/wiki/Oil_well
Abandonment
One popular use for an improperly abandoned well: Throwing things down it. .. A well is said to reach an "economic limit" when its production rate doesn't cover the expenses, including taxes.[5]
The economic limit for oil and gas wells can be expressed using these formulas:
Oil fields:
Gas fields:
Where:
ELoil is an oil well's economic limit in oil barrels per month (bbls/month).
ELgas is a gas well's economic limit in thousand standard cubic feet per month (MSCF/month).
Po,Pg are the current prices of oil and gas in dollars per barrels and dollars per MSCF respectively.
LOE is the lease operating expenses in dollars per well per month.
WI working interest, as a fraction.[6]
NRI net revenue interest, as a fraction.
GOR gas/oil ratio as bbls/MSCF.
Y condensate yield as barrel/million standard cubic feet.
T production and severance taxes, as a fraction.
...
Just wait until this kind of thing goes nuclear:
Sneaking New Nukes Into War Spendinghttp://counterpunch.org/katz05272010.html
The liability is limited to $75 million as far as the US is concerned. In my opinion the liability is unlimited as far as other countries who are affected by this disaster is concerned. One only has to prove that the origin of the oil creating the problem can be traced to this spill.
Thanks for this post. It will be forwarded to my usual suspects.
I would like to know when the 75 million cap was cooked up.
I don't think it's going too far to call the US Minerals Management Service (Dept of Interior) a co-conspirator. They had a vested financial interest in letting BP take risks. Worse still...the cost ends up with the taxpayers, again.
What I cannot fathom is that there was no disaster plan. So this is what happens when the worst happens? Not even a fucking plan A? My professional life was spent in planning and feasibility and this is incomprehensible.
Welcome to Obama Beach.
I think the facts will demonstrate that BP did cut corners to save money but I doubt if they did so out of a calculated decision that if their well blew up their liability for economic damages would be limited to $75 million.
The clean up costs alone could bankrupt the company if the oil slick spreads beyond the sparsely populated Louisiana delta and starts fouling beaches as far away as Galveston or the Tampa Bay area. One tourist with oily sandals walking through a hotel lobby is going to cost BP new carpeting! Cleaning the hulls of tens of thousands of pleasure craft, hauling away and replacing millions of tons of sand, sheesh the mind boggles at what could come BP's way on clean up alone.
First of all it was Transocean's equipment and they should get just as much rage from the public. Second, liability caps for all involved were indeed what made it so fucking easy to destroy the Gulf in one fell swoop with finger pointing in every direction.
The clean-up will take a decade. It will go everywhere it shouldn't according to Murphy's Law...
I think Jim Cramer was buying beachfront condos in Miami a few months ago. If that is any indication of how bad this will be, given he is the god of bad investing, then I think Florida is fucked.
Imagine a meeting where management wants quick results an minimum cost, and engineering favors a more conservative, time-consuming, and expensive plan. All the engineers have are scary stories of what might happen, and management says "you don't know any of those things will happen, whereas we know for sure that your plan will cost time and money." It's hard to win an argument like that when the worst-case scenario really is unlikely, and especially if the downside costs are limited below the expense of caution.
As for cleanup costs, Exxon proved for all time that a major corporation can out-litigate and outlive any number of claimants. Despite all the outrage currently vented by individuals and their "representatives" in the end most victims will end up paying for damages themselves, whether directly, through lost value and income, or as taxpayers footing yet another massive government program.
What do you know, the same model Wall Street works on. Steal $1T, get fined $100M, rinse and repeat ad infinitum.
And, if you talked with the average dumbass peasant he'd be very uncomfortable "punishing" and "restricting the freedom" of "the companies that made this glorious country the most powerful in the entire universe". Why, I'd bet there's lots of peasants that think their imaginary-friend has stock in these companies.
This gets close to an important point but oversimplifies it. Liability insurers don't just just say yes or no at this level of business; instead they negotiate. In this case, the insurer would more likely suggest modifications to the drilling plan that would mitigate risks at the cost of more safety precautions and a measured pace of progress that would allow for ongoing re-evaluation of emerging, unexpected dangers. Once both parties agreed to a detailed plan and corresponding cost of insurance, the operation could proceed. But the insurer would insist on having its own people oversee the entire operation with power to call a halt if the customer's actions threatened to raise the insurers liabilities beyond predetermined limits.
In this way, liability insurers for large industrial projects are often more effective at controlling risky behavior than any regulatory agency.
Seventree,
Excellent point and I agree completely. This is what should happen to control risk. The government is just incompetent. Insurers have skin in the game. I oversimplified due to the length of the article, and you filled in the pieces perfectly.
Thanks.
While I have been raging, I want to thank you for a great post with excellent points.