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Who Pays For The Oil Cleanup?

So who pays for an oil-spill disaster like this one? Matthew Wald offers some context. Big, wealthy oil companies like BP are usually expected to pay to the cleanup costs themselves. But that still leaves the cost of all the indirect damage to fisheries and wildlife habitats in the area. In that case, under current law, an offshore rig operator is liable for up to $75 million in damages. After that, the federal government picks up the tab, using an oil spill liability trust fund that's paid for by a tiny tax on oil (amounting to one-tenth of 1 percent of the price).

For smaller accidents, that's an okay set-up. But the trust fund managers have long warned that the system is inadequate to deal with rarer but catastrophic spills. And that's what we're dealing with now. The trust fund has about $1.6 billion in it. Yet, according to David Kotok of Cumberland Investors, the Gulf of Mexico spill, which likely won't be stopped before June, could easily inflict tens of billions of dollars worth of damages on Texas, Louisiana, Mississippi, Alabama, and Florida. If the oil leaks beyond Florida and up through the East Coast, the costs could be far, far higher. "Use your imagination for the rest of the damage," Kotok writes.

So that's the backdrop for why Senators Robert Menendez, Frank Lautenberg, and Bill Nelson are now pushing the "Big Oil Bailout Prevention Act," which would raise the liability cap on economic damages from $75 million to $10 billion. Given that BP is already spending $6 million per day on cleanup, that would be a huge deal. Presumably one argument for raising the liability limit is that it would give rig operators even more incentive to invest in safety measurers—especially in light of reports that BP fought against requirements to invest in a $500,000 remote-control shutoff switch.

(Photo credit: NASA Goddard)