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More evidence that oil isn't as cheap as it looks

Yesterday, Sen. Lisa Murkowski rose to deny unanimous consent to Democrats trying to pass a bill increasing the cap on damages for oil spills from $75 million to $10 billion. Murkowski saw a problem: "It would be impossible or perhaps close to impossible for any energy company that is smaller than the super majors, smaller than the national oil companies, to operate in the OCS. Ten billion dollars in strict liability would preclude their ability to obtain financing, to obtain the bonds or insurance for any exploration."

To put it slightly more clearly, if oil producers are on hook for up to $10 billion of the cost of a spill, smaller oil producers won't be able to afford the insurance necessary to do offshore drilling. Murkowski might be right about that. But why should the federal government be in the business of helping oil companies take risks that they don't find economically viable? As David Roberts put it, "Murkowski wants small, independent oil companies to be able to privatize the profits of offshore drilling but offload the financial risks to the public."

Of course, this is par for the course in the oil business. If companies really had to pay full freight, their product would be much more expensive, and other energy sources would look better in comparison. Last year, the National Academy of Sciences estimated that health and related other non-climate costs of gasoline vehicles adds about 29 cents to the gallon -- 29 cents that people aren't paying at the gallon. And if you add in clime change? If you add in uses of oil beyond driving? If you add in economic damage from spills?

Well, oil starts looking pretty expensive. So expensive, in fact, that many of these companies might not find it a profitable business, and some of these more energetic efforts to extract oil from remote locations might look worse than doubling down on renewables. But because those costs are hidden from the pump price, oil merrily operates in a market where its risk is underpriced and the costs of catastrophe are borne by taxpayers. In that way, it's a bit like the financial market, at least before the 2008 crash.

By Ezra Klein  |  May 14, 2010; 11:50 AM ET
Categories:  Energy  
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Comments

Ezra -- two typos in the 3rd paragraph. I think you meant "29 cents that people aren't paying at the PUMP" and you sort of bungled "climate".

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"As David Roberts put it, "Murkowski wants small, independent oil companies to be able to privatize the profits of offshore drilling but offload the financial risks to the public." Of course, this is par for the course in the oil business."

Um, don't you mean that's par for business. It's how Wall Street survived (and thrives), it's how insuance giants meet profit margins, and the list goes on and on. It's how big business operates - you get enough money in influence DC...then you clean house.

Posted by: TheBBQChickenMadness | May 14, 2010 12:15 PM | Report abuse

Almost fully agree on this one - there should be no cap on damages. If an oil company creates $12 billion worth of damages, then it (or its insurer) should be on the hook for all of it. (Most) Republicans are such hypocrites when it comes to the free market.

It is interesting that government subsidies to oil companies are impeding progress on alternative energy development, not to mention leading to higher oil usage than would be the case if free market conditions prevailed.

The solution isn't to try to force government to subsidize only the 'right' things. The people in favor of the 'right' things aren't always going to be in power, and in any case the oil companies have lots of money. The solution is to get government out of the corporate welfare business.

In the absence of that option, and given that the government will in any needs tax revenue, the case of a pigouvian tax on carbon is overwhelming. Even under completely free market conditions, there still should be a carbon tax to adjust for climate damage, which is a tragedy of the commons problem where assigning property rights alone is unlikely to work.

Posted by: justin84 | May 14, 2010 12:20 PM | Report abuse

"Doubling down" on renewables? It's more like "tripling down" or "thousanding down", dude.

Posted by: Klug | May 14, 2010 12:45 PM | Report abuse

I likewise don't get why we need a cap on damages. Didn't we realize this when we made the cap $75 million so many years ago, then never adjusted it and it was spent in the first week? They make a mess, they clean it up. Just like my 6 year old. Its that simple.

And as far as the insurance, actuaries can absolutely figure the difference between insurance cost for a 1 billion dollar spill and a 30 billion dollar spill.

If they can't afford it, they shouldn't be out there plain and simple.

Posted by: visionbrkr | May 14, 2010 12:53 PM | Report abuse

this is a good point. i think i agree that there should be no cap on damages.

my one concern is that this pushes all offshore drilling into less regulated areas, and takes jobs away from US coastal areas.
of course, this would also take spills away from US coastal areas (and to other parts of the world, that can less afford to clean them up). so i guess it depends on perspective.

Posted by: jfcarro | May 14, 2010 1:03 PM | Report abuse

More like this please. Meaning more reporting on the specifics of how oil/gas/coal have all sorts of hidden costs and subsidies that are never included in reporting on supposedly uncompetitive renewable energy technologies. I'd love to see some good, clear Ezra-style numbers on this issue.

Posted by: jeirvine | May 14, 2010 1:38 PM | Report abuse

I think you would have to include the cost of the air craft carrier, and the men and women that staff it, in the cost. Without our military presence in the Gulf protecting private oil companies, it would never be economically viable to drill for oil there, because you could never afford the security. This is also part of the reason oil companies love our offshore rigs, they are protected by the coast guard.

Posted by: MadIrishFrog | May 14, 2010 1:39 PM | Report abuse

Agree that oil comanies should have strict & complete liability for the cost of any spill.

Agree also that is insane that we subsidize the oil companies to take a natural resource out of the seabed. The corporations should be paying the American people for the right to take away a public resource, not the other way around.

Posted by: Patrick_M | May 14, 2010 2:10 PM | Report abuse

jfcarro,

That's a legitimate concern, but in all honesty if other countries are okay with tens of billions of dollars worth of environmental destruction, then by all means let them have it. They can deal with ruined coastlines and collateral damage, while we buy their oil at the subsidized prices from them.

While jobs are nice we shouldn't support corporate welfare in order to have jobs. That argument can be used in any bailout/subsidy for any industry. The billions of oil spill subisides could have been used by others to create jobs in another industry.

Posted by: justin84 | May 14, 2010 2:20 PM | Report abuse

re...capping their liability limit....

criminals. scoundrels.
just like the individuals, actual persons, who decided in the minerals management office, that they didnt need permits for their drilling, and were oblivious to endangered species.
criminals, mean human beingsa acting less than human. not caring about the well-being of our planet, and all of the things on it.

Posted by: jkaren | May 14, 2010 2:23 PM | Report abuse

and now, we should consider privatization of space exploration???
so that we can muck up the sacred heavens next?
bombing the moon for water, leaving trails of space junk orbiting for eternity?????
if we cant figure out how to respect this planet, we should not be taking stewardship over the heavens.
people engaged in space research, just for a profit motive.
it will be something.

Posted by: jkaren | May 14, 2010 2:29 PM | Report abuse

Uh, you also forgot to add in the extra military capability we seem to need to protect, control, or threaten to control, the sources of oil and the transportation channels for oil.

That's a lot more than $.29/gal.

Posted by: Dollared | May 14, 2010 2:35 PM | Report abuse

Just try to put a price on the risks of nuclear. It might costs more money than exists to clean up a nuclear accident. Nuclear is the worst idea, ever. A literally toxic asset, waiting to blow up.

As in all insurance, we need to discount the risk across all the platforms. So, if we cap risk at some level, say $10B over 10 years, that only adds 4% to the oil price (based on 80Mb/d production) We see 4% price swings all of the time.

The hidden costs of oil exist, but they aren't big enough to favor any other energy source.

Posted by: staticvars | May 14, 2010 2:49 PM | Report abuse

I'll post here a comment I had made on Paul Krugman's related post (http://krugman.blogs.nytimes.com/2010/05/14/why-libertarianism-doesnt-work-part-n/):

All of the energy-industry approaches to climate change, which Obama seems to be embracing, seem to depend on huge gov't subsidies: liability limitations for oil drilling (why should there be any liability limitation at all, leave alone debating how big it should be?); loan guarantees for nuclear plants, and I imagine there are also liability limitations for nuclear catastrophes and that the gov't assumes much of the cost for the still unsolved problem of waste disposal (and security?), though I don't know; huge gov't subsidies for "clean coal". Have any economists (working with realistic, heavy-tailed distributions for probabilities of things like oil spills and nuclear disasters, not Gaussian distributions) worked out the value per kilowatt of all of these gov't subsidies, so we could get a realistic comparison of costs with renewables?

Posted by: kenm3 | May 14, 2010 3:10 PM | Report abuse

@J84:That's a legitimate concern, but in all honesty if other countries are okay with tens of billions of dollars worth of environmental destruction, then by all means let them have it. They can deal with ruined coastlines and collateral damage, while we buy their oil at the subsidized prices from them.

This is a deeply flawed argument. Just wait until the other countries in the Caribbean start seeing the effect of the spill on their economies. Who is going to compensate them? The effects of polluting an entire ecosystem are not restricted to the country that allowed the pollution. If the Atlantic fishery is decimated by the degradation of the US coastal wetlands where 70% of the commercial fish in the Atlantic spawn, it will be even more of an international disaster. The world ends up paying the price for this mega screwup.

Posted by: srw3 | May 14, 2010 3:30 PM | Report abuse

Good post! I agree...we need much more like this. More evidence for everything.

I like this point that Krugman made in his post: "And don’t say that we just need better politicians. If libertarianism requires incorruptible politicians to work, it’s not serious."

Of course, that argument could apply to so many things.

Posted by: slag | May 14, 2010 3:35 PM | Report abuse

Srw3,

I don't get what you're saying. Are you arguing in favor of limiting liability for oil companies?

Right now oil companies have near zero liability in the event of a spill. Congress is talking about raising the liability cap to $10 billion, and I'm in favor of no cap. Without a cap, oil companies are forced to consider the costs of oil spills beyond a token value and some PR damage, and adjust their security measures accordingly. Jfcarro worries that oil companies will receive subsidies such as damage limitations from other countries and then we won't have oil wells here, and this will be bad because oil spills will happen elsewhere and we'll have fewer jobs. I say every country knows oil spills can happen and if they don't hold oil companies responsible for their damages that's their own problem. I admit that's bad, but what's your solution? We can only ban oil well drilling here - Jfcarro's worry still applies in that case, only more so.

Having the public pay for damages caused by oil companies is bad policy, both here and elsewhere. We should end it no matter what other countries do. By the way, my view is that we should hold oil companies responsible for cleaning up/paying for spills that occur in U.S. coastal waters, and I'm fine requiring that this holds even if oil from a local spill goes into another country's coastal waters. Now if we don't provide liability protection but China does, and more companies go there to drill, then I say fine let them deal with the spills. There really isn't anything we can do to stop it, is there?

Posted by: justin84 | May 14, 2010 4:17 PM | Report abuse

@ justin84 : I believe that oil companies should pay all costs with no liability limits.

You said " if other countries are okay with tens of billions of dollars worth of environmental destruction, then by all means let them have it."

My point is that environmental damage doesn't recognize national borders and that other countries in the Caribbean basin will be wanting compensation from BP et al as well.

Posted by: srw3 | May 14, 2010 5:08 PM | Report abuse

"I like this point that Krugman made in his post: 'And don’t say that we just need better politicians. If libertarianism requires incorruptible politicians to work, it’s not serious.' "

A libertarian would say the problem is that the government has power to grant favors. Libertarians are libertarians because they don't trust politicians to be good. Liberals and conservatives like it when the government has power to do what they like (invade Iraq, raise taxes, whatever), and then are depressed when the other side gets into power and does something they don't like. Granted you need an initial set of libertarian politicians to get the ball rolling, but you only need that one initial set if the straightjacket on government power is tight enough.

Posted by: justin84 | May 14, 2010 5:15 PM | Report abuse

Srw3:

I'm completely fine with other countries wanting compensation for damages. I'm just saying if, say, Brazil invites in BP and tells them they have no liability when an oil spill occurs, that's their problem - in as much as it damages property outside of Brazil, I think they are within their rights to go after BP for damages as well.

Posted by: justin84 | May 14, 2010 5:18 PM | Report abuse

I am interested by the caption of the youtube video. I would have thought a more accurate caption would be "Republicans block bill that would stop big oil bailouts" or "Republicans block anti big oil bailout bill."

It's not as if our Republican friends have decided that "bailout bill" is a synonym for "bil." That's not what Luntz recommended.

Posted by: rjw88 | May 15, 2010 11:13 AM | Report abuse

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