On Wednesday the White House released a statement explaining that BP had agreed to set aside $20 billion for an escrow account through which legitimate claims of damages resulting from the Gulf oil spill would be paid. Kenneth Feinberg, who formerly headed the September 11th Victim Compensation Fund, will be the independent claims administrator, and both individuals and businesses may file claims.
It's an important step in amending the tragedy currently wreaking havoc on the Gulf region. But is it enough? Who will the claimants be? And why did BP, after years of balking at regulations, submit so quickly to this demand for a cash payout? To find out, The Root reached out to experts in public policy, ecology and disaster management, and even Louisiana Senator Mary Landrieu.
Brian C. Murray, Ph.D., director for economic analysis at the Nicholas Institute for Environmental Policy Solutions and research professor at Duke University:
The Root: How do you think this escrow account is going to affect BP's stability?
BCM: I do think this money is going to sort of stabilize things for BP, because it starts to define what the limits of their liability might be. Their stock value went down 50 percent since the spill, and that's much more than it's going to cost to clean up the spill. There was obviously a degree of uncertainty about BP and how they were handling operations, and that was casting questions in the market about their ability to continue as a company. $20 billion is a lot of money, but compared to the market cap of BP, it's not a lot.
TR: With the spill far from being over, why is the government in such a hurry to establish this account?
BCM: I think the logic is they do not want to wait until BP goes bankrupt to go looking for money. That's the rationale for doing this earlier in the process, because it's going to take many, many years to work this out. If you just wait, then you run the risk that BP will be bankrupt or won't have the resources to pay. And then where are you?
TR: What do you think of the escrow idea in general?
BCM: This sort of account is exactly what we should get out of all drilling operations. We should start looking at these things as almost like insurance. In the future, if you'd like to drill off our shores, you'll have to put forth a large sum of money so that if something goes wrong, as it has so many times in the past, you'll be forced to pay at least something.
Gregory V. Button, Ph.D., professor of anthropology at the University of Tennessee, Knoxville and a former lead researcher on the Exxon Valdez oil spill:
TR: Is $20 billion too small an amount for the escrow account?
GVB: I am at a loss to think of what an appropriate number is, but I will say that I'm inclined to err on the larger side. And while I think it's a good idea to set up an escrow account, this spill is by no means over. It could go uncontrolled for as long as December, and even if they were able to cap that oil today, the long-term harm of what's already happened could continue to unfold for many years to come. It puts you in a difficult position to even try and predict what the final outcomes will be. We are literally in uncharted waters. This spill has the potential — and I stress potential — to be the worst oil spill in world history. It's pretty hard at this point to gauge how much this is going to cost without a lot more investigation.
GVB: It might actually enter into BP's interest to arrive at a number now [rather] than negotiate it later on. This is going to continue to unfold for years, and if you settle early, as a commercial fisherman or a hotel owner or what-have-you, for what you think your costs are, you might be shortchanging yourself. If [BP gets] people to sign off early, that closes the door and probably finds [BP] paying a lot less than [they] would in the long run.
TR: What variety of costs do you see in the wake of a disaster like this?
GVB: One interesting thing is that BP says it will pay all legitimate claims. Well, we know from litigation in previous oil spills and other disasters that the devil is in the details. How you define "legitimate" is going to be one of the big questions. BP has already given us some indication of where they're going by saying they would pay for all direct costs but not indirect costs. And it's going to be very problematic to define an indirect cost.
For instance, [if] someone who owns a hotel on the coast loses money, that's a direct cost. But what about the people who supply the food to that hotel? Is that direct or indirect? Presumably, BP's going to want to cut that off immediately and say, "No, that's not a direct cost." And that's dangerous, because you're probably going to see quite a ripple effect on the economy from this spill. Presumably, suppliers will lose money from [their] suppliers — people who then might lose their homes and stop spending money in the community. It's a cascading effect.
TR: What are some costs you see outside of general business?
GVB: In the wake of the Exxon Valdez spill, we saw over time — both in the immediate wake of the spill and years after — a cost increase in providing social services to the people who had been harmed by the spill physically or mentally. We found cost increases in social services for spouse abuse, child abuse, and drug and alcohol abuse. We found increases in homicides and suicides. When communities are traumatized like this, there are enormous costs to those families that were involved. There's an enormous cost to the community to provide those services — enormous both in terms of the social fabric and in pure monetary costs. And I'm almost sure BP [will] say they're not going to pay for these types of costs.
Senator Mary Landrieu of Louisiana:
Formal statement: I firmly believe that BP should establish an escrow account to compensate all individuals, businesses and communities in the Gulf Coast who have suffered damages because of this spill. But before we start throwing around figures like $20 billion, I wanted to have some basis for that amount. Why $20 billion? Why not $5 billion? Why not $30 billion? Congress needs to proceed carefully and responsibly to address this issue in a comprehensive way so that our actions do not have unintended consequences on the victims of this disaster. An escrow account should be established, but it must be done in a way that ensures BP remains viable enough to pay every penny of what they owe to those who have been affected by this horrific spill and tragedy. The worst-case scenario is BP declaring bankruptcy before our citizens are compensated for the tremendous damage the company has inflicted on our fragile coast and economy.
Robert Costanza, Ph.D., professor of ecological economics and director of the Gund Institute for Ecological Economics at the University of Vermont (Professor Costanza recently released a paper estimating that the cost of the spill to ecosystem services could reach $670 billion):
TR: Do you think $20 billion will be enough for the escrow account?
RC: The $20 billion might be enough to cover some of the more direct compensation, but it's certainly not going to be enough to cover the loss of ecosystem services surrounding the marshes.
RC: Since the early 1900s, the [U.S. Army] Corps of Engineers built levees along the Mississippi River to prevent flooding, but there's a whole plain that was built by the Mississippi flooding into the marshes and delivering sediments and nutrients. And that built up the whole marsh system. So by [their] leveeing the river, all those sediments and nutrients are now going off the edge of the continental shelf rather than into the marshes. That, combined with all the oil-exploration activity in the marshes in Louisiana — they would dredge canals to put in the oil rigs, and it would totally disrupt the hydrology of the marshes — all led to a rapid rate of marsh losses.
TR: How expensive do you expect the recovery will be?
RC: It's hard to estimate, but I can guess, and I'm guessing that once all of those costs are in, it could be more than $100 billion. And the problem is, that risk is something that's been externalized onto the public. BP is liable now, but this is going to take years to estimate what the true damages are, much less pay back what it's going to cost. For the time being, we estimated [that] the value of the coastal plain in terms of producing services was on the order of $12 [billion] to $47 billion per year. To put it in the right order of magnitude, it's certainly in the multibillions of dollars.
Mitchell L. Moss, Ph.D., professor of urban policy and planning at New York University's Robert F. Wagner Graduate School of Public Service:
TR: Do you think $20 billion is fair?
MLM: No one can really know today the cost of the cleanup and the cost of the damages. I think $20 billion is a starting point, and it provides clarity for the public officials to say, "We have funds available." It's a very useful thing for BP because now that this [account] is established, it releases some of the pressure on them. The actual [amount] is quite affordable for them, because they're a very profitable company.
Whether this is going to be sufficient, however, is certainly not something we can know now. The problem with $20 billion is that it's a lot of money, but the effects of this [disaster] are unknown. Only now is the scope of [it] coming to light. One thing we do know for certain is that disasters have much greater impacts over time than we initially expect. The costs of the cleanup and economic losses and potential health problems are so unknown that $20 billion should be a point of departure, not an endpoint. They're just getting around to the health problems of the workers at Ground Zero during 9/11, and this is almost a decade later.
Cord Jefferson is a staff writer at The Root. Follow him on Twitter.