Oil Spill FAQ

How will the BP disaster affect the U.S. economy?

The oil-coated Gulf waters off the coast of Louisiana

Efforts to clean up the BP oil spill in the Gulf of Mexico continued this week, but as of Thursday the well was still leaking 210,000 gallons a day. This raises questions about the effect of the spill on the oil industry, some of which we’ve tried to answer below.

Will the spill raise the price of gasoline? Probably not. The Deepwater Horizon rig was digging an exploration well (used to learn more about the area), not a production well (used to sell oil). So the mishap has not changed the daily U.S. oil supply by a single gallon. Besides, the quantity of oil gushing out every day—about 5,000 barrels a day—isn’t enough to disrupt the global market, since energy companies produce 85 million new barrels daily. The Exxon-Valdez spill in 1989, by comparison, leaked 10 million gallons into Prince William Sound and did not significantly affect the price of oil.

Granted, if the spill leads to more regulation—an increase in safety standards, at the very least, or a moratorium on new deep-water drilling at the most—the price of oil could rise, since companies will pass the cost of any change along to the customer. But the difference would probably be imperceptible at the pump.

Given the likely damages from the spill, can BP survive? Yes. Even if Congress raises the cap on damages to $10 billion, that’s unlikely to topple BP, which reported a profit of $13.6 billion in 2009. BP stock has dropped by nearly 20 percent since mid-April—the equivalent of about $34 billion in value. But economists expect the company to stay afloat.

Will the accident hurt the earnings of other oil companies? Possibly. Offshore drilling accounts for about 30 percent of U.S. oil production. (The rest of our domestic oil comes from land drilling in places such as Texas, California, and Alaska.) If Congress or the administration decides to freeze new offshore drilling, companies that rely disproportionately on this method will suffer.

Federal law caps the liability of oil companies at $75 million in damages for a spill. (That doesn’t include the cost of cleanup, for which BP is responsible.) Members of Congress want to raise the cap retroactively to $10 billion. Is that legal? It depends. Article I, section 9 of the Constitution disallows changing the law  ex post facto  in criminal cases. (There are some exceptions. For example, the 2006 law that created new registration requirements for sex offenders applied even to those who had already completed their sentences.) In civil law, however, courts generally allow retroactive rule changes. A series of court decisions in the 1980s and ‘90s held that the 1980 Superfund law regulating hazardous substances could apply to companies that had released toxins before the law was in place.

For his part, BP executive Tony Hayward has suggested that the oil giant would be willing to pay more than the $75 million cap if the claims are “legitimate.” But BP would likely challenge in court any attempt to raise the cap as high as $10 billion.

(For an explanation of how damages to natural resources are calculated in the first place, click here.)

Got a question about today’s news?  Ask the Explainer.

Explainer thanks Jim Burkhard of Cambridge Energy Research Associates, Rodger Citron of Touro Law Center, Robert Glicksman of George Washington University, James Hamilton of the University of California San Diego, Matthew Kotchen of Yale University, and Adele Morris of the Brookings Institution.

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