A Break in Risk-Reward Connection Allowed Valdez Spill to Happen

If you’re playing a dangerous game, and you swear that it’s safe, aren’t you responsible if someone gets hurt?

If you make a gigantic mess, don’t you have to clean it up?

If the Internal Revenue Service suspects you didn’t pay your taxes, aren’t you subject to a painstaking audit?

In a capitalist system, isn’t there supposed to be some connection between risk and reward?

One of the most sickening things about the oil spill off the Alaskan coast is what it says about the way the world really works.

It is another cynical lesson that the really big players don’t have to play by the same rules that apply to the rest of us. In this case, a Titanic foul-up by a major oil company, those responsible will not really pay the price. We will.

For starters, taxpayers and consumers will subsidize the cost of the whole murderous mess. Exxon’s loss of more than 10 million gallons of oil from the Exxon Valdez can be fully written off corporate income taxes, as can all of the cleanup costs paid by the company. No wonder Exxon announced that cost was no object in attacking the spill. They aren’t paying it.

Moreover, it is absolutely unclear who in the end is going to pick up the tab from the damages caused by the spill--Exxon, its insurers or the taxpayers. The rules on who is ultimately responsible in such disasters are extremely muddy and desperately need to be clarified. Congress, by setting up a welter of insurance funds, tried to socialize the risk so that no oil company would face bankruptcy in the event of something like the Valdez catastrophe.

But if the risk is socialized, the rewards of the deadly oil traffic remain firmly private. In the wake of the spill, the price of crude oil and products have skyrocketed--the largest single oil price increase in history. As a result, oil companies as a whole have made tens of millions of dollars on the disaster, to such an extent that industry insiders kid that Exxon slid onto that reef on purpose.

That may be a sick joke, but it points to the dangerous lack of accountability in this disaster.

Maybe the corporate mind would be more focused if responsible executives, right on up to the chairman, lost their jobs when something like this happens. The president of Japan Air Lines stepped down when one of his jets crashed. Lawrence Rawls, Exxon chief executive, is still there, drawing his generous salary. Conceivably, if he and others down the line who grew complacent and ultimately put a known alcoholic in charge of a tanker knew that their jobs were at stake, this accident might not have happened.

This spill might also prompt some rethinking about oil company taxes. If the public bears most of the cost of the destruction of the environment and millions of Earth’s creatures, then perhaps the public purse ought to enjoy more of the gain from the hazardous commerce in oil. In a free enterprise system, theoretically at least, there should be some connection between risk and reward.

That principle was reflected in the Windfall Profits Tax of 1980, which sought to capture the profits that domestic oil producers reaped when the price of domestic oil was deregulated and rose to the OPEC cartel price. But did the companies overpay that tax as intended? The IRS believes that at least some of the producers operating in Alaska and California did not; that they significantly underpaid.

Last summer, the IRS issued a deficiency notice to Arco for $1.2 billion for underpayment of taxes from 1980 to 1983 on windfall profits from the Alaskan North Slope. That figure does not include possible underpayments from 1983 to mid-1985, when prices fell below the windfall profits tax-base price, or underpayments by the other major producers.

Officials in California--in the controller’s office, the state Lands Commission and in the City of Long Beach--and some industry analysts believe that the oil companies have avoided paying the windfall profits tax on oil produced in California as well. They suspect this was accomplished by means of a complicated system of underpricing crude oil when it was sold to the companies’ refining subsidiaries. This had the effect of transferring the profits “downstream,” so that they would be taxed at the then-corporate rate of 46% instead of at the much-higher windfall profits rate.

The issue is pending in several court cases in California, and the oil companies have spent tens of millions of dollars in legal fees challenging the complex charges. If the companies lose, they stand to pay plenty. Officials estimate that the damages to the state of California alone, in lost tax revenues and oil royalties, came to at least $550 million between 1980 and 1985. The losses to the federal treasury could run into the billions, but so far the IRS has not aggressively pursued the case.

If Alaskan and California crude oil has systematically been priced below its fair market value, how can rational environmental decisions be made? If this oil is in fact more valuable than past pricing would indicate, then the government can and should have imposed tighter and more costly precautions on the ways the companies have been operating.

That and a few heads on the line might have spared us our current grief.