Thursday, June 3, 2010

Oil Spill Exploited For Political Gains

The tragedy in the Gulf of Mexico is bad enough.  The reaction, or OVER-reaction by the political community, is the real crime.

Let's take an objective look at the situation.  The worst oil spill in history has been nothing short of an ecological disaster.  First, was the death of the 11 platform workers when the well exploded.  Then came the destruction of wildlife, whose cost is immeasurable.  What should the Obama Adminstration do?

Punish British Petroleum (BP)?  The marketplace has already taken care of it.  Currently trading at $38 per share, BP has lost nearly $100 billion dollars in market capitalization since news broke of the spill in just a few weeks.  The stock has lost more than 40% of its value.  Could any penalties imposed by Washington do anything more than merely pandering to all the constituents calling for BP's death?

Add to that the tremendous public relations hit that BP is taking, and, for that matter, the entire oil industry.  It's easy to hate oil companies.  In the view of the public, oil companies make obscene profits, manipulate energy prices, block the creation of alternative fuels and enter into deals with governments that sponsor terrorism.

Oil companies are owned by shareholders like you and me.  So, punishing them just places economic costs on a different set of constituents.  Of course they are after profits.  So, are the shareholders.  So am I.  So are you.  They have never claimed to be altruistic any more than Big-Pharma, the auto companies or the financial sector.

The other response has been to call for severe restrictions on offshore drilling.  What would that accomplish?  Higher energy prices and higher profits for all the OTHER oil companies!  Less supply for Americans.  More dependence on the Middle East.  Bad approach.

But, we have to do SOMETHING!  Really?  Why?  Uncle Sam can't cap the well.  Uncle Sam has been a miserable failure when it comes to interfering in the energy business.  Remember the "Windfall Profits Tax"?  That was an unmitigated policy disaster which only drove oil prices higher and led to the famous gasoline lines in the 1970's.

Politicians everywhere are using the public outcry to gain political footing by creating a policy issue where none exists.  It's politically popular to wring your hands and claim that things should have been handled differently.  How would you have prevented this, Mr. Senator?  Mr. President?  Mr. Candidate?

The liability for the damage, which will easily run into the tens of billions, clearly belongs primarily to BP and Transocean Ltd. (RIG).  Since the explosion on Transocean's platform on April 20, the company has lost nearly HALF its value, or $15 billion. 

Undoubtedly, each of these companies carries insurance which will be employed to cover some portion or the majority of the costs.  

Regulate future oil drilling activity?  Not necessary.  The entire oil industry has taken a hit.  Even stalwarts such as ExxonMobil (XOM) have suffered massive losses in value in anticipation of a much less friendly business environment.  XOM's market value has dropped by 10% or about $30 billion.  If one were to factor in the entire oil industry including drillers, the losses would certainly exceed an additional $100 billion.

Clearly, any company NOT involved is working overtime to make sure a similar disaster does not occur in one of their wells.  The last thing any oil company wants right now is to be responsible for some other disaster while the world's microscope is analyzing every step they take.

There is no place for public policy here, despite the cry for penalties, regulations and restrictions.  The marketplace has imposed HUGE penalties, as has the forum of public opinion.  We can either choose, as a society, to encourage more oil supplies at the cost of an occasional disaster, or we can reduce the probability of this kind of problem by imposing massive costs on society.  Oil is highly combustible, therefore, we can not possibly eliminate the risk in this industry any more than we can eliminate traffic deaths by imposing more penalties on the automobile manufacturers. 

No solution to this situation exists.  You want more nuclear?  Prepare for the occasional reactor radiation leak.  You want less production of oil here?  Prepare to be more beholden to Saudi Arabia and other nations that sponsor terrorism. 

What we have to understand is that life comes with trade-offs.  These can't be legislated away despite the self-serving proclamations of our elected officials and those that seek to be elected.  Cry about it, but don't make it worse by over-reacting.  Let the market take care of it.

Marko's Take

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  1. It’s hard to imagine the magnitude of this disaster. But seeing the image of sea birds completely drenched in oil brings home the horrendous reality. I agree we should not over-react and it’s not the time for any knee-jerk reaction. But there ought to be huge lessons learned to prevent this type of disasters from happening again. If that means adjusting existing regulations, so be it. The market is driven by profit, greed and fear. If we let the market take care of it, as Marko suggested, it’s no better than playing Russian roulette. But more fundamentally, our insatiable appetite for cheap oil is, on many levels, responsible for what happened. It’s time for some deep soul searching collectively as a people.

  2. Ada:

    I disagree. If we even dream of having the government take care of it, the situation will only worsen AND cost everyone money. The marketplace has ALREADY taken care of it. No further measures need to be taken, other than the dispensing of disaster relief if necessary. In that case, BP and RIG should foot the bill.

    Thanks for the comment


  3. Yes BP has received huge financial penalty for the mess that it has created. But we still have to live with the fact that the gulf coast and the way of life there will not be the same for a long time to come. There is no price tag for that. Not everything in life is about dollars and cents…. Yes our government doesn’t have a stellar history of being an effective regulator. But to say that what happened is simply the price we have to pay in keeping the oil supply flowing, and therefore we should live with it, it’s like saying that air and water pollution is the price of modernization and we should let the market take care of it. Are we prepared to accept the destruction of the California coastline if the same type of disaster happens here today? Yes we all want cheap oil but we sure don’t want our environment destroyed in the process of getting cheap oil. Short of having it both ways, we have to make some HARD choices – I for one would like to see more aggressive reduction in our oil consumption as well as less large scale off-shore drilling. If Europe can live with more expansive oil, why can’t we?

  4. Ada:

    your entire comment rests on the trade-off you would take, i.e. less oil in exchange for less environmental damage. That is the only place where the ballot box should come in.
    Yes, water and air pollution ARE the cost of modernization, along with more stress and crime and other side-effects most of us don't care for. To avoid these, you can choose to live in a remote location and give up the modern conveniences and access to employment.

    So, the electorate can make the hard choice: accept less oil and a lower probability of disaster or accept the environmental disaster and keep the spiggots on.


  5. Hi Marko, thanks for your response. Just to clarify, I was not disputing the “well known” fact that air and water pollutions, along with crime and other negative things, are direct results of modernization. The point I was trying to make is that regulations (examples including smog check for automobiles and mass transit regulations) ARE in place to manage some of these negative side-effects. We can’t solely rely on the “market’ to adequately address these issues for us. For most people, moving to a remote location as you suggested is NOT the answer. In fact, many world class cities (e.g. Vancouver) have been successfully promoting city living where your home and work are in close proximity, reducing traffic jam, commute time, air pollution and energy consumption.


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