BP: Is Team Obama Pushing for a Full Externalities Precedent?

BP: Is Team Obama Pushing for a Full Externalities Precedent?

Posted: 11 Jun 2010 02:05 AM PDT

As readers may know, I’ve been consistently disappointed by the Obama Administration: its faux progressive packaging versus its corporatist posture, its half-hearted, halting reforms which are noisily trumpeted as the real thing, its deep seated belief that public antipathy to its initiatives means it needs to work harder on selling its message, when it really needs a new strategy.

But the escalating disaster of the Gulf oil spill, and the unique constellation it presents, namely, a big, rich, isolated, foreign perp, which is largely if not solely responsible for the mess, in close proximity to contested mid-term elections, might actually rouse Obama to do something uncharacteristic, namely get tough.

This is by no means a likely outcome, but we are seeing some novel behaviors. First is that Obama finally may have succeeded in getting someone important afraid of him. This is a critically important lesson; Machiavelli told his prince it was much more important to be feared than loved. Mere anger is often negotiation posturing or a manifestation of CEO Derangement Syndrome; fear is much harder to fake. And BP is finally starting to get rattled. Per the Wall Street Journal:

Mr. Hayward immediately canceled an employee town hall meeting and a trip to review clean-up on the Louisiana coast, and gathered his visibly shaken executives at the crisis center in Houston. At a top management call between Houston and London to review its “Sub-sea and Surface” agenda, the top item on “Surface” issues suddenly became “Washington politics.”

“This demand is chilling,” said one executive in the meeting. “The administration keeps pushing the boundaries on what we are responsible for.”

Yves here. Why has the mood changed at the formerly self assured BP? First, it seemed to believe its ridiculous cover-up strategy would work: that by shooing people away from beaches, putting gag orders on clean-up workers, and preventing scientists from estimating the size of the leak, it could somehow reduce the bad PR and damages. Since there weren’t any other monster leaks in the vicinity of the Deepwater Horizon blowout, it’s hard to fathom how they thought they could escape having the resulting damage pinned on them. And as they always do, the cover-up simply made BP look even worse.

Second (perhaps taking a page from the financial services playbook), BP clearly thought it could negotiate with the US as at worst an equal partner. After all, not only is BP teh biggest oil and gas company in the US, but it also has knowledge of deepwater drilling that would make it hard (as in impossible) to displace in the rescue operation. Recall this brazen remark from BP’s chairman:

The US is a big and important market for BP, and BP is also a big and important company for the US, with its contribution to drilling and oil and gas production. So the position goes both ways.

This is not the first time something has gone wrong in this industry, but the industry has moved on.

Yves here. If the leak had been a mere 5,000 barrels a day as BP claimed, this would have offensive but not untrue. But the latest estimate of the daily output is 25,000 to 30,000 barrels. The damage, both hard and soft along the coast (damage to fragile ecosystems, loss of income, loss of access to fishing and recreation, cleanup costs) is going to be far higher than initially thought. Recent tallies were at $20 billion gross, but given how long things would play out in the court system, and per Exxon, conceivably be cut back, had mainstream tallies putting the net present value at $10 billion.

But this is a vastly bigger leak, and most important, the Gulf is not Alaska. The visibility is vastly higher, more people are affected, as are more governors, senators, and representatives. And Obama appears to be laying the groundwork to demand that BP pay not just cleanup costs, but the full cost of the damage wrought. From an economic standpoint, this is sound: the problem with “externalities” or costs of a product that are foisted on innocent bystanders is that the people who suffer seldom can recover their losses. So the parties to the product sale get an artificial subsidy (the product is provided for a cost lower than its true, fully loaded cost to society) which they somehow divide up between them.

BP seems stunned that it might be on the hook for lost income to shrimp fishermen, or hotels on the Gulf. Again from the Journal:

Tensions escalated sharply on Wednesday when the U.S. Interior Secretary, Ken Salazar, said he would demand that BP pay the lost wages of oil workers in the Gulf region idled because of the administration’s order to halt new deepwater drilling for six months. That demand could add hundreds of millions of dollars to BP’s obligations….

In Washington, White House officials Thursday said they believe they have the legal authority to demand that BP subsidize the wages of U.S. workers idled because of the administration’s moratorium on deepwater oil drilling in the Gulf. If not, Mr. Obama said, Congress should give it to him.

Congress must “update the laws to make sure that the people in the Gulf, the fishermen, the hotel owners, families who are dependent for their livelihoods in the Gulf, that they are all made whole,” he said at a meeting with Congressional leadership.

Yves here. Imposing retroactive punishments isn’t exactly a great way to square this circle, and this is more likely a negotiating posture. But my impression is that this is a novel stance, to try to make a corporate bad actor make its victims whole for all the losses suffered in an industrial disaster, not merely the ones that fall in conventional categories (readers may correct me if I am wrong, but my impression is often collateral damage takes place where the losses are not subject to restitution).

But if I am not mistaken (and reader input would be very much appreciated), the criminal investigation against BP is an even more blunt weapon. If BP were found guilty (and the continued bad press of a protracted trial would be terribly damaging to its public image and its share price), I believe it would allow the US to cancel all its oil and gas leases.

Admittedly, it isn’t clear that an investigation will lead to charges, but BP seems rather slow to have realized who hold the whip hand if things get ugly. Not surprising, since contingency planning is not the oil producer’s strong suit.

I wouldn’t be optimistic; Team Obama has yet to rough up anyone. But this particular set of circumstances – a monstrous disaster that is not going to be resolved anytime soon and a rich, unpopular, and relatively isolated target – will show whether Obama’s survival instincts will overcome his deep seated deference to corporate chieftans.