I am both fascinated and concerned with the BP oil spill saga. I am left troubled that the political response to this crisis has the trappings of a schoolyard bully. Let me explain.
We all know the history. Transocean operated a deep-sea oil drilling rig on behalf of BP in the Gulf of Mexico. Halliburton had just finished cementing the drill casing when the cement failed, precipitating the worst oil spill in U.S. history. Each of the three entities pointed a finger at the other. However, BP accepted full liability. It could have taken advantage of the statutory $75 million liability cap, imposed in the aftermath of the Exxon Valdez disaster. Or, it could have tapped into the oil cleanup fund that is supported by a small tax on domestic oil extracted. BP instead offered to do the right thing as a gesture of responsibility for some bad decisions by a local BP manager over a short period of time.
Estimates of the cost of cleanup and compensation range from $5 billion to $25 billion. While these amounts are well within BP's capacity to pay, the stock has plummeted nonetheless.
BP's unprecedented transparency allowed us all to visually witness the source of the damage. With each plume of oil came greater anxiety that we must cut the flow off at its source. Unfortunately, oil companies are staffed by engineers, not politicians. Their problem-solving approach appeared to be plodding and clumsy, especially when the eyes of the world are looking over their shoulder.
As a world leader who senses he, too, is viewed as a cerebral and passionless problem solver, President Obama has taken this opportunity to prove his mettle. His basketball court trash talking has been taken to the court of public opinion. He, too, has come out looking awkward and clumsy. And, consistent with his over-achieving style, he has compensated by giving the appearance of doing more, not necessarily doing better.
BP is not alone in its ineptitude. Lax government regulations and a too-cozy relationship between oil companies and the Minerals Management Service created an accident waiting to happen. In the days following the disaster, we saw a government decision process that is little improved since Hurricane Katrina. Even the Jones Act from almost a century ago prevented foreign ships from assisting in the cleanup of our shores. However, if we accept the premise that BP is responsible for the spill and hence for the cleanup and damages, as BP has itself professed, then the interesting question is in the determination of the extent of the damages.
It is here that we must make some far-reaching decisions. The court of public opinion agrees that BP should pay for the cleanup and restoration. We also agree that BP should indemnify those fishermen, hoteliers, boat operators, and tourism providers who make their living from the Gulf as well.
The issue, though, is whether we indemnify all those who are indirectly affected by the spill. If the primary claimants are restored, presumably they are still buying groceries, paying taxes and the like. However, some grandstanding congressmen are arguing that even the most remote and indirect claims should also be honored. For instance, they argue that BP should pay other oil companies because of the recent moratorium Obama imposed on offshore drilling. They also would argue BP should pay first and then process later. If BP adopted their model, good luck in retrieving claims paid today but deemed frivolous or ineligible tomorrow.
The closest analogy I can think of was in the aftermath of 9/11, another distinctly American tragedy that, too, had historical roots in our unquenchable thirst for oil. In its aftermath, Congress authorized Special Master Kenneth Feinberg to allocate $7 billion to the survivors of those lost on that fateful day. Mr. Feinberg was also called in to work out a fair compensation scheme for executives of companies that received bailout money following the worst economic disaster to hit the world in our lifetime.
An appointed special master could presumably also administer the claims process on behalf of BP and the claimants of the disaster in the Gulf. The objective, though, is complicated. Do we return the economies of the Gulf of Mexico to their pre-spill levels? If we compensate someone who loses income, do we also insist those who profit from the spill return their profits? In other words, if someone loses a job in tourism because of the spill, but also gains a job in cleanup or in transporting the myriad reporters around, how is this netted out?
Taking the compensation process still further, should we demand the same culpability for those who created the recent global financial meltdown? The difference, of course, is that BP or its agents made a mistake at a moment that had dire consequences and caused damages totaling in the tens of billions of dollars. In the financial disaster, a handful of corporations plotted, connived, and profited for years in unethical ways that brought the world's economies to their knees, and rained losses of tens of trillions of dollars upon all of us. Rather than imposing liability on these companies, Obama bailed them out.
The argument was that these firms were too big to fail. Indeed, Obama wants to be tough with BP, unlike American International Group, Bank of America, Goldman Sachs and Citibank, precisely because BP has the capacity to pay without being forced into bankruptcy. We all agree that if Obama were to force BP into bankruptcy, its shareholders, 40 percent of which are American, lose, as do the claimants in the Gulf.
Consequently, Obama wants to act tough, but not too tough. He wants his pound of flesh, without spilling an ounce of blood. Meanwhile, he bailed out American companies that imposed damages a thousand times larger on us all. He is engaging in politics now, rather than a consistent legal or economic theory.
Obama is coming across as a schoolyard bully by picking on an easy foreign target that he knows he can beat up on, rather than the likes of AIG, a company that was unethical, and perhaps even criminal, over a long period of time, but was far more politically connected than BP.
I, for one, would opt for a more cohesive and consistent, and a less opportunistic and political, solution to this problem and to other calamities that will doubtlessly arise at some future date uncertain.
What I wish they'd said: President Obama — "The Gulf of Mexico has experienced an environmental disaster of unprecedented proportions. Clearly, our thirst for oil at any cost, a lax regulatory and oversight process, and poor drilling processes in such deep sea conditions all contributed to this calamity. There will be plenty of time to attribute blame and address the causes so such a disaster does not occur again. The most important thing we must do right now is to stop the leaking oil, repair the environment, and ensure that those who earn their livelihood from the Gulf are compensated so that they can continue to buy their groceries, pay their rent and taxes, and retain their optimism for their own economic future. That is why I am going to skip this obvious political opportunity and instead work toward a partnership with BP in fixing this mess. We need to appoint a special master to handle claims. We need the best minds and ideas in the country to help clean up this spill. And we need to get the communities around the Gulf back to normal. Once that is done, we need to have much better regulation and oversight of an industry that has lobbied for, and received, regulations that are far too lax. And we need to become world leaders in transitioning away from oil and into sustainable forms of energy, rather than world leaders in the magnitude of collateral damage as a consequence of our thirst for oil."
Colin Read is a professor of economics and finance and former dean of the School of Business and Economics at SUNY Plattsburgh. His fifth book, "The Rise and Fall of an Economic Empire," will be published by MacMillan Palgrave in September. He also runs an economic and business consulting company, and can be reached through his website www.economicinsights.net.
