Estimates suggest the Deepwater Horizon oilspill has already cost BP plc about one billion pounds. This does not even take into consideration total clean up costs going forward if the leak were to somehow suddenly stop right now.
But so far we haven’t heard much about the wider economic effects that the Deepwater environmental disaster will have on the worldwide economy. I’m not ignoring the environmental costs here, but in this post I’ll just keep the topic focused to the economy, since that’s what I focus on here – although at the end of the day I do not think the economy is more important on an ethical basis.
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Is Deepwater the Double-Dip?
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Let’s think two steps ahead here. I just learned from this Telegraph article today (incidentally, its tone and focus suggest the Brits are only just tuning into the severity of the oil spill, although this is by no means the first Telegraph article about the spill) some dire facts about BP’s interrelatedness to the rest of the UK economy.
That’s right, it might be the case that BP is too big to fail. In the UK, anyway. And we all know how much of swamp the UK economy is sitting on right now. The timing may be right, too, now that Europe is in economic flux and markets are freshly jittery after the recent downgrade in Spain’s credit ratings.
BP Too Big to Fail
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According to the Telegraph, BP is the largest holding in most British pension funds. That’s a scary number when coupled with the fact that of late, BP’s share price has fallen 25%. And I expect it to fall further by mid-week when markets re-open to news that Top Kill failed and so did the junk shots. And probably, too, so will the “cap” method.
The UK has a sovereign debt problem probably equivalent to that of Greece, if not slightly higher. It has so far had the advantage over the U.S. though, that its debt maturity is in much longer-term bonds, so it has more time to adjust to higher interest rates if and when they occur. Also, it is, like the U.S. in control of its own quantitative easing.
But you can see how BP is “too big to fail” in that interrelated kind of way if it is one of the bedrocks of the UK economy. The entire Gulf coast is being affected. Not just the people and their jobs, but all the wildlife in the region, which are, unfortunately in my mind, the source of many of those jobs, as well as food, and food for other wildlife in the region. (Do you think you will ever be able to swim in the Gulf again? Would you really want to? If you think so, better check out some of the latest high-resolution pictures of the water.)
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Oil Companies CEO Compensation
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An interesting point of comparison with the financial crisis – I haven’t seen any critics yet discuss the issue of the compensation of oil company CEOs. Personally, I am not of the opinion that their compensation should necessarily be less, but you can see the argument. Especially if Deepwater Horizon keeps on gushing.
BP’s mistakes (although I think they could have happened to any company in the Gulf – apparently there are about 32,000 wells in the Gulf!) will damage the Gulf of Mexico for decades for wildlife and people in the area. It could be worse once more of the slick starts seeping into the Gulf stream and around the eastern seaboard (which has already begun).
So should oil CEO’s not be punished, as the bankers were punished? There are key differences, though – the oil CEO’s aren’t engaged in taking risks with other people’s money – although they are engaged in a fundamental risk to ecology which will still have, indirectly, a huge economic fallout.
All in all, the show is not over yet. BP appears to be stalling and there is no reason in sight for its share price to improve. I don’t think this is going to be a good week for markets or for the UK in particular. If we hear any further bad economic news from the UK, expect those stocks to dip as traders take advantage of these events.
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There are so many variables, intricacies, subsidies and bailouts, that it’s really hard to say what the short to medium term affects of this will be. If BP is that significant to the government of any nation, it will have full cooperation of it’s governing authorities and thus it’s unlikely to play out in a linear fashion in the way any of us might think it should.
Longer term is a problem that won’t be solved by bailouts themselves, and that’s the overall oil situation. I’m no expert on oil/energy, but from what we’ve seen over the past 20 years at least is that new oil discoveries are increasingly coming from more remote and more dangerous sources, offshore being the most prevalent. An oil disater at sea is many times more complicated than it would be on land. The real miracle is that something of this magnitude didn’t happen MUCH sooner and more frequently.
This doesn’t bode well for energy prices or for the global economy since it isn’t hard to project higher prices into the future. We’re back to being blase about oil because prices have fallen from their 2008 highs, but that doens’t cover the fact that they’re still substantially higher than they were just a few years ago.
Nicely put, I agree. I doubt we’ll see BP in the kind of fiscal trouble that, say, GM or Chrysler or Fannie Mae got into – no. But if the share prices keep falling I can see them possibly lowering their dividend – someone even mentioned cutting it. All of that is going to be bad for UK pensioners who might be trying to live off the income.
Well, the incident does give us a perspective in a sense for the future. If you are worried about the sheer amount of oil that is gushing out, and the obvious damage it is causing, consider that this is just a small part of the total oil consumption in the US.
Alternative energy needs to go a long way to replace oil.
Arohan – “Alternative energy needs to go a long way to replace oil.”–but that’s really where the focus needs to be, and in a serious way. We’ve been experimenting with alt energy while bankrolling oil like business as usual.
Replacing oil may be the biggest undertaking imaginable, but without limitless energy the global economy won’t be able to grow. It’s worth the effort and capital invested.
Imagine where we’d be today if a serious alt energy plan had begun 30 years ago, when everyone was mostly talking about it while doing little. Or even 10 or 20 years ago.
Like always, the American Taxpayer will pay for this.. .at the pump I am sure.
good excuse to raise gas prices this summer. not that they needed one. they would raise prices anyway. My personal rant and viewpoint for the day. :)
@Kevin – good point – if GM had never killed their electric car plan, for example, in the 80’s. They’ve had the technology for a long time. No single alt. energy avenue can replace what oil does, but altogether – if everyone used them – they’d make an impact. Wind and sun can do quite a lot for the mere household. Now, whether the US could still play global security guard with its oil-guzzling military, that’s another story.
Denmark already gets 20% of it’s electricity from wind power, most of it from private souces. It took many years to achieve that. If we decided to go down a similar path, it would probably take even longer since we’re a larger and more diverse society.
If we could move toward renewable energy the need for a global military would decline, as would the amount of our imports. That’s a win-win, but it seems as if it’s less important than defending the status quo.
We have the innovation, the beginnings of the technology; we should have the political will. Fossil fuels were what powered the 20th Century. As Kevin points out, we need to move beyond that status quo and into the 21st Century. Between the recent coal mine collapse and this massive spill, it is obvious that we need to use our vaunted innovation and start moving away from these dirty and dangerous fossil fuel power sources, and put more investment into our future.
@Miranda – exactly – it seems to be a no-brainer – the U.S. needs to move beyond Apple and Google into true 21st century innovation – energy innovation. It’s scary, though, because of where energy innovation took us in the 20th century. We need ethically-driven leadership, not profits-driven leadership, or innovation motivated by merely “ngeative” concerns such as isolationism/protectionism. When Pandora is out of the box, she’s out of the box for everyone, and nation-state relations need to be mature enough to handle that.
That’s SO true! We’ve rolled into the 21st century, still carrying a 19th century concept of the nation-state. Technology alone has rendered the emotionally comforting “us-vs-them” mentality a losing proposition.
Of course I agree with Kevin and all others that we need to maintain and increase our focus on developing alternative sources of energy. Every bit helps but we need to understand that it is a vast undertaking. All the more reason to do more now and not get discouraged.
It will take some time. The problem is that with all the quick-fix media sound bites that we are now used to, there will be times when it will seem all too slow. True, the switch over should have started a long time ago, but now we do not have any more time to lose. One day we will wake up and find that the world has run out of oil. That day might come sooner rather than later.
Expanding on Kevin’s last comment (hopefully I understand where he was going with it), we can wait for the governments to create a new global alternative energy infrastructure OR we can all individually and at local levels start adopting sustainable energy sources. Waiting for the government is probably going to be a everyone-lose proposition, as it might take a long long time, the time that we in all likelihood do not have.
Arohan, you’ve interpreted my comments perfectly. Innovation has always come from the ground up, and it’ll probably be that way with alt energy. We should be looking into solar panels and windmills–heck that’s what people in Denmark are doing–or what ever else is coming down the pike that looks promising.
We’re busy thinking “they” have to do something about our problems, but they’re too caught up in maintaining the status quo to bring about the type of changes that are needed. If we start generating electricity with a solar panel on the roof, that takes out the electric company, and the taxes they pay (after collecting them from us, of course). Do we really think governments want to get behind an effort that’ll cut out tax revenues?
Grass roots ingenuity has always been mankinds preferred way of making real progress.
Well, it’s like that Chinese proverb – the best time to plant a tree was 20 years ago. The second best time is right now. So I agree with @Arohan, even though it is a monumental task, it is still better if we start on it now. Who knows what the planet will look like in 20 years!
BP really is too big to fail. Their stock will plummit though, and that may make it a good time to invest while they climb right back up to where they were. Just my investment thoughts I suppose.
The Daily Pixel Blog
BP has to give it a break now! this is our one and only planet. if BP is really too big to fail why did the oil spill at the first place.now that was absolutely the first fail but Hey its never too late to dust yourself up get up and learn from your mistakes.
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