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.
Is Deepwater the Double-Dip?
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
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.)
Oil Companies CEO Compensation
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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