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

[KoKo]

Friday, June 11, 2010
BP: Is Team Obama Pushing for a Full Externalities Precedent?

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.

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.
MORE at......

http://www.nakedcapitalism.com/2010/06/bp-is-team-obama-pushing-for-a-full-externalities-precedent.html

[mike_c]

1. one of the elephants in the room that few want to talk about...

...is the U.S. government complicity that is at least partly responsible for the spill. WHO ultimately takes the brunt for that remains to be seen, although no matter who is responsible for the chummy relationship between polluters and regulators will ultimately be less an issue of real responsibility and more an issue of perceived responsibility. Obama is at least a good enough politician to understand that the folks in charge usually inherit most of the angry blame, whether justified or not, but with Ken Salazar at the helm, Obama cannot blithely dodge at least partial culpability.

Frankly, I think that's partly why the administration took a slow start in this crisis. If the spill HAD turned out to be relatively minor-- jeeze, I never thought I'd describe 5,000 barrels of oil a day in the Gulf of Mexico as "relatively minor"-- then the hands off approach MIGHT have left BP standing in the spotlight more-or-less alone. But the spill is WAY beyond that, and the political damage will be commensurate with the environmental damage, which is horrendous.

Frankly, I think Obama DESERVES his share of the blame, both for the political nature of the administration's response and for his role in perpetuating the petroleum industry's stranglehold on the U.S. It's time to put environmental concerns before business and profit concerns, and Barack Obama is not the president to do that, IMO.

[msongs]

2. lol vision is not his thing nt

[GeorgeGist]

3. I never had success getting an incompetent employee to do better by getting tough.

Although I had to admire one who shouted
"I would never have been fired, if you hadn't hired me in the first place".