The $20 billion payout by BP for damages related to the Deepwater Horizon oil spill was the result of a very controversial move by the Obama Administration, in which the White House effectively ignored established legal due process and assessed the extent of BP’s liability on its own, then ordered the company to pony up the cash.
The Obama Administration claimed victory; BP apologized and assured us that it cared about the “small people.” But who are the real winners and losers in this deal?
Agreeing on a settlement amount before the full extent of the damage is known is probably a very good thing for BP. Assigning a dollar amount to BP’s liability has already eased the uncertainty in the markets regarding BP’s portion of the total cost of the Gulf cleanup. BP’s share price rose nearly 10% after the settlement was announced, which clearly indicates that analysts are comfortable with having at least a baseline dollar amount to work with, even if the company’s total liability eventually exceeds that amount. Even though its share price has fallen by nearly 50% since the disaster, BP is still very sound financially, with over 18 billion barrels of proven oil reserves, a lucrative cash flow stream, and very little debt. In addition to suspending shareholder dividends for the remainder of the year (which will keep $8 billion cash it its coffers), BP also plans to raise as much as $10 billion in cash in the near future by selling off non-critical assets. As the Associated Press reported yesterday, $20 billion is only a drop in BP’s very large bucket of assets and revenue.
(It’s probably also worth mentioning that without “obscene profits,” companies with large liability potential, like BP and the other oil majors, would not be able to cover the costs of those risks.)
BP has also supported many of the green energy initiatives backed by Democrats. It has received millions in US government subsidies for solar and biofuels research and implementation. It supports Federal government subsidies for coal-fired power plants that switch to natural gas. (Did I mention that BP is the largest producer of natural gas in the US?) And before the Deepwater Horizon spill, BP was set to become one of the Administration’s most powerful corporate allies in its quest to pass Cap and Trade. It’s probably not a stretch to assume that the Obama Administration, while attempting to give BP a public ass-kicking, is also secretly working with company officials to ensure their continued support for Democratic Party environmental policies. I’m not sure exactly who wins on this count, but I am pretty certain that BP doesn’t have much to lose.
Left out in the cold of course are BP shareholders, including (at least) tens of thousands of retirees as well as pension and benefit funds. All of them have seen the value of their shares drop by half during the last two months, and none of them will be receiving their dividends. Former BP employees living on a fixed income and who have a significant portion of their retirement invested in BP stock stand to lose a great deal, at least through the end of 2010.
Meanwhile, regarding the $20 billion settlement that BP will pay into a government escrow account that will be managed by Obama “pay czar” Kenneth Feinburg, the Financial Times puts it rather bluntly: “Oil Has Become The New Tobacco“
For a time, it looked as if public anger over the financial crisis of two years ago would be confined to Wall Street banks. But the gulf spill raises a broader threat to companies and shareholders. Oil is becoming the new tobacco and other industries could well be next.
If chief executives were brought to Washington merely to be humiliated, investors would not care. But the pressure on BP to suspend dividends to shareholders and put $20bn into an escrow fund for compensation and clean-up before anyone knows what it will cost is ominous.
It has echoes of the 1998 tobacco settlement in which the industry paid $246bn to states following legal action by their attorneys-general. Only 5 per cent of that money was spent on tobacco-related initiatives, with Virginia, for example, investing in higher education, fibreoptic cables and research into energy.
I don’t think it’s hyperbole to refer to this $20 billion as a “slush fund”. It will probably take the Federal Government only a matter of weeks to come up with ways to spend all of it, and then ask BP for more. Certainly a big win for Big Government. American Thinker’s Steve McCann also believes that the ultimate result of the Obama Administration’s guilty-until-proven-innocent handling of BP will be a weaker economy:
The Obama administration has just made certain that there will be minimal foreign or even domestic investment in the United States. Their shakedown and blackmail of BP has major corporate investors looking elsewhere for expansion and exploration. No company answerable to their shareholders or investors will risk capital in a country which has brutally abandoned the rule of law.
My company is headquartered in Switzerland and in recent conversations with business executives and clients overseas, they have told me that this and many of this governments actions has completely chilled their enthusiasm to invest in the United States.
The same applies to domestic U.S. companies, why would they expand within the country or even continue to do business here? They will not.
This lack of faith and confidence will not be easily overcome and will exacerbate and make permanent a high unemployment rate and a lower standard of living. This is yet another step in making certain another recession in just over the horizon.
As I wrote in the comments section of another post earlier this morning, “Is it just me, or is there a pattern emerging, pointing to a distinct attitude among elite members of the current regime that basically says, we’re smarter than you, we know what’s best for you, and we don’t need no stinkin’ legal system keeping us from dispensing ‘justice’?”
Any student of history knows that elites have a very poor track record when it comes to taking justice (economic, financial, social, or whatever) into their own hands. If that is what is happening with BP and the Deepwater Horizon spill, we will all be losers.