Oil, Money and Politics

It would be best if Deepwater Horizon’s catastrophe did not cause profound changes in the oil industry.

Santa Barbara, Three Mile Island, Bhopal and Chernobyl: these four sites have little in common apart from the ecological tragedies that took place there in 1969, 1979, 1985 and 1986 respectively. The common factor in the oil spill on the shores of California, the incident with the central Pennsylvanian nuclear plant, the explosion of plant pesticides in the Indian city and the crack in the nuclear reactor in the USSR is that all led to serious changes in their respective industries. Now we can add Deepwater Horizon to the list — the oil platform in the Gulf of Mexico, operated by British Petroleum (BP), which has caused one of the most massive oil spills in the history of the energy industry.

Only two weeks after the explosion at Deepwater Horizon, Carl Henric Svansberg, chief of the BP board of directors, said during a European business leaders’ conference that the impact will be similar to the effect of what happened at Three Mile Island. Thirty years ago, the incident in Pennsylvania led to a comprehensive rethinking of the regulations pertaining to nuclear energy and to a practical moratorium on the construction of new reactors in the USA. The slight difference is that, if we use analogies from the nuclear industry, the BP incident can be compared only to Chernobyl. The cautious estimations of direct damage range between $20 and $30 million, provided that BP manages to stop the leakage from its wells by early August.

Oil Does Not Smell

The White House already requested the suspension of deep water research for a period of six months, and Norway postponed the release of new licenses. However, it is too early for Greenpeace to be happy about the bad news.

According to the majority of experts, the spill will not lead to major changes in the oil industry. Although deep-water output is an extremely expensive enterprise, most of the undiscovered reserves lie exactly there. Unlike nuclear energy, oil still does not have a substitute. According to the independent expert Chris Nader, in order to compensate for the loss of oil in the Gulf of Mexico with wind energy, the U.S. would need to build its capacity to be 74 times greater than what is currently available in Texas (the second largest American state and a world leader in the production of wind energy). The Gulf is the source of one-third of the oil consumed in the U.S.

More importantly, the oil industry is a very profitable business. In 2009, when the world’s economy was undergoing the second deepest recession since World War II, BP profits were $16.8 billion and, for the first three months of 2010, the profits were two and one-half times higher than they were during the same period last year. Even if the fines and compensations, combined with the cost of cleaning the spill, reach $100 million, this would only be equal to five-years profit for the company. In other words, this is bad news for shareholders. Since late April until now, BP has lost 50 percent of the original value of its shares but the catastrophe will not lead to the bankruptcy of the company, let alone put an end to the risky research.

The expenditures are also bad news for pension fund organizations, since the oil company is present in their portfolios. At the same time, the interests of pensioners assure against BP’s bankruptcy. The British government already has launched a campaign to save BP, starting with a conversation between British Prime Minister David Cameron and U.S. President Barack Obama. Washington insists that the company should first pay the [affected] fishermen and hotel owners for damages caused, but this aroused anger among pensioners (39 percent of BP’s shares are in possession of U.S. citizens and legal entities).

It is a well-known fact that, unlike other industries, there is no large oil company that has perished in the wake of an environmental disaster.

The People vs. BP

“We went into Iraq because there was supposedly these nuclear weapons there… Now, we have BP… They, as far as I can tell, are attacking us with oil. And so I propose we declare war and invade them. They’ve got no standing army.” The comedian Lewis Black might not represent overall public opinion, but his opinion is very characteristic of the reaction to BP in the U.S. The rage against the oil company exceeds the hatred of Wall Street — although, assuming they were the sole culprits of the financial crisis in 2008, the damages caused [by Wall Street] would be much greater. The oil spill, however, is much more visible and comprehensible than the financial derivatives. In addition, it is difficult to say that the dolphins and pelicans, drowning in oil, were asking for it, like the people who took unreasonably high mortgages.

So far, the result is a discussion about changing the law that restricts damage compensations made by the company to $75 million and the fines to $500 million. The law was endorsed after the Exxon Valdez spill in 1989 because the lack of a ceiling makes it impossible for the companies to obtain insurance. In the early ’90s, this would have meant the cessation of tanker traffic to the USA.

The ceiling is not valid if there is a purposeful violation of federal safety standards. BP is the company with the worst reputation in this respect among all oil giants in the U.S. As of now, the Department of Justice already has begun preliminary checks to determine whether there are prerequisites for criminal prosecution.

Accelerated scrutiny of oil companies can certainly be expected. The case of BP showed that the American government has abdicated from exercising actual control for years. For example, the British company’s 2009 plan to prevent oil spills designates a person who had died four years earlier to act as its chief scientist-consultant. Some of the inspection reports were filled out in pencil by the company’s clerks, and then were blackened with pen by officials of the Bureau for Management of Natural Resources of the U.S. Department of the Interior (which is analogous to the Ministry of Ecology in Europe).

In the long run, the fate of deep-water drilling, much to the dissatisfaction of nature lovers, will be dependent upon more factors. Even the biggest oil spill does not pose as much of a threat to mankind as does a nuclear power plant’s explosion. Meanwhile, even if the U.S. decides that oil production from the ocean floor is too dangerous, this would mean that the world’s production capacity would shrink by only 2 percent.

Ken Salazar, who is in charge of ecological issues in Obama’s cabinet, and the governor of Louisiana have already asked for a fast investigation process and a renewal of the suspended projects. During Zeitgeist Europe 2010, Svansberg also said that the accident in Three Mile Island led to a much better regulation of nuclear business, and since then, there haven’t been serious accidents (at least in the West). The chief of BP’s board of directors expects this scenario to be repeated.

The Silence of the President

At a ratio of 2-to-1, Americans expect criminal charges to be pressed against BP, and 63 percent think Obama’s reaction is much less satisfactory than that of George W. Bush during Hurricane Katrina in 2005. As long as society insists, even the White House should probably agree with that. Although Obama neither issued the drilling permit nor had the opportunity to send the military in with a nuclear bomb (one of the suggested solutions to the problem), let alone block the hole in the ocean with his own hands, the pressure on him is tremendous.

The media are full of profound analyses of the reason the president hasn’t telephoned the executive director of BP, or why doesn’t he show more anger than merely wondering “whose ass to kick.” And, if you think the moderation in Obama’s tone comes from his Harvard law education, you are totally misled. It turns out that Obama is the product of the upbringing of Afro-Americans whose parents and teachers have taught them from an early age not to show fury or suspicion among their white peers.

The White House is obviously concerned that, if the president takes the lead in the measures against the oil spill, it will soon become clear he is unable to do anything. This would be a much tougher slap in the face for the leader of the Democratic world than the media murmur.