Why BP's Deep Pockets Are a Good Thing

| About: BP p.l.c. (BP)

Imagine if General Motors had spilled all of that oil into the Gulf of Mexico. Or Citigroup (NYSE:C). Or AIG. Shudder.

The Gulf oil spill is an appalling abuse of the world's natural resources, and BP should be held accountable for every bit of damage, for as long as it can be documented. If there were crimes, BP should be prosecuted and legal loopholes closed. But while we're all scolding BP, we might also want to acknowledge some of the things that are working in the aftermath of the Deepwater Horizon disaster that occurred on April 20. As depressing as it is to watch oil gush into the ocean for weeks on end, the whole ordeal could end up forming a template for how industry and the government should work together when a man-made catastrophe occurs. And despite voter disgust with all manner of big institutions, the BP spill shows there's a role for both deep-pocketed companies and an activist government when something goes wrong.

At the moment, we have no such template, which is readily apparent in the aftermath of another disaster that left wounds that are still bleeding—the 2008 financial meltdown. Both the BP spill and the financial meltdown were caused by private industry, abetted by government policies that encouraged reckless behavior. When the banks foundered, it took extraordinary intervention by the government to contain the damage, with taxpayers footing the bill. Stimulus spending and dozens of bailouts will end up costing more than $1 trillion—over $9,000 per U.S. household. Add in Federal Reserve actions and other government maneuvers that won't come directly from taxpayer wallets, and the total cost is probably three or four times higher.

The cost of the BP spill, by contrast, is being borne largely by one company—the one that caused the damage. To be clear, BP isn't doing this voluntarily. The company has fought the disclosure of information related to the spill and refused to admit wrongdoing, guided more by defense lawyers than by any sense of public responsibility. But public and government pressure has been working. Congressional hearings have forced the company into a hot spotlight it would clearly like to avoid, and helped pry loose information about the spill. The Obama administration strong-armed BP into pledging $20 billion for reparations. A few corporate-rights advocates complained that the hasty deal violated due process, but that got about as much traction as an oiled pelican on a mossy log.

BP has obviously paid a price for all this. Its stock price has fallen by about 40 percent since the spill, slicing about $70 billion off the company's value. BP has suspended the dividend paid to shareholders and looked into selling up to $10 billion worth of assets. And the company will have to deal with a kind of pariah status for years. Some critics would like to see more draconian action, like a government seizure of BP's U.S. assets or other moves that could essentially force the breakup of the company. But those kinds of plans don't account for 29,000 Americans employed by BP, retirees holding BP stock, or many others who would be harmed by BP's demise even though they had nothing to do with the fateful spill.

We can curse BP's profits all we want, but we're lucky it has profits to start with—and lots of them. The company earned nearly $60 billion between 2007 and 2009, a lot more than it will likely end up spending for the Gulf spill. This means that as long as the government keeps the pressure on, BP ought to be able to pay for the entire cleanup itself.

Thank goodness for deep pockets. As we've all learned to our chagrin, the technology for operating machinery a mile beneath the sea is complex, unproven, expensive and well beyond the government's capabilities. Most Americans are uncomfortable with the government running banks, insurance companies, or automakers—and those jobs seem easy compared to capping a gushing well in frigid water, under pressure that would crush the strongest Navy submarine. If BP became insolvent, like GM or AIG, we'd then have to watch a ham-handed government cobble together the expertise to handle one of the most complex undertakings in its history. Much better to let BP employ its own expertise—and bear the blame when things go wrong.

The role of government in American society will be a dominant undercurrent in the upcoming midterm elections, emboldening the Tea Party movement and perhaps motivating voters more than any other issue to save the struggling economy. Voters are in a nihilist mood, fed up with the big companies that employ them and the government that helps take care of them. But the BP fiasco shows how strong companies can lessen the burden on government when something goes wrong, which in turn lets the government stick to what it's supposed to do—regulate—without straying into misadventures like taking over huge companies.

The bank bailouts were so aggressive because regulators at the Treasury Dept., Federal Reserve, and White House believed the banks were so weak they were unable to help themselves. So Washington basically took over the whole financial sector for awhile. We'll never know if they were right about the banks, but if they were wrong, it wasn't by much. The BP spill is a more measured response in which the government is asserting its power while leaving more free-market incentives in place. If BP fixes the problem in time, it will live to see another profitable quarter. If it doesn't, the market—not the government—will kill the company, by bidding its shares lower and lower as the cost of mistakes and incompetence mounts.

So far, BP seems to have the resources to get the job done. The government should hold BP to the task—and be thankful it has the money to do it. It's a lot better to have rich companies able to bail themselves out than broke ones clinging to your neck while they claw for your checkbook.

Related Articles

[See 5 lessons from oil spills and reform bills.]

[See 10 states where taxes are up, services down.]

[See 5 reasons a double-dip recession could happen.]

[See why voters will get a lot angrier.]

[See why American workers need to toughen up.]

Disclosure: No positions

About this article:

Tagged: , Major Integrated Oil & Gas, United Kingdom
Problem with this article? Please tell us. Disagree with this article? .