By Michael Baxter 2 Jun 2010 [0 Comments | 1,008 views]
Related articles
There’s a whiff all right, but what exactly is that smell?
There are lots of theories. The obvious one is that BP cut costs, and therefore deserves the criminal investigation coming its way. Others argue that BP is a victim of an Obama anti British agenda; still others that it’s a victim of a US backlash against all big business. Or maybe the anti business brigade is right, and the real problem is the latter day culture in the corporate world of cost cutting whatever the consequences.
Then there’s the cost of the disaster to BP, one of Britain’s most important companies. One analyst focusing on BP’s future says the disaster has the “smell of death”.
But we would like to venture another explanation for what’s going on.
The effect on BP’s share price has been devastating. No less than £42bn has been knocked off its market cap. On April 20, BP shares were trading at 655p; last night 430p. But will the crash continue? Now that the US government has launched a criminal investigation, the mind boggles at the ultimate cost of the oil leak. No wonder an oil analyst at Arbuthnot, Dougie Youngson was quoted in the Guardian as saying: “This situation has now gone far beyond concerns of BP’s chief executive Tony Hayward being fired, or shareholder dividend payouts being cut – it’s got the real smell of death. This could break BP.” See Billions more wiped from BP’s value as shares plunge on oil spill failure.
Then again, BP remains a massive company. It generated just a mite short of $30bn in cash last year, and $18.1bn was invested. No one, repeat no one, is yet predicting the final bill to BP will be anything like that high. The question of whether BP can survive this disaster was covered here in more depth last month – see Can BP afford oil disaster?
But then again, once popular opinion gets behind an idea, there is no telling where things will end. Nothing is more dangerous than a public with a cause. Sometimes the crowd can exert wisdom and force government to do the right thing. More often, crowd behaviour is an almost unstoppable force for destruction, and a popular cause can take on a life of its own, and little things like balance and truth become almost irrelevant.
An article in The Telegraph has said Barack Obama is simply anti British, and he is determined to get BP. It is an absurd argument. See BP-bashing Americans could jeopardise British pensions. They should remember 1988
In fact, Mr Obama has come under huge criticism at home for not doing enough, and for putting too much faith in BP. Right now, British Petroleum is very unpopular in the US, and this has nothing to do with the country’s president. There’s even a campaign in America to have the US assets of BP taken into temporary receivership. No one is yet suggesting the US government should nationalise the US portion of the company, merely take temporary ownership. But that is bad enough. The view Stateside seems to be that the US government could do a better job of dealing with the disaster. See Put BP into temporary receivership
Yet it seems unlikely anyone else can do a better job than the giant oil company. BP’s knowledge of deep-sea oil drilling is second to none. The fact that the company has been unable to resolve this crisis tells us more about how little we know, rather than of how bad BP is.
Maybe US politicians are simply venting their fury. First there was Toyota, then Goldman Sachs, and now BP. If you are in a bad mood, then little things can upset you. Of course, there is nothing little about the problems caused by these three companies. Even so, it does seem the culture on Capitol Hill at the moment is to blame business. Maybe if they can do that, the public will overlook politicians’ own incompetence.
Then again, maybe Toyota, Goldman Sachs and BP are a part of the same problem. It’s called greed. Businesses around the world cut costs in a drive to generate more profits, and now we are paying the cost. Just as banking greed put short-term consideration before all else, so too has corporate greed.
Maybe we are seeing yet another example of what Nassim Taleb would call a ‘Black Swan event’. We used to believe all swans were white until we discovered black swans in the New World. Taleb reckons we underestimate the chances of these ‘Black Swan events’. Hence, despite all those clever mathematicians saying it wouldn’t happen, the banking system blew up. Now it’s the turn of the corporate world.
BP, along with Toyota, cut costs believing it was safe to do so, but underestimated the possibility of the ‘Black Swan’.
But we would say there is something else going on here.
What we are really seeing – that’s really, really seeing – in the Gulf Mexico are the consequences of the fact we are getting ever closer to the day of peak oil. Peak oil is meant to be that time when global oil production begins to fall because we have started to run out of the black stuff. Tony Hayward himself, BP’s boss, denied that peak oil’s arrival was imminent earlier this year, saying that it was in fact decades away, and cited the tar sands of Alberta as an example of massive oil reserves we are yet to exploit. But the oil in Alberta is dirty, and hugely expensive to reach. For that matter, so is oil buried several kilometres below the sea bed in the Gulf of Mexico.
Our insatiable appetite for oil is making disasters such as the one BP is grappling with inevitable. Its expertise in deep-sea oil drilling is second to none, but at the same time it is clearly inadequate.
If we want to avoid future disasters such as the one that is unravelling on the Louisiana coast, then we need investment in alternatives to oil, with renewables surely representing the cleanest possible option.
There’s another lesson to be learned. The banking crisis, the Toyota and now the BP crisis show us how things can cascade. We are pretty useless at planning for the worst case, or the ‘Black Swan’. Just bear that in mind next time someone tells you to stop worrying about global warming.
