By Michael Baxter 14 May 2010 [1 Comment | 917 views]
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Nothing lasts for ever. Did you know, of the world’s 100 largest companies in 1912, by 1995, 29 had gone bust; 48 had disappeared; and just 19 were still counted in the top 100. One assumes that today, in this post credit crunch era, the number of survivors is even lower. The question is, can BP manage to survive its latest disaster? And for that matter, are we set to see many more corporate casualties?
Exactly what will be the cost of the oil spillage in the Gulf of Mexico?
The truth is, no one knows. Latest estimates suggest the final cost to BP will be around $13bn. The company itself is spending around $33m a day. But then again, with the equivalent of approximately 5,000 barrels of oil a day leaking out, this is a bill that will escalate.
BP are making the right noises, at least they are trying to. Promising that they will pay for this and pay for that, and leaving just a hint that, actually, their partners in the oil venture were more to blame than BP. But then BP’s CEO Tony Hayward said: “The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume.”
But in the US, this is seen as a disaster of simply gigantic proportions. The talk is about how the area infected is outstandingly beautiful. Barack Obama said in a letter to House of Representatives Speaker Nancy Pelosi: “I will spare no effort to clean up whatever damage has been caused, assist those whose livelihoods have been affected by this spill, and restore the Gulf coast.”
And the costs seem to be without end: there’s the region’s $2.4bn seafood industry and a $20bn tourist industry. But then there’s the ecological cost.
Maybe we should take a look at the cost of the Exxon Valdez oil tanker disaster of 1989. Exxon Mobil eventually forked out around $3.8bn in cleanup costs and half a billion in damages. But it could have been so much higher. Originally, the company was fined $5bn, the equivalent of its annual profits, but only after appealing, and appealing against the appeal and then appealing against that did it finally get the cost down to the half a billion. When the company was initially fined the $5bn, it trundled off to its bank JP Morgan for a loan, and the bank in turn tried to cover its exposure by issuing the world’s first credit default swap.
In total, around 1¼ million barrels of oil eventually spilled into the ocean. But in some ways the company was lucky. Back then, ecology wasn’t the topic it is today. It is thought around 140 bald eagles, 302 harbour seals, 2,800 sea otters and 150,000 sea birds were killed within a few days of the leak. It is thought the tourist industry in the area lost around 26,000 jobs and $2.4bn in sales, and that even a decade and a half later had still not completely recovered.
But how much does the US government want from BP?
Yesterday US senators grilled Lamar McKay, President and Chairman of BP America. Protestors outside chanted: “Hey, hey, Lamar McKay, how many fish did you kill today?”
Maria Cantwell, Democrat Senator from Washington State quizzed McKay on what BP were going to pay out in compensation. “OK,” she said, “so if it’s a legitimate claim, harm to the fishing industry both short-term and long-term, you’re going to pay.”
McKay: “We’re going to pay all legitimate claims.”
Cantwell: “If it’s an impact for business loss from tourism, you’re going to pay.”
McKay: “We’re going to pay all legitimate claims.”
Cantwell: “To state and local governments for lost tax revenue, you’re going to pay.”
McKay: “Question mark.”
And that just about says it. US authorities seem to want to put everything in their invoice to BP. The governor of Florida wants BP to pay for the cost of the state’s tourist industry advertising bill.
George Dubya’s reputation was damaged enormously by the way he dealt with the flooding in New Orleans. Obama doesn’t want to make a similar mistake.
But in today’s post credit crunch era, US authorities seem to have risen to new levels of venom aimed at the corporate world. First there was Toyota, then Goldman Sachs, and now BP. We are not saying that the authorities are right or wrong, just that the backlash against big business seems to be undeniable.
The cost to BP of this oil spillage will be much greater than was the cost to Exxon Mobil, because that’s the way of the world today. Corporates are expected to be more accountable. Add to that, this disaster seems far worse; add to that the fact that ecology costs are taken far more seriously today, and it seems estimates that the bill will finally come in at $13bn are on the low side.
Can BP afford it? Yes, it can. In the last quarter alone it made profits of $5.5bn; dividends were $2.5bn.
But a bigger question mark hangs over whether the corporate world can afford the new way of thinking. Time was when big money ruled US governments to such a degree that the excesses that the corporate world could get away with were scandalous. That has changed. It is only a matter of time before the next mighty CEO is dragged before Senate in chains of repentance, head bowed and asking for forgiveness. Has the pendulum swung too far? Not necessarily, but watch out for the next big US government versus corporate clash. It’s become a fixture on the political schedule.
For relevant links, see: Effect of Exxon Valdez Oil Spill on the Economy
Transcript of Senate grilling of BP and others
Barrack Obama is really taking the lead with regards corporate responsibility. Powers to curb excesses have been in place for a long time but very rarely (if ever!) used to to much effect. Events in the US will make it easier for other countries to follow suit, weakening the argument that companies can relocate (e.g city firms to the New York). The only missing ingredient may be political will on this side of the pond.