About That $20 Billion

by Jim Davies by Jim Davies Previously by Jim Davies: The Recovery of Stolen Roads

I was very disappointed to hear how the D.C. Mafia had subjected BP to what the possibly vertebrate Joe Barton (R-TX) called a “shakedown” for $20B to compensate those hurt by its oil spill, but had also made the company agree not to cap that sum (meaning the bill may be higher yet) and to let a government nominee administer the payments (meaning it is almost sure to be higher yet). Coupled with yet more apologies outside the White House, and inside Congress to the monotonously loathsome Henry Waxman (D-CA), this looked like an abject capitulation; for it has not yet been established that BP is even to blame for the spill, and the law – which government wrote – limits its liability anyway to $75 million. That was the basis on which BP hunted for oil, and on which its owners invested their money. Now that it has voluntarily exceeded that limit by a factor of at least 267, who can ever trust its word again?

The word of the Company, that is. The word of government has long ago been recognized as worthless, for if it finds any of its laws inconvenient (like the one that taxes the income only of those made legally “liable” for it) it will simply ignore them and do what it wants. We know that. But BP is not government. Is it?

After a sleepless night worrying about all this, of which more below, I pulled up BP’s Annual Report for 2009, to see if there’s another way to look at this financial disaster.

Perhaps things may not be quite as bad as they seem. The Company made sales of $246 billion in that year, of which $25.1B was “profit before taxation” – that’s 10.2%, not bad. Then taxation by the world’s governments confiscated $8.4B of it, or 33%. That left net, after-tax profits for shareholders of $16.7 billion or 88 cents a share.

The Obamagrab means BP will cancel its remaining three 2010 dividend payments, and if 2010 is as good a year as 2009 (one source suggests it may not be) then three quarters of $16.7B is to be diverted from shareholders to the government’s nominee. That’s $12.5 billion.

However, to obtain that sum BP has to earn pre-tax profits of (12.5 / 0.67 =) $18.7 billion, and the $20B payment will presumably come out of pre-tax profits. Accordingly, if BP ends up paying $20B, it will be “only” (20 – 18.7 =) $1.3 billion out of pocket this year. Plus what it will spend on a new rig, overtime, cleanup, and so forth. But the total may be no more than around 1% of its sales or a tenth of its profits. Nasty, but not crippling.

What, meantime, will this plunder mean for Americans? – some 40% of BP’s shares are held in this country, many of them on behalf of pensioners. So a few million seniors, dependent on hitherto reliable BP dividends, are going to run short this year; in effect, wealth will be transferred from them to younger, more active recipients on the Gulf Coast. I don’t say that’s wrong, mind; it’s proper that owners of a company do the right thing by those it damages, but only to the extent that law or (far preferably) contract provides. Here, BP is having to buy favor in Washington by stiffing its owners. Like all Faustian bargains, the favor will be a phantom.

Government transfers are never fast, and always expensive – the bureau-rats administering them always manage to skim off a rich layer for themselves – so those idled fishermen and hoteliers may have to wait a while. Some of them are already complaining that BP is too slow, and now that the Feds have the job of making payments, they will find out what waiting really means. That will increase hostility to Washington, and so is no bad result. One other potentially good result is that scrutiny of applications for money is likely to be poor (what do b-rats know about meeting small-business payrolls?). This $20 billion could prove a bonanza for all manner of malingerers and spongers, so rather than complain, why not join them? Above, I mentioned my sleepless night. I do worry about this matter, it deprives me of rest and brings emotional distress. I’m not sure how to put a price on that damage, but think it cannot be less than $1,000. Where’s the application form?

Another class of applications might reasonably come from those pensioners, deprived of their dividends – deprived, not by the accident on BP’s rig but by the shameful deal with the devil that Carl-Henric Svanberg and his men felt obliged to strike. They will be suffering, so why not ask for compensation? There’s no fee for applying, is there, so what have they to lose? That would be farcical indeed; the government taketh away with one hand, and giveth with the other. But when one thinks about that, government never does anything else.

What will the Company get, for its net billion or two? – very little, and that’s a problem. It will fix the mess, stop the gusher, raise a new rig, pay the promised money. Then it will bounce back and continue to bring us competitively priced gasoline for our thirsty tanks. But its deeply humiliated officers will not forget this extortion, or just in case they might, I hope everyone reading this will buy a share or two (they are rather well-priced, about now) so that at the next Annual General Meeting or three, they can be reminded. Then, I expect that the next time America needs a favor from this multi-national giant, its attention may focus on some more deserving need on the far side of the world. Next time there’s a shortage, as in 1979, tankers may be diverted to Japan, or Germany. Next time there’s a price bubble, as in 2008, BP’s ears may be tuned to the needs of Indian customers, or those back home in Britain. What goes around, comes around – long after Obama has left office and Salazar’s jackboots are back in the closet.

Lastly, what might have happened in a free society, had such an accident as this taken place? Suppose government didn’t exist, but that Deepwater Horizon blew up, and the blowout preventer failed to activate. What next?

Note, there would have been no law-based liability limit of $75 million, so there would have been a much stronger incentive on BP to make sure that none of the above ever took place. Still, accidents happen. Suppose it did. Oil would still have gushed, but two things would then have happened very differently.

First, application of that detergent-like compound which BP started to use but stopped on EPA orders, might not have ended. That way, the quantity of oil on the surface would have been substantially less than is now landing. Possibly the detergent itself would damage someone, but the responsible company itself would make the judgment and take that risk, optimizing its predicted, respective liabilities. As it is, a lot of the oil in the marshes and beach sand is there because of the EPA, and the EPA isn’t going to compensate anybody.

Second, the Company would have welcomed all manner of help from all manner of people offering it; it tried to do that anyway, but government stepped in and told boat captains to stay in port. Many more would have been at work, moving booms and skimming oil; my wise friend Elmo Zoneball suggests that BP would simply have offered to buy oil recovered from the sea by any method, at whatever rewards per barrel were sufficient to prevent it drifting on-shore. Who knows what ways would be found? Even domestic vacuum cleaners might have been rigged (in reverse) to pump the stuff. Those clever Floridians who demonstrated on YouTube how ordinary hay soaks up oil from water would have taken their Bayliners out to collect as much as they could, and thousands like them; at hundreds of dollars a barrel, there would have been few idle hands around the Gulf. It would have been a kind of peacetime, for-profit Dunkirk.

Such will be the power of the free market, when it is unleashed.