What should we do about BP?

In a democracy, the people or their representatives decide how to respond to great problems. The Deepwater Horizon oil well explosion on April 20 and spill in the GOM Gulf of Mexico counts as a great problem. It has caused loss of income to fishermen. As oil comes ashore, people who depend on tourism and outdoor sports will suffer, and it will degrade the quality of life for communities near the water. It has caused immense fouling of water and wildlife habitats. Eleven people died in the explosion. The U.S. government’s prudent suspension of exploratory drilling in GOM interrupts the incomes of industry workers. Today, two months after the explosion, the broken well continues to emit large quantities of oil, most of which, in late June, is captured or burned. This fragile jury-rigged stopgap will try to catch emerging oil for two more months until drillers complete the relief well.

First, is this a situation for government action? Or should private parties work out remedies among themselves? Some people allege reckless working decisions that created the unsafe conditions aboard the Deepwater Horizon which led to the explosion. This suggests possible criminal charges. It might be possible for private parties to negotiate agreements or more likely sue each other to work out compensating payments and other remedies. We could expect delayed responses, unfair independent settlements and congestion of the courts. For these reasons, government can address this better than private parties.

What then should the government do? It’s helpful to imagine a hypothetical company, the DoRight Oil Company, which does everything right. DoRight is a major oil company with deep water exploratory drilling operations in GOM. DoRight adheres meticulously to all regulations and standards of safety and responsible good practice. DoRight earns good profits. Employees, customers, suppliers and shareholders value their relationship with DoRight. Unfortunately, despite careful work of high quality, one of their wells exploded, killing eleven people and releasing huge quantities of oil uncontrollably into the environment. What should we do about DoRight?

In deciding what to do about BP, we should ask whether we would do the same with DoRight. Unless there is good reason to do otherwise, the government should treat BP as well as it would treat the honest and worthy corporate citizen DoRight.

From the start, BP promised to pay all “legitimate” claims. DoRight would do exactly the same. We wouldn’t expect DoRight to pay fraudulent claims, nor should we expect BP to pay fraudulent claims.

A portion of the electorate feels that these extraordinary circumstances require the government to nationalize BP. Would the government nationalize DoRight? We think not. The U.S. Supreme Court overruled President Harry Truman’s attempt to nationalize the steel industry. The U.S. government doesn’t have a successful precedent for nationalizing profitable companies. Further, government ownership wouldn’t prevent blowouts of exploratory wells in GOM. The Ixtoc I oil well was owned by the government of Mexico.

Others feel the government should seize the assets of BP and dissolve the company, to punish the company and teach the industry a lesson. The U.S. Constitution, Amendment V, would require payments to BP shareholders to compensate them fairly for the assets seized. Those payments would equal the money raised by the sale of the assets. Other large energy companies would buy the auctioned assets. If courts could be persuaded the seizure was legal, then logos would change, but the operations of the properties would continue much as before. The net value would be zero.

Some people believe the costs will be so large that they will bankrupt BP. However, BP has profits of about USD 20 billion per year. The company could pay out USD 10 billion per year for ten years and remain profitable.

I think our society and the world will be best served if the government assures these are accomplished:
1. With urgency, act to stop the oil leak.
2. Repair damage, clean the water and shore, restore wildlife habitats.
3. BP will compensate people fully for loss of income and damages, and BP will compensate the government for its costs.
4. Investigate the disaster to understand the sequence of events and the causes.
5. If appropriate, bring criminal charges and regulatory remedies based on the findings of the investigations.
6. Revise law and regulation to prevent future occurrences.
7. Decentralize the organization of disaster responses to local GOM communities to mitigate future occurrences.

Disclosure: Daniel Brockman is a shareholder of BP.

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