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Don’t Prop Up BP

eye on the news

Don’t Prop Up BP

The president should stop claiming that the company is “strong and viable.” June 17, 2010

In announcing that BP will gradually fund a $20 billion escrow fund for Gulf oil-gusher victims, President Obama said something odd: “BP is a strong and viable company and it is in all our interests that it remains so.”

The president has no particular insight on whether BP, a private company, is “strong and viable.” BP appears to have made a spectacularly fatal error in what was supposed to be its core competency: technological prowess in extracting ever-harder-to-get oil. Eleven people have died, and a delicate ecosystem and priceless piece of our national and natural heritage is under grave threat. Only time will tell whether BP can shoulder the costs that stem from its actions or inactions—$20 billion is just a random number—and whether governments around the world will allow BP anywhere near critical habitats again.

Furthermore, it’s no more in our national interest that BP survive than it was for companies such as Citigroup, AIG, Lehman Brothers, Bear Stearns, and Enron to survive as corporate entities. Companies succeed and fail. Shareholders win or lose. Creditors are made whole or they’re not, out of whatever financial resources are available.

In fact, if it turns out BP can’t regain the sustained confidence of investors, it’s very much in our national interest that markets render that verdict uncontaminated by government interference that goes beyond time-tested legal channels, whether it’s to defend BP or to bully it. Just as we don’t want failed banks handing out mortgages, we don’t want a failed oil company bumbling about trying to get petroleum out of the seabed. If BP were to fail, unaided by any government, another company could find, produce, and sell the oil—preferably a company better at it. On Tuesday, executives from BP’s competitors explained in detail what they would have done differently to prevent the disaster. These competitors would scoop up its best assets and people if the firm went under. It happens every day in a free-market economy.

And the signal that the firm’s failure would send to markets would do much to “price” oil more accurately, something that proponents of a carbon tax or cap-and-trade regime, including the president, say they want to do. Investors could determine from BP’s demise that extracting oil can be a far riskier and costlier venture than they had thought, and they would demand higher returns accordingly. Oil, viewed as scarcer and more valuable, would cost more.

As for the disaster’s victims, BP must of course compensate them to the extent that it can. But if it can’t, it would be terrible public policy to try to prop up a zombie company with political words of confidence—and maybe money from the British government, which has a strong political interest in keeping BP in business—so that the firm could earn enough money to repay Gulf Coast residents, workers, and local governments.

If BP can’t pay up, it becomes a social and moral question of how much taxpayers should offer to help their fellow citizens (considering that bad regulators, too, likely contributed to this catastrophe). That’s a question to be asked and answered through the democratic process, not wished away by pretending that BP is “strong and viable,” even if it’s not.

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