It is often a problem that a fine while huge in absolute numbers is a blip to a mega-company like BP. With a quarter trillion dollars in revenue yearly, a fine of $86 million (which is what BP paid for their failure to fix the problems at Texas City, after pleading guilty to criminal charges) while a dent in a divisions bottom line is nothing to the whole enterprise. It was less than three one hundredths of a percent of the operating revenue. At the same time it is also the largest fine the EPA has ever levied. The apparent disconnect between those two facts shows that our fine structure is out balance, at least when it comes to super-major corporations.
The Deepwater Horizon disaster may change that. The fine for spilled oil is between $1,100 and $4,330 per barrel, depending on the EPA finding that there was extreme negligence or not. Based on the estimates to date, there may be 25 to 50 million barrels of oil spilled. That would make the fine between 275 million and 550 million for the lowest fine and whopping 10.7 to 21.5 billion for the higher fine.
We are quickly approaching a fine that could wipe out the entire operating profit of BP for a year, and we have not yet stopped the flow of oil. Given Admiral Allen's assertion that the oil is likely to be flowing at some level until at least the fall, these numbers will keep growing.
All of this is before BP has to pay the royalties on the oil. Royalty calculations are moderately complex in that they are paid on what the oil can be sold for, minus deductions (subsidies) of between 1/6 and 1/8 of the expected sale. It is hard to estimate what that would be, but if we take today's per barrel price of $71 and do a rough calculation without deductions we at 1/8th we get $8.75 per barrel. This applied to the 25 to 50 million barrels lose in the Gulf would give another $218 to $436 million owed by BP.
All of this, if it were required to be paid at once could drive BP into a very deep hole from which it would have a lot of trouble recovering. Still this is company that had vast reserves of oil and natural gas in its portfolio, so it might be able to survive, even if it were greatly cut back.
There are other options as well. The Federal Government has billions of dollars of contracts with BP for fuel and other petrochemical supplies. Most of this goes to the military and our ill advised wars in Iraq and Afghanistan. If we really wanted to play hardball we could end those contracts and find BP an unfit partner. This would deprive them of the ability to bid on contracts in the future. This tactic combined with the fines would almost certainly send this company on the path that accounting giant Arthur Anderson.
All of this is before we get to the legal costs of BP lying on their applications for drilling permits. It is perjury to make false statements to a Federal agency. The assertions of being able to control a spill ten times the amount that is now in the Gulf are prima fascia evidence of perjury and fraud on a massive scale. This kind of criminal case might be enough to destroy the company on its own, given that the statements are likely boiler plate and have been repeated hundreds of times on other applications.
The question is do we really want to do this? I feel a lot of anger at the arrogance and callousness of BP and think that there is some value in making an example of a giant company like this. However it would not be as easy as it seems. The British government is not going to be very happy to sit by and see one of its largest companies destroyed by action from the United States. They are currently facing a major economic crisis of their own, with their Prime Minister talking about a decade of austerity measures.
If we were to put the screws to BP there would almost certainly be resistance from the British Parliament. This could have the affect of damaging one of our most important alliances as we take our fully justified pound of flesh from a British company. Given the geopolitical state of play this could make many of our foreign policy objectives much more difficult from Afghanistan to the Horn of Africa.
There will also be political resistance here in the United States. We have already seen the bought and paid for Senators and Governors lamenting the temporary moratorium on deep water drilling. The jobs lost are very real there is no getting around that, of course it totally ignores the jobs that are being lost in fishing and tourism. Still any move that might bring BP down would be resisted for with the very same logic; "If we destroy this company we will be destroying thousands of American jobs!"
This will be a straw-man, but they will use it anyway. If BP goes under companies like Shell and Exxon will buy up their leases and refineries. There will be jobs it will just be under new management.
There will also be an argument that no company will want to do business with the United State if we use our laws to kill BP. This is the weakest argument of all. It is precisely because we have weakened enforcement of our laws that we are in this situation. When BP did not fear the consequences of cutting corners on the Deepwater Horizon rig it led directly to this ecological catastrophe in the Gulf. If they had more fear of what would happen, both in terms of loss of life and revenue, then the cost/benefit analysis might have moved them to be more cautious.
The biggest reason not to start to bring the hammer down on BP is the clean up and its cost. Right now they are making a real hash of the efforts, but some effort is better than none. They are also insisting loudly and publically that they will pay the costs for the clean up. If we start talking about fining them out of existence too loudly, they may just throw in the towel and leave the United States on the hook for all the costs, even if we do recoup some from the sale of their assets.
It seems likely that we will continue to drill for oil and do so in deep water and ecologically sensitive areas. We are not ready to take the steps that would move us from a fossil fuel economy to a renewable energy one. Even if we are ready it will take time to make the move and during that time we will need the oil. Given that we must find a way to make the cost of failing to be ready for such an accident and failing to be able to control it so high that companies will do all they can to avoid this kind of disaster.
If that means that down the road, say next spring when the oil has stopped flowing, we have to take steps to dismantle the fourth largest company in the world, then that is what we should do. The world can not afford to have companies that are big enough and powerful enough to break the law and not worry about the consequences. By making an example of one this size we start to reassert some control and put the other mega-corporations on notice that they flout the law at their peril.
The floor is yours.