Has BP ever made a profit? The question looks daft. The oil company posted profits of US$26 billion last year. There’s no doubt that BP has been pumping money into the pockets of its shareholders. The question is whether this money is what the company says it is. BP calls it profit. I call it the provision that the firm should be making against future liabilities.
Despite an angry letter from two US senators and a warning from president Barack Obama about spending big money on their shareholders while nickel-and-diming coastal people, despite the fact that it has no idea what its total liabilities in the Gulf of Mexico will be, BP had been planning to pay a dividend this year. It was likely to amount to more than US$10 billion.
On June 16, however, BP announced it would not pay any further dividends this year and agreed to a “$20-billion commitment to ensure that all legitimate claims for which BP is responsible are met fairly and promptly”. As the two senators noted earlier in June, by moving money "off the company’s books and into investors’ pockets", BP would “make it much more difficult to repay the US government and American communities".
Pollution has been defined as a resource in the wrong place. That’s also a pretty good description of the company’s profits. The great plumes of money that have been bursting out of the company’s accounts every year are not BP’s to give away. They consist, in part or in whole, of the externalised costs the company has failed to pay, and which the rest of society must carry.
Does this sound familiar? In the 10 years preceding their crash, the banks posted and disposed of stupendous profits. When their risky ventures failed, they discovered that they hadn’t made sufficient provision against future costs, and had to go begging from the state. They had classified their annual surplus as profit and given it to their investors and staff long before it was safe to do so.
Recently, the British government bumped into another consequence of failing to take future costs into account. Chris Huhne, the new secretary of state for energy and climate change, revealed that nuclear decommissioning liabilities will cost the government nearly US$6 billion more than it was expecting to pay over the next three years. This will cancel out two-thirds of the vicious cuts the government has announced and swallow most of his department’s budget. As Huhne pointed out: "It is a classic example of short-termism. I cannot think of a better example of a failure to take a decision in the short run costing the taxpayer a hell of a lot more in the long run."
The decommissioning costs imposed on society by nuclear power will be dwarfed by those that are imposed by the fossil-fuel industry. They include, but are not confined to, the money that will have to be spent on adapting to climate change. The United Nations estimates this cost at US$50 billion to $170 billion a year, but a report last year by British scientists suggested that this is around three times too low, as it counts only a small proportion of likely impacts.
The UN has hired the consultancy Trucost to estimate the costs dumped on the environment by the world’s 3,000 biggest public companies. It doesn’t report until October, but earlier this year The Guardian published the interim results. Trucost had estimated the damage these companies inflicted on the environment in 2008 at US$2.2 trillion, equivalent to one third of their profits for that year. This too is likely to be an underestimate, as the draft report did not try to value the long-term costs of any issue except climate change. Nor did it count the wider social costs of environmental change.
A paper by the New Economics Foundation (nef) in 2006 used government estimates of the cost of carbon emissions to calculate the liabilities of Shell and BP. It found that while the two companies had just posted profits of about US$37 billion, they had incurred costs in the same year of nearly US$69 billion. The oil leaking into the Gulf of Mexico from the Deepwater Horizon well is scarcely more damaging, and its eventual impacts scarcely more expensive, than the oil that is captured by neighbouring rigs then processed and burnt as intended.
The total costs imposed by the oil companies, which include the loss of human lives and the extinction of species, cannot be accounted. But even if they could, you shouldn’t expect the companies to carry them. They might be incapable of capping their leaks; they are adept at capping their liabilities. The Deepwater Horizon rig, which is owned by Transocean, is registered in the Marshall Islands. Most oil companies pull the same trick: they register their rigs and ships in small countries with weak governments and no international reach. These nations are, in other words, incapable of regulating them.
Flags of convenience signify more than the place of registration: they’re an unmistakable sign that responsibilities are being offloaded. If powerful governments were serious about tackling pollution, the first thing they would do would be to force oil companies to register their property in the places where their major interests lie.
US lawyers are drooling over the prospect of what one of them called "the largest tort we’ve had in this country". Some financial analysts are predicting the death of BP, as the fines and compensation it will have to pay outweigh its earnings. I don’t believe a word of it.
ExxonMobil was initially fined US$5 billion for the Exxon Valdez disaster, in 1989. But its record-breaking profits allowed it to pay record-breaking legal fees: after 19 years of argument it got the fine reduced to $507 million. That’s equivalent to the profit it made every 10 days last year. And after 25 years of deliberations, an Indian court triumphantly convicted Union Carbide India Ltd of causing death by negligence through the Bhopal catastrophe. There was just one catch: Union Carbide India Ltd ceased to exist many years ago. It wound itself up to avoid this outcome, and its liabilities vanished in a puff of poisoned gas.
BP’s insurers will take a hit, as will the pension funds that invested so heavily in it; but, though some people are proposing costs of US$40 billion or even $60 billion, I will bet the price of a barrel of crude that the company is still in business 10 years from now. Everything else – the ecosystems it blights, the fishing and tourist industries, a habitable climate – might collapse around it, but BP, like the banks, will be deemed too big to fail. Other people will pick up the costs.
There is an alternative, but it is unlikely to materialise. Just as Norway has treated its oil money not as profit but as provision against a tougher future, so the governments in whose territories oil companies work should force them to pay into a decommissioning fund. The levy should reflect the costs that economists are able to calculate, plus a contingency for those we can’t yet foresee.
This would outrage the oil firms, as it would render many of them unprofitable. But there’s a simple answer to that: the money currently defined as profit is nothing of the kind.
Copyright Guardian News and Media Ltd, 2010
Homepage image from Greenpeace UK