Why BP Will Get Off Easy

Punishing BP will amount to punishing ourselves.

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How much would you be willing to pay to punish BP?

It might sound like a backward question, since it's supposed to be BP that pays for the damage caused by its ruptured well in the Gulf of Mexico. But the unhappy reality is that it's extremely hard to punish a company without also punishing its employees, customers, and many others who bear no responsibility at all for the harm caused by a few.

[See 10 companies back from the brink.]

President Obama has promised that BP will cough up "whatever resources are required" to compensate the fishermen, tourism workers, and everybody else harmed by the oil fouling the Gulf and its shorelines. BP, with its tail between its legs, is going along for now, agreeing to set aside $20 billion for a compensation fund. But it will take years to determine all the damage, clean it up and attach a final price tag to it, and by some estimates the ultimate cost could be much higher than $20 billion. By the time we know that, however, the headlines will have faded, the outrage will have dissipated—and BP will have dug in its heels.

It would be nice to think that a lot has changed since the Exxon Valdez spill in 1989, but not much has. Americans are as addicted to oil as ever. We tolerate costly overseas wars, military casualties, and oil dictators funding terrorists as an acceptable price for cheap oil. Spills too. After the Valdez spill, Exxon's stock price fell by about 10 percent, but it bounced back and actually rose for the year, and continued on an upward trajectory virtually unaffected by cleanup costs or damage claims. A judge ordered Exxon to pay $2.5 billion in punitive damages, yet years of litigation whittled that down to $500 million. Exxon Mobil (formed in a 1999 merger) is now one of the biggest and most profitable companies in the world.

For now, BP's problems look worse. The spill in the Gulf dwarfs the Valdez, and with another month or two of gushing likely, the uncertainty has cut BP's stock price nearly in half. Liability estimates range as high as $40 billion, multiples of what Exxon paid. And politicians in Washington are talking about changing various rules so they can throttle BP so thoroughly it might threaten the company's existence. Yet BP may already be bouncing back, a la Exxon; the stock spurted upward after the settlement fund was announced, driven by investors who value certainty over unpredictability, even when the news is bad.

[See 5 lessons from oil spills and reform bills.]

Speculation about the company's demise is exaggerated, too. Politicians love to bash big, evil corporations when it's convenient, but they also know there are practical limitations to the retribution they can demand. BP is a British company, so it seems like a safe punching bag, but it also employs 29,000 Americans and owns the Amoco, Arco, am/pm, and Castrol Motor Oil brands. It spends several billion dollars a year in the United States, supporting suppliers and small businesses that provide everything from huge rigs like the Deepwater Horizon to food for workers. The vast majority of those people did nothing to cause the Gulf spill, and at some point, punishing BP will mean punishing hard-working Americans who vote.

It's happened before. In 2002, government prosecutors earned a guilty verdict against accounting firm Arthur Andersen, for obstruction of justice relating to audits of its client, Enron. The verdict effectively killed the firm, which had 28,000 U.S. workers. Competitors bought some divisions, but others simply went out of business, with the jobs disappearing. Then, in 2005, the Supreme Court overturned the verdict, leaving huge questions about overzealous prosecutions that take down the innocent along with the guilty. With jobs a lot more scarce in 2010 than they were in 2002, Obama and his minions must certainly be reluctant to add to the nation's unemployment problems.

BP also has an obligation to fight back, which it will do aggressively sooner or later. For better or worse, BP is a public company whose CEO has a fiduciary duty to protect the interests of the company's owners—its shareholders. Yes, that includes plenty of fat-cats, but as with every big company, it also includes the pension funds and investment portfolios of many ordinary people. They bear a risk that comes with the territory when you invest in stocks, and it's not the government's job to protect them. But it is the CEO's job, whether it's the current, embattled boss, Tony Hayward, or a successor. To some extent, drawing down company resources to pay claims, rebuild wrecked communities, and settle with the government is good for business, and maybe even essential to the company's survival. But bankrupting the company in the process would be an abrogation of the CEO's duties. So BP will eventually use all the legal resources it can to limit its exposure, rebrand itself, and become profitable again. Distasteful, yes, but capitalism isn't always pretty.

[See why the Gulf Oil spill will barely affect most Americans.]

Obama has also avoided costly measures that BP and other oil companies might easily pass on to the public, through higher prices. For all his jawboning about the need for new energy sources—which is sensible—Obama's six-month moratorium on deepwater drilling affects wells that are not yet producing oil. So it doesn't affect the supply of our favorite narcotic—or the price. He could have banned current production at deepwater wells, which would have affected oil and gas prices, but he didn't.

Obama could also propose an increase in the federal gas tax, to help pay for years of cleanup in the Gulf, beef up enforcement of drilling regulations, and fund subsidies for new energy development. If the goal is to break America's dependence on oil—and reduce the need for risky practices like deepwater drilling—then higher gas taxes are a logical step, supported by many tax and energy analysts and even some automaker CEOs. But this is another shell game. An increase in the gas tax, of course, would be politically explosive, especially since Obama has pledged no new middle-class taxes. So he's likely to keep telling us we should use other kinds of energy without taking the bold steps that would make it happen. He'll also probably avoid any sanctions on BP that could be passed on to consumers via higher prices. We wouldn't tolerate it.

Yet we're all going to pay for a portion of the Gulf cleanup, and we should. For one thing, the government itself is partly responsible, thanks to lax oversight that allowed oil companies "to conduct their own safety inspections and write their own regulations," as Obama put it. So while BP's compensation fund will focus on local workers harmed by the spill, don't expect it to reimburse the Coast Guard, FEMA, or dozens of other federal agencies responding to the disaster. That cost will be borne by taxpayers.

[See why voters will get a lot angrier.]

That might seem unfair, yet we all benefit from the kinds of shortcuts and risks BP apparently took while drilling its doomed well. Like every other oil company, BP pushes the envelope on drilling because there's an insatiable demand for oil. By us. We don't want workers to die, oceans to be befouled or the food chain to be corrupted, but Americans are almost uniquely determined to keep fuel prices low, regardless of the unseen costs. So we'll force BP to pay. But also make sure the oil keeps flowing.