Puts and Calls: The high political costs of the Gulf oil spill

Tom Karol Occasional Political Commentator
Font Size:

Gulf oil clean-up: In response to the oil spill in the Gulf of Mexico, President Obama imposed a freeze on new offshore-drilling leases until a comprehensive review of the accident can be completed. Obama declined, however, to back away from the his earlier proposal to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas drilling, much of it for the first time. The April 20 explosion on the BP-operated Deepwater Horizon drilling platform about 50 miles off the southeast coast of Louisiana has left an untapped wellhead pouring about 5,000 barrels of oil a day into the Gulf. The Coast Guard estimates that 1.6 million gallons of oil have spilled since the explosion. BP Chief Executive Tony Hayward said in an interview with Reuters that the company would compensate those affected by the spill, but the cost could be $8 billion or more — and the company’s stock price has already dipped 12%. The cost is about $6 million a day now, but will increase. Containing and cleaning up the spill are only the beginning as there will be millions — or even billions — of dollars in lost revenue for fishing, tourism and other industries. Lawsuits have already been filed and the share prices are tumbling for BP, the rig operator Transocean and Cameron International, which made the blowout protectors.

The political slick: The White House press office is churning out reports of the administration’s progress while Republicans have tried to brand the oil spill “Obama’s Katrina.” Obama flew to the Gulf on Sunday morning to survey the damage. The administration has had only a few minor foot faults so far. About two weeks before the spill, President Obama publicly stated: “It turns out, by the way, that oil rigs today generally don’t cause spills. They are technologically very advanced.” The Minerals Management Service, a part of the Interior Department that oversees safety on offshore rigs, had inspected the rig numerous times and reported no problems. The blowout preventer had been inspected and approved only 10 days before the accident. Homeland Security waited a week after the spill to declare it “a spill of national significance,” and senior officials have questioned what resources might be useful in containing and cleaning the spill. As an added precaution, the administration has sent lawyers from Justice and EPA to the Gulf as the first wave in dealing with the inevitable “blame game” that will result. The Coast Guard’s response to this newly designated “spill of national significance” will be paid for through the U.S. Oil Spill Liability Trust Fund, established under the first President Bush. If this funding runs out, Congress will likely provide more.

Climate change legislation: The bi-partisan climate bill from Sens. Graham, Kerry and Lieberman was derailed when Majority Leader Reid pushed it behind immigration. Obama has promised to make climate change a high priority, but public interest and the political will was waning prior to the spill. As a result of the spill concessions to business included in earlier proposals may be harder to obtain; Sen. Bill Nelson has called on the administration to scrap its plan to open new coastal waters for oil and gas exploration. The Senate climate and energy bill has been expected to include measures to boost offshore development — including provisions that give coastal states with new offshore development a generous slice of the leasing and royalty revenue to attract Republican support. The Graham/Kerry/Lieberman bill is still a leading contender. Kerry has asked the EPA to analyze a compromise climate change bill that he hopes to move through the Senate this year. The EPA economic impact analysis will likely take a month or more to complete and the bill would not likely be considered by the Senate until the analysis is done and digested. The Congressional Budget Office is likely to conduct its own analysis, and the oil industry wants the Energy Department’s Energy Information administration to take a look, too. That means that the Senate probably would not even consider the bill until July or later.

Buffet defends Goldman: Goldman stock dropped almost 10 percent on reports that the Justice Department opened a criminal investigation of the bank, but one of the world’s richest men, and perhaps the markets’ most respected investor, still likes the company. On Friday, Warren Buffett told Berkshire Hathaway shareholders that Berkshire’s $5 billion of preferred stock in Goldman is a good investment, generating 10 percent interest a year, which includes warrants that can convert the preferred shares into regular stock at $115 a share (about $30 lower than Goldman’s current price). Buffett and Berkshire Vice Chairman Charlie Munger praised the bank before a crowd of about 40,000 at an annual shareholder meeting, saying that they’re happy with Goldman’s  leadership. Of course, Buffett has much better Goldman interests than you or I could get today. Berkshire Hathaway acquired its Goldman interests in September 2008 as part of the bailout.

You say “tomato,” I say “collateralized debt obligations”: It’s no state secret that many of the 535 members of Congress who will end up voting on financial reform are poorly informed on the nuances of more sophisticated investment products and services. Many would have difficulty explaining what derivatives are and how they work. But as Alain Sherter details in a must-read piece for anyone interested in financial reform, even sophisticated minds can look at the same issue and see very different things. In Why Goldman and Congress Aren’t Speaking the Same Language, Sherter illustrates the disagreement, misunderstanding and distrust over what Goldman and other financial services firms do and how they do it. Goldman’s seemingly inexplicable defense is at heart a surprisingly simple claim that it was merely acting as an impartial market maker for the deal, and owed no duty to buyers or sellers to provide additional information. Congress and others cannot fathom that such a duty would not exist. The courts will decide (unless Goldman settles), but this issue highlights how two informed sides can see things in very different ways. As the financial reform bill ambles towards enactment, the need for interpreters is bound to increase.