View all Articles
Commentary By Nicole Gelinas

Why BP Will Be the Next Bailout

For all the administration’s tough talk on the oil gusher in the Gulf of Mex ico, the signs are already there that this crisis will actually play out like the financial crisis -- complete with BP’s being declared “too big to fail.”

Once again, politics and posturing will govern the response to catastrophe -- at the expense of both free-market discipline and the rule of law -- creating a bigger disaster for the economy and the environment. Oil and credit both grease the real economy.

But the economy won’t work right if oil or credit is too expensive -- or too cheap.

As became obvious in 2008, credit was too cheap and plentiful for the last decade or so. Financial-engineering innovations had seemingly made the risk of borrowing and lending vanish. This illusion made mortgages and other loans cheaper than they should have been -- and people lent and borrowed too much.

Likewise, in oil, deepwater-engineering innovations made drilling in difficult territory seemingly less risky than it was. This illusion also kept oil prices cheaper than they should have been.

Sure, prices seemed high -- but each dollar lost today or next year from an idle fisherman or an empty beach is part of the price of replacing oil we’ve already used.

The private sector is supposed to incur any losses if it screws up. But in the “inconceivable” financial crisis, the government stepped in -- and then moved in as a permanent partner.

Sure, President Obama’s now saying about BP, “We will make sure they pay every dime.” He also pledged months ago that big banks would repay “every single dime” of bailout money.

In fact, there’s an excellent chance Washington will do as it did in the financial, housing and auto-industry crises -- and decide that BP is “too big to fail.” This time, it won’t be to prevent panic but to keep peace among allies and to keep oil prices low. You see, the British public is outraged at us -- for being mad at BP, one of Britain’s crown jewels and a huge taxpayer.

As The London Evening Standard editorialized Wednesday, “One in every six pounds that UK institutions earn in dividends is derived from BP . . . We can understand American anger . . . but [Obama’s] punitive approach to BP will help no one.”

The UK’s new prime minister, David Cameron, centered his campaign on weaning Britain’s economy off finance -- and BP is one of the nation’s marquee non-finance companies. If losses for the cleanup and damages overwhelm BP’s ability to pay up, the Brits won’t stand by and watch as shareholders and maybe creditors -- “not fat cats but British pensioners,” notes the Standard -- lose. Nor will the British stand by if a US company like ExxonMobil tries to sweep in and buy up BP’s best assets on the cheap.

Once BP stops this gusher, Obama will be tempted to work with the British government to devise a creative solution out side of American financial and judicial systems. That is, British taxpayers would pump a limited amount of money into BP for a “victims’ compensation fund” to be doled out by American politicians, who will enjoy the power.

Congress, in turn, would protect BP or its non-American acquirer -- and the British government -- by capping claims. BP’s disaster will be a key test of our economic future: Do we still have rules that we respect? Or are arbitrary exceptions going to become the new rules for a protected economic class?

If America’s market and legal systems aren’t adequate to deal with the modern economy, if we can’t allow fair rules to govern everyone, then we might as well become the Middle East or Russia -- where Big Government and Big Business dispense favors and punishments in secret. Allowing the system to work helps the environment, too.

At some oil price, more “green” energy like solar power becomes economical -- and Americans started to buy smaller cars when prices neared $150 two years ago. But if the pols protect investors from the full cost of oil-industry disasters, we’ll never know the real economic price of oil.

If politicians seize the “opportunity” of this crisis to govern oil through arbitrary one-off deals, just as they have with finance, the markets for two of the economy’s critical resources will be just as polluted as the Gulf waters.

This piece originally appeared in New York Post

This piece originally appeared in New York Post