This Changes Things…

On thursday, I sat and watched the congressional grilling of BP (BP: NYSE) CEO Tony Hayward. Is anyone else embarrassed for everyone involved? I’ll admit that I know nothing about sub-sea cement bonding or fluid dynamics, but at least I don’t go on TV and pretend that I do. Did all dozen congressmen read the same cliff notes on the way into the hearing? How many different ways are there to ask the same ridiculous question? How many times can you vent at CEO Hayward before it loses all sense of proportion? Meanwhile, Hayward sat there with stoic dignity. He never flinched. He didn’t even turn around when a protestor tried to rush the podium and smear him with oil. Unlike our congressmen, he at least looked professional.

It’s clear that Tony Hayward has no idea how to fix this well. I think he realizes that he screwed up. America is angry. There’s a certain desire to put a face on this tragedy and assail that individual. However, the way congress did it is just disgraceful. As the hearing dragged on, I started to feel sorry for Hayward. His response to each of the questions was consistent. Simply put, it was too soon to tell what caused the disaster. BP accepted full responsibility for the spill and intended to spend whatever was necessary to make things right. He was profusely sorry. What else can you ask for?

Meanwhile, our congressmen were grandstanding in a comically childish manner. Nothing was resolved at this hearing. How could there be a resolution? We don’t yet even have the facts. Like most congressional inquisitions, it was a total waste of everyone’s time. Shouldn’t these congressmen still be investigating steroid use in baseball? Was there a resolution to that ‘calamity’?

It is 61 days into this crisis and it is obvious that the oil well cannot be contained by standard methods. There is increasing evidence that there are multiple leaks that cannot even be accessed. At best, BP is only capturing a small percentage of the oil spilled. It’s an environmental disaster of epic proportions. Rest assured that politicians will milk this crisis from every possible angle.

Watching the cleanup crews on the beaches is comically depressing. A few dozen guys sweating on the beach armed with brooms and garbage bags. Is this the best we can do? We’re the most technologically advanced nation on earth. There must be a better way to do this. My cleaning lady has more sophisticated equipment for cleaning my kitchen—I bought it for her at Target. Are we trying to clean up the beach, or are we trying to funnel hundreds of thousands of redundant census workers into another make-work program? Sure, machinery can be used on the beach, but nothing creates jobs like an army of men armed with shovels and mops.

Others are using this crisis to bilk taxpayers for more funding for pet projects in the domain of green energy. I’m all for environmentally friendly energy production. I just don’t think congress has the ability to conjure up green energy any better than they can create a unicorn. Since Nixon, we’ve had repeated 5-year plans aimed at green energy. Much like the Soviets, when we fail, we just announce a new 5-year plan and change the name. Private industry will eventually create green energy. We need to better motivate private industry. We don’t need congress siphoning off funds for their cronies.

We have been using fossil fuels for over a century. Twenty years from now, we will still be using fossil fuels. What will change is how we go about producing those fuels. In the US, expect more regulations, more regulators, more paperwork and more rules for oil companies. This will all serve to slow down production and increase costs. For oil companies, it becomes a question of sticking it out in the US or exploring in the less regulated third world where you risk arbitrary tax changes and nationalizations. Previously, oil companies made generous campaign contributions so they could avoid this Hobson’s choice. Now, public outrage has foisted it upon them. No matter what, this will reduce exploration, curtail production and dramatically increase oil prices going forward.

Even worse, how does the notion of unlimited liability impact the world? For now, I am operating on the premise that BP was not criminally negligent. Rather, they had an ordinary case of bad luck. BP may have been more susceptible because of how they handled themselves, however this could have happened to any of the oil companies operating in the Gulf. Blow-outs happen. It’s unfortunately part of the business. Now it looks like it will come close to bankrupting the company. In the future, is any CEO going to risk his corporation on this sort of drilling? It’s unlikely.

Liability imbedded in a business is scary. It’s hidden until it leaps out at you unexpectedly. I never considered the chance that a busted pipe could lead to the near bankruptcy of one of the largest companies in the world. What about my little companies? I’ve always looked at the balance sheets or at the competitors. I’ve looked at lawsuits or past environmental liabilities. I never considered simple bad luck in my investments. How can you? How can you quantify the risk of something like this striking?

There is a reason why you must always be diversified. You may really like a company, but you cannot let it become your whole portfolio. Who knows what the future holds for any business? You can analyze something a hundred different ways, but simple bad luck can strike at any time. I’m sure that Tony Hayward never thought that a failed blow-out preventer could land him in a congressional inquiry or cost him his corporation.

Unlimited liability is a scary concept. Many business activities—not just in oil—will now be curtailed or even cancelled. These fluke accidents happen rarely, but they scare businessmen and force them to reassess every part of their business. As investors, you need to do the same.

I know that as investors we are always focused on profits, but you need to also focus on safety records and environmental records. Those are often emblematic of deeper problems lurking at a business. As we learned at BP, those businesses that have past problems may be more susceptible to these sorts of disasters.

Since this well exploded, we have two new risks as investors. First, we have the notion of unlimited liability for companies. Secondly, we have to contemplate that energy prices are going to increase significantly in the next few years. Could it cost $10 a gallon to fill up your car? I wouldn’t rule it out. If you have investments that use a lot of energy, I’d reassess them before energy prices begin to spike. They are going to spike.

Categories: Comments On Events
Positions Mentioned: none

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