Wednesday, May 12, 2010
Who's to Blame for the Gulf Oil Spill?
The oil spill disaster in the Gulf is of course generating much attention. Many would say that British Petroleum (BP) has been quite responsive to this spill but there have been some subtle hints of defensiveness. A couple of weeks ago, CEO Tony Hayward said, “We are responsible, not for the accident, but…for the oil and for dealing with it and cleaning up the situation”. More recently, BP, Transocean, and Halliburton Inc. were blaming each other for the catastrophe. BP owned the well that Halliburton helped build but Transocean owned the rig that caught fire and ultimately sank in a mile of water.
Arguing over who is ultimately at fault may be a fool’s errand when we look back at other major corporations trying to avoid blame by pinning the problem on others. The apparel sector in the 1990s faced huge backlash as firms like Nike and Gap avoided taking responsibility for poor labour conditions of their supplier factories. They stated that because they don’t own the factories, they have no legal basis on which to enforce improved labour conditions. This was unacceptable to fair labour groups and consumers in developed countries who quite swiftly forced Nike and others to take responsibility for its supply chain regardless of their ownership status within that supply chain. Coca-Cola played the defensiveness card when they initially denied responsibility for the Belgium contamination of 1999 and the killing of union members at a Columbian bottler. Coca-Cola has since shown a change of face by taking responsibility for their suppliers’ actions and admitting publicly that their products may be linked to obesity in children. We’re seeing similar scenarios in other industries where the expectation is that firms take responsibility for parts of the supply chain that they would otherwise ignore. The consumer electronics sector is working to reduce the use of toxic materials in their products that end up being inhaled by children in developing country children who are paid to take these components apart for resale.
If payouts represent any admittance of guilt, BP doesn’t look so good. According to the Wall Street Journal, they’ve already spent $350 million in cleanup efforts and paid out $3.5 million in initial claims to businesses along the Gulf Coast X. This is over and above the $1 million per day they are spending on stopping the flow of oil.
Whereas Exxon has been a leader in improving their operations since the Valdez spill, BP has cut costs perhaps too crudely making them ill-equipped to cope with the complexities of extracting from more remote locations like beneath the ocean floor. In early 2009, the EPA identified violations surrounding BP’s role in the catastrophic explosion and fire in March 2005 at the Texas City refinery. This was one of a string of incidents leading congressmen to question the cost cutting maneuvers of BP that led to very “dangerous operations”, yet $70 billion in profit last year. In 2007, CEO of BP America Robert Malone told Congress: "These [negative] experiences have changed BP and all of us who work for the company…We are determined to learn from what happened and to become a better, stronger company." I’m not sure much has changed.
While executives and government officials are arguing over who is to blame, there might be an important and highly neglected elephant in the room. Are there perhaps a deeper set of issues here underlying the many stories tracking this spill? Was this a freak accident that will likely not happen again or is this perhaps a signal that our technological advances in oil extraction are unable to keep up with our need to move to more and more remote locations to feed our demand? According to the CEO of BP, “The industry has been exploring in deep water for over 20 years." He added: The global industry "has drilled over 5,000 wells in greater than 1,000 feet of water and has not hitherto had an issue of this sort to contend with."
In his powerful book “Thousand Barrels a Second”, Peter Tertzakian chronicled how we reached a point where we now produce 1000 barrels (or 42,000 gallons) of oil per second globally. This means that every one of the 7 billion people on this planet consumes an average of 0.5 gallons per day. Of course 0.5 gallons per day is quite low when we consider that two-thirds of the population is living on less than $2,000 annually. Imagine what will happen when the 2 billion people living on $1-3 per day start to increase their income levels. Because of our dependence on oil, the profit incentive to keep supply steady is equally mind boggling. We can probably find petroleum in 90%+ of the products we consume from the food we eat, the chairs we sit on, the cars we drive, and the fuel to move that car.
Spending time investigating whether BP, Transocean or Halliburton is to blame may overlook a more important point that perhaps our consumption levels and overwhelming dependence on the substance has guaranteed a rather relentless effort to find the substance at its most remote locations. History may just warn of a looming set of events that would suggest these sorts of accidents will only increase. Whale oil, once the primary source of energy in industrialized nations in the 1700s and 1800s, became increasingly scarce as whales were no longer found in convenient locations. This pushed companies to hunt whales in dangerous arctic waters without the appropriate technologies and skill levels. Countless workers died and costs became overwhelming as whales were harder to find and catch. This scarcity precipitated a movement towards alternatives, one of which was rock oil. Are we facing a similar circumstance here? Is our technological prowess keeping up with the need to move to remote locations?
I recall a few years back reading part of a statement from a minister in Eastern Asia warning that there is something terribly wrong with systematically extracting billions of gallons of a substance meant to be underground. Perhaps the sheer volume of oil spreading in the gulf is a symbol of how much of the substance we are consuming as a society. Or perhaps this is Mother Nature’s way of balancing itself out. The US consumed 21 billion barrels of oil in 2008, which represents 25% of world consumption despite only having 5% of the world’s population. I can’t help but wonder whether this spill signifies how the negative effects of our behaviour, once conveniently contained, is bursting at the seams.