Uncle Target

2010-06-17T16:02:00.002+02:00

On Tuesday, US President Barack Obama described the oil spill that has resulted from the April 20 explosion and fire on BP's oil rig as "the worst environmental disaster America has ever faced". He compared the millions of gallons of oil leaking into the ocean to an epidemic "we will be fighting for months and even years" (watch the video here).

President Obama went on to demand that BP establish an escrow account to set aside funds to compensate those effected by the ongoing oil spill in the Gulf of Mexico. The account is to be administered by an independent third party, according to the president. Democratic senators are asking for $20 billion from the oil company.

Whilst President Obama's response is understandable it lacks logic and clarity of mind. Put more bluntly, his response is riddled with contradictions. The greatest contradictions become apparent by comparing the White House's response to the BP disaster with the response to the financial crisis.

In the case of the BP disaster, the response has taken the form "the company must pay at all cost". By contrast, in the case of the financial crisis - that is filled with cases of moral hazard, human failure and individual greed - was met with a White House response of "Where do we sign?".

As far as the oil spill being the "greatest environmental disaster America has ever faced" goes, President Obama misses the elephant in the room. The greatest environmental disaster the US has ever faced is that caused by its own economic growth and unchecked resource consumption over the past 100 years.

In the article below, Tim Cohen, Associate Editor at Business Day, builds the argument.

Sense Being Spilt As BP Becomes Uncle Target

THE oil spill in the Gulf of Mexico is a serious situation, but that doesn’t mean there isn’t room for a cheap sound bite. Nevada senator Harry Reid, with some support from Democratic colleagues, sent a letter to BP CEO Tony Hayward asking the company to put away 20bn in a special account to be used to pay for economic damages and clean-up costs. He told reporters: “If you drill, and you spill, we’re going to make you pay the bill.” Cute.

The question now is whether BP wants fight or flight, or whether it can sound sufficiently contrite with the right sound bite.

BP is presumably at fault, and the company should pay as much as is reasonably possible to clean up the mess. But 20bn seems such an extraordinary sum it raises questions outside of the incident itself about acceptable levels of corporate responsibility. At this level, those who might be allowed to claim include not only companies that suffered direct damage, but out-of- work fishermen and tourist resorts that received cancellations. Can that be right?

The way the narrative of the event is unfolding illustrates that there comes a point when politics takes over and rationality struggles to maintain a grip. It’s hard not to notice a kind of vortex of hypocrisy. For example, rather than lumbering all the blame on BP, it ought to be at least conceivable that the good people of Earth might consider giving themselves some blame for requiring progressively deeper and more dangerous drilling to satisfy their relentless fuel requirements.

BP’s share price is now half what it was before the spill, and there seems a chance the company will be taken over or perhaps even go bankrupt. Companies should take responsibility for their actions, but doesn’t it seem a little odd that US banks can get away with fleecing taxpayers and yet a British company has to use its own money to clean the US coastline?

There is a military concept known as an “Uncle Target”, whereby in the chaos of war, all the attacking armies somehow believe that some small unit is the critical point in the manoeuvre, when it’s just a tiny unit. The unit gets its socks blown off, to the disguised relief of all the other units, who might sympathise with the unit in the cross hairs but are secretly relieved they are not the ones taking the heat.

BP’s situation is comparable. S ome of the other oil companies claim they could have stopped the flow, which is questionable, since all the action is taking place 1,5km underwater. But it does justify the existence of the word “schadenfreude”. They will doubtless relish the travails of their competitor, but will presumably rue their actions when their turn comes at destroying some part of the environment.

The irony is that BP is one of the leaders in the notion that it’s not an oil company but an energy company. As such, it supported lots of good things that progressive environmentalists wanted. Yet the public are very angry at US President Barack Obama for not being very angry, so all the previous public- private co-operation has been tossed out of the window as BP becomes the Uncle Target.

Hypocrisy is not fussy. Republicans in the US are seemingly relishing Obama’s discomfort, but Republicans are normally the first to support drilling for oil wherever it might be. Yet it was not only Republicans who passed the US Oil Pollution Act of 1990, which limits BP’s liability for non-cleanup costs to 75m .

This legislation was put in place after the Exxon Valdez oil spill precisely to limit civil damages, since it was thought at the time the potential claims could affect the oil flow. It wasn’t introduced by the Republicans, although it got huge support and passed in the House of Representatives by 375 votes to five.

It’s at times like these that the human race seems an abominably low thing. Personally, and I may be a vote of precisely one here, but Obama’s equanimity is the one thing that seems sane in all this, and it’s with great disappointment that I see him concede to the rabble-rousers from all sides.

Commodity Fight Club: Anglos versus BHP Billiton

2010-06-15T10:00:00.002+02:00

The link below connects to an article that I contributed to the business section of iafrica.com which looks at the metrics of the JSE's two largest diversified resources companies.

My argument goes in favour of Anglo offering better value than BHP Billiton.

http://personalfinance.iafrica.com/

TANSTAAFL & Keynesian Endpoints

2010-06-10T14:10:00.004+02:00

I won't be the last
I won't be the first
Find a way to where the sky meets the earth
It's all right and all wrong
For me it begins at the end of the road

Eddie Vedder, End of the Road

The swift, deep and aggressive policy action adopted by the policy makers of advanced economies during the global financial crisis avoided the dire outcome of banking system failure. But, as any first-year student of economics will tell you, there ain't no such thing as a free lunch (TANSTAAFL). To this end, recent months has seen growing recognition amongst capital market participants that the solutions that were brought to address the crisis have the attributes of a magic elixir that has morphed into poison.

As PIMCO's Tony Crescenzi notes, many of the world's advanced economies have reached the so-called Keynesian Endpoint. To state things baldly, these nations have reached the point where there are no more balance sheets left to support either economic activity or the financial system. This point is not literally true, because in places such as France and Britain nationally owned real estate and, in places, operating assets, are being sold to raise scarce capital. But, as Crescenzi argues, the point is true in practice because investors have no tolerance left to cater for fiscal profligacy or the monetisation of deficits by the world’s central banks.

Thus, as Crescenzi notes, "[N]ations are left with old playbooks and fewer choices by which to resolve their respective problems. This means that time, devaluations and debt restructurings might be the only way out for many nations. It also means their citizenry will require politicians that can think outside of the box and act with greater unity and resolve than perhaps they are used to."

As the saying amongst investors goes, the four most dangerous words in investing are "this time is different". That advanced nations have reached the Keynesian Endpoint is startling, but not surprising. Mountains of debt, a belief that more debt would solve a credit crisis and policy actions that involved fiscal splurging and the wild printing of money initially carried with it the belief that this time was different. And with this came the belief that the end point could be averted and that the music did not have to stop. The sobering reality is that this time is never different, and the Keynesian Endpoint is at hand.

Gone to the Dogs

Uncle Target

Commodity Fight Club: Anglos versus BHP Billiton

TANSTAAFL & Keynesian Endpoints