MARKETWATCH VIEW: 5 Things To Know Before Obama's Spill Speech

15th Jun 2010 14:13

By Brett Arends A DOW JONES COLUMN President Barack Obama plans to address the nation from the Oval Office on Tuesday night on the Gulf of Mexico oil disaster. Better power up our baloney shields. Here are five things you need to know before you tune in: 1. BP PLC (BP, BP.LN) was going to pay the bills anyway. Obama is demanding BP set up a special $20 billion "fund" for gulf victims. It sounds tough. But this is largely theater. It's like the kid who trained his pet rock to "stay." There is no serious risk that BP would somehow skip town without paying. There never was. And despite the hysteria, there is no danger the company will be unable to find $20 billion either. BP has $240 billion in assets, including $70 billion in cash, inventories and receivables, compared to $135 billion in liabilities. It is one of the largest oil and gas companies in the world. It employs more than 80,000 people and has more than 50 exploration and production sites around the globe. Analysts predict BP will have operating cash flow of $30 billion this year, $36 billion next year, $42 billion in 2012 and $45 billion in 2013. Despite the brouhaha over the $10 billion in dividends, BP spends twice that each year in capital expenditures, including research, development and exploration. To put all this in context, Exxon Mobil Corp.'s (XOM) entire costs for the Valdez spill in 1989 came to $7 billion in today's money. There is no reason at the moment for anyone in the gulf to fear that BP or its partners cannot or will not meet the legal obligation of $20 billion or even more. 2. Will Obama really kick the a-- of those responsible? Hope springs eternal, but I'd be surprised. That's because he wants our votes in 2012. Yes, BP--and its Deepwater Horizon partners, including Halliburton Co. (HAL)--have a lot of questions to answer. They may have cut corners. They have apparently not been candid about the size of the leak. They certainly seem to have mismanaged the crisis. Yet the real question isn't why this disaster has happened. It's why it doesn't happen more often. A mile underwater it's pitch-black and the pressure is 150 times greater than on the surface. No one had any contingency plans. BP wasn't drilling down there for its own amusement. As long as we demand oil, and we refuse to allow more drilling where it would be safer, this is going to happen. The worst estimates now put the amount of oil spilled in the gulf as high as 2 million, maybe even 3 million, barrels. Does that sound like a lot? The U.S. uses that much every few hours. We consume an incredible 22% of the world's oil--around 19 million barrels a day. In total energy we use far more per person than any other advanced country. We use 70% more than the New Zealanders, nearly twice as much as the French and Japanese, and more than twice as much as the Germans, the Italians, or those Britons. 3. Yes, so far he's failing this test. But not for the reasons you may think. It's not because he hasn't spent enough time striding around on gulf beaches in Douglas MacArthur's old fatigues, teeth clenched around a cigar, vowing to "kick a-- and take names." It's because so far he's flubbed this huge opportunity to make the case for clean energy. Will he do so Tuesday night? Reports say the president is planning to use his speech to press climate initiatives. Let's hope so. But it's a little late. The "narrative" is already about competence: BP's and the government's. They say one picture is worth a thousand words. But the most depressing image out of the gulf crisis may not be one of those pitiful cormorants. Maybe it's the chart of the PowerShares Global Clean Energy exchange-traded fund (PBD), which tracks the stocks of companies engaged in clean energy. It has actually fallen 16% since the April 20 blowout of Deepwater Horizon. Yes, there's been a slump on the stock market over that time, and clean energy has also been hit by the looming expiration of tax credits in Europe. Nonetheless they have actually underperformed small-caps, and the Nasdaq, since April 20. Just think about that. We've just seen one of the greatest disasters ever caused by dirty energy. In any rational universe, shares in wind power, solar power, geothermal and energy-efficiency companies should be skyrocketing. This crisis should be waking this country out of a 30-year bout of laziness and torpor, and making us get serious about conserving energy and developing sources that don't foul the earth. Instead they have fallen by about a sixth. Investors aren't stupid. If they thought we were about to mend our ways they'd be piling into these stocks. Instead they've looked at the national reaction to the gulf disaster, from Washington to Main Street. And so far they are drawing their own conclusions. 4. Define 'British.' For obvious reasons, the president has pointedly referred to BP as "British Petroleum"--a name it abandoned years ago. He may try that again Tuesday night. Like most major oil companies, it's really just a multinational. We hear time and again about "British" pensioners and shareholders in the company. Yet the reality is BP is traded on Wall Street as well as in London, and plenty of Americans own stock in this company through mutual funds as well. Major U.S. mutual funds that had big stakes in BP at the end of the last quarter, according to FactSet, included Vanguard Wellington (VWELX), Fidelity Diversified International (FDIVX), Vanguard Wellesley Income (VWINX), T. Rowe Price Equity Income (PRFDX), T. Rowe Price New Era (PRNEX), Putnam Equity Income (PEYAX), Vanguard Equity-Income (VEIPX), and Hartford Dividend & Growth (IHGIX). Unless they sold all their shares the weeks before April 20, investors in those funds got hit by the slump in the stock following the explosion at Deepwater Horizon. 5. Let's get some perspective here. Obviously, this is an ecological disaster. The people of the Gulf Coast are going to need help getting back on their feet. The wetlands need saving and restoring. No one's going to dispute any of that. But amid some of this hysteria, let's get a little context. Big Oil was not some evil outside monster feeding on Louisiana's plain folk. On the contrary, it was very good business for the local economy and remains so. According to the U.S. Commerce Department, Louisiana residents earn $13 from mining and related activities for every dollar they get from fishing. No kidding. In 2007, the last year for which we have data, the total compensation paid to people in Louisiana working in forestry, fishing and related activities came to just $310 million. The figure for mining and support activities was $4.1 billion, with nearly all of it related to oil and gas. Furthermore, this isn't the first bailout on the Bayou. It isn't even (after Hurricane Katrina) the second. Louisiana, Mississippi and Alabama were getting billions of dollars a year in subsidies from the rest of us even when times were good. That's because they get vastly more back in federal spending than they pay in taxes. The Tax Foundation, a nonpartisan think tank in Washington, has done the most authoritative analysis. It looked at federal tax and spending data through 2005, the last year for which numbers are available. In the preceding quarter-century, it found, these three states got an extra $430 billion from the rest of us. That's the difference between how much they paid into the pot and how much they took out. (In today's money, after accounting for inflation, by my math it comes to around $609 billion.) And this is a lowball figure because the Tax Foundation adjusted the numbers to balance the federal budget. In reality, thanks to the huge deficits racked up nationwide most years, the true cash subsidies were even greater than that. In 2004, the year before Katrina distorted things, Louisiana got back $1.57 in federal spending for every dollar it paid in taxes. That's a net profit of $3,100 per resident. In Mississippi the figure was $1.82 in spending per dollar paid in taxes, or $3,800 per person. In Alabama, $1.67, or nearly $4,000 per person. And never forget that the majority of voters in these states have spent years railing against "Big Government" and "federal waste" even while pocketing the same. Alabama is proud to call itself a heartland of the Tea Party. Louisiana elected as governor--with a 54% majority--Bobby Jindal, who was, up until around April 20, busy trying to build a career denouncing federal spending. (Brett Arends writes for MarketWatch. He can be reached at 415-439-6400 or by email at [email protected].) (END) Dow Jones Newswires June 15, 2010 09:13 ET (13:13 GMT)