FRFI 216 August/September 2010

BP oil spill –the murky waters of finance capital

The news of the appalling environmental disaster created by the explosion at BP’s Macondo Prospect drilling site in the Gulf of Mexico is well known. The visible oil slick is half the size of Britain, and has spread over hundreds of miles of shoreline. Scientists have also discovered huge plumes of oil of unknown size hundreds of feet beneath the surface. Even with the flow of oil cut off, the overall environmental impact is unknown and clean-up will take many years. On the face of it, this is a terrible accident. But, behind the pitiful pictures of helpless animals drenched in oil, and gobs of tar spread across formerly pristine white sandy beaches, lurks the shadow of finance capital. Every facet of the crisis is inseparably entwined with imperialism, from the very origins of BP, through the reasons for the ‘accident’, to the way the clean-up has been handled and how it will be paid for, as our US correspondent STEVE PALMER explains.

The history of BP is inseparable from the history of British imperialism. In 1913 the British navy decided to switch fuel from coal to oil – it was more efficient and required a significantly smaller crew. ‘Oil in the next war [this was written in 1918!] will occupy the place of coal in the present war. … The only big potential supply that we can get under British control is the Persian and Mesopotamian supply … The control over these oil supplies becomes a first-class British war aim.’[1] Apparently devoid of domestic sources of oil, the British government bought a 51% stake in the struggling Anglo-Persian Oil Company (APOC, later to become BP), which had negotiated in 1901 an extraordinarily advantageous exclusive oil concession in Persia (Iran) that was tax-free and allowed it to pocket 84% of the profits, with perfunctory royalty payments to the Persian monarch.

A superficially more generous agreement was negotiated in 1933, but left crucial loopholes open that enabled APOC to continue robbing the country. APOC also had a half share in the Turkish Petroleum Company (TPC). By the early 1920s, the British had managed to create a new country called Iraq, install a ruler and create a government that conveniently granted the TPC a generous oil concession. The Admiralty noted in 1924 that ‘from a strategic point of view, the essential point is that Great Britain should control the territories on which the oilfields are situated’.[2]

By the post World War II period, British oil operations in the Middle East had reached a point where Britain owned the largest oil refinery in the world at Abadan in Iran, its largest single Sterling asset. The contribution of Middle East oil to the British economy was vital: quite apart from its use as an energy source, the fact that it was priced in Sterling, at a time when the currency was inconvertible against the dollar, meant that scarce dollars, mostly stolen from the empire, did not have to be spent on fuel. The operations of BP and Royal Dutch Shell contributed a huge proportion of the overseas investment income of the British economy and were vital in supporting the British balance of payments.[3] The British imperialists lived in luxury in Abadan, while the workers slaved in absolute squalor.[4] The vast bulk of the oil wealth flowed relentlessly out of Iran.

However, following the great ‘War to save Democracy’, the masses in Iran and Iraq were ready to throw off the burden of comprador rulers and imperialist exploitation. After attempts to renegotiate the agreement failed, the Iranian government nationalised the oil industry in 1951. The Labour Party, which had no problem helping British imperialism get back on its feet by nationalising bankrupt industries at home, was apoplectic when the Iranians nationalised the highly profitable AIOC, calling the Iranians ungrateful and ‘thieves’! These British ‘socialists’ imposed harsh economic sanctions and worked behind the scenes to devise a covert operation to bring down the Iranian government, an attempt that came to fruition in the famous CIA-organised coup ‘Operation Ajax’.[5]

BP today

Before the recent collapse of its share price, BP was the largest British company and the fourth largest ‘non-financial’ company in the world. Vertically integrated, it prospects for oil, extracts it, ships it (it has a fleet of well over 200 tankers), refines it, stores it and sells it to customers. It operates oil fields as far apart as Alaska and Angola, Vietnam and Azerbaijan, Colombia and Australia. It directly employs 80,000 workers worldwide and hundreds of thousands more indirectly through the numerous subcontractors it uses. It delivers £1 of every £7 of the dividends of the 100 companies which make up the Financial Times Stock Exchange (FTSE) index; with Shell, it is responsible for 25% of the total dividends paid into the UK market. British pension funds have about 8% of their UK equity holdings in BP, shadowing its weight in the FTSE index.

BP and finance capital: not just an oil company

Large monopoly corporations like BP are not simply materially productive entities: as capitalist enterprises, they are deeply involved in the circulation and realisation of capital. They require vast amounts of capital to operate. The Deepwater Horizon, the oil drilling platform which BP was using in the Macondo Prospect when it exploded, cost half a million dollars per day to lease from Transocean and a further half million per day to operate. Multiplied by hundreds of other prospects, this means a high ‘burn rate’ of several billion dollars annually, which has to be financed before wells can become productive and profitable. Although most of this is paid for internally, it is partly financed by issuing bonds – longer term interest bearing securities – and short-term commercial paper.[6] In addition to financing its production and exploration operations, BP is active in the futures market – selling oil through futures contracts and other derivative activities.

At the same time it is active in the same market on the other side of the trade, trying to offset exposure to fluctuations in commodity prices, foreign exchange rates, interest rates and other uncertainties – a practice known as ‘hedging’. BP engages just as cheerfully in making money through financial operations as it does by producing oil. In the first quarter of 2009, BP made a cool $500 million simply by delaying delivery of North Sea crude by one month. The BP Group operates pension plans for its employees, with associated investments worth billions. Finally, due to the constant day-to-day imbalance between receipts and expenditures, BP’s treasury department is actively lending and borrowing potentially hundreds of millions of dollars every day. Altogether, the Group’s borrowing in 2009 was about $56 billion – £36.7 billion.[7]

At one point during this crisis, BP was dangerously close to triggering another financial meltdown. According to Moody’s credit rating agency, ‘We reviewed our entire universe of outstanding CSOs and determined that exposure to BP and its rated subsidiaries appears in 117…transactions, which represents approximately 18% of global Moody’s-rated CSOs.’ CSOs are Collateralized Synthetic Obligations, yet another part of the toxic financial alphabet soup which triggered the financial crisis. Halliburton, Anadarko Petroleum, Transocean and Cameron International, BP’s partners in grime, are also participants in CSOs. If a major ‘credit event’, such as a restructuring or bankruptcy of BP occurs – a strong possibility given the staggering costs of the clean-up – then the insurers of, or investors in, these CSOs will have to pony up tens of billions of dollars, with all the consequences of deleveraging that we witnessed during the last financial crisis. It was precisely this kind of scenario that caused the financial crisis triggered by the collapse of Lehman in 2008.[8]

Profits versus safety

The relentless drive for profits guarantees that huge pressure will be put on to cut costs and find shortcuts at the expense of safety. Workers from the Deepwater Horizon gave sworn statements describing how, in the final days before the explosion, BP managers deliberately ignored warning signs of problems with the blow-out preventer and the drilling itself. The Macondo Prospect incident is just the latest in a long list of ‘accidents’ at BP facilities and installations. In March 2005, 15 workers were killed and 180 injured when BP’s Texas City refinery exploded. Safety regulators found hundreds of safety violations and fined BP millions of dollars. Two BP refineries – Texas City and Toledo – have been found responsible for 97% of all flagrant safety violations in the refining industry in the past three years. Cost-cutting measures are also believed to be responsible for the leak of more than 250,000 gallons of crude oil at Prudhoe Bay in Alaska, due to weakened preventive maintenance and other safety practices. A full list of incidents would go on for many pages. This demonstrates that these are not accidents, but the predictable result of a culture focused on profit rather than safety.

The clean-up and the payout

The clean-up is still in process. How much progress is being made is difficult to say because of concerted attempts by the state, at BP’s behest, to prevent journalists from reporting the story – some have been harassed, detained and threatened with arrest by law enforcement officials, despite being in public areas.

The payout of compensation to individuals and businesses is hopelessly entangled. Everyone needs to produce evidence of earnings. Yet anyone who operates wholly or partly by cash, such as many fishermen or restaurant waiting staff in the many hotels and many small businesses, are unable to provide documented proof of earnings. Only the very largest businesses are in a position to claim full compensation.

Too big to pay

However, there may be some relief for BP.[9] Despite having to deposit $20bn in a special account, the money spent plugging the well, cleaning up the beaches and compensating people for lost income can be offset against tax. The only expenses that cannot be offset against tax are any fines imposed by the US government. BP will be paying out the money now, only to get in back in the future. Once again, finance capital is getting bailed out by the taxpayer, ie, by ordinary working people.

Yet the only reason that there is any fuss about the Macondo oil leak at all is because it is happening on the southern beaches of the wealthiest imperialist country in the world. Over the last five decades, Nigeria has experienced half a billion gallons of oil being spilt into the Niger Delta, destroying the mangrove swamps and a primary source of fish, shellfish and staple crops.[10] Located in West Africa, well away from the comfortable existence of much of the population of the imperialist countries, Nigerians have suffered with no interest or assistance. This event is only a crisis because it happened on imperialism’s doorstep. Such is the hypocrisy of imperialism and finance capital.

1 War Cabinet Secretary Sir Maurice Hankey to Foreign Secretary Lord Balfour, quoted in Leonardo Maugeri, The Age of Oil, p26.

2 Quoted in John Keay, Sowing the Wind, p128. Despite its racist explanations of underdevelopment, Benjamin Shwadran’s The Middle East, Oil and the Great Powers gives a helpful picture of the elbowing, jostling and shoving amongst the imperialist powers as they attempted to grab chunks of the Middle East to get their hands on its oil.

3 See Steven Galpern, Money, Oil, and Empire in the Middle East, p149, tables on pp296-7 and passim.

4 See the vivid description in Manucher Farmanfarmaian Blood & Oil, pp184-186.

5 A candid account of the CIA’s operations and of British collaboration is given by CIA agent Kermit Roosevelt in his book Countercoup.

6 For an explanation of the ‘commercial paper’ market, see Steve Palmer, ‘Capitalism on the Rocks’, FRFI 199, October/November 2007.

7 BP Annual Report 2009, p59.

8 See Steve Palmer ‘Goodbye Wall Street’, FRFI 205, October/November 2008.

9 Ed Crooks ‘Spill costs to cut BP tax bill by $10bn’, Financial Times, 12 July 2010.

10 Adam Nossiter, ‘Far from the Gulf, a Spill Scourge 5 Decades Old’, New York Times, 16 June 2010.