Obama’s big oil test

President Barack Obama and BP CEO Tony Hayward both face moments of truth in their meeting tomorrow. Given the brutality of American politics, Obama must take control of the runaway train of vitriol surrounding the Gulf of Mexico oil spill by showing he’s doing everything short of body-slamming Hayward. (Even that wouldn’t satisfy some, such ...

JIM WATSON/AFP/Getty Images
JIM WATSON/AFP/Getty Images
JIM WATSON/AFP/Getty Images

President Barack Obama and BP CEO Tony Hayward both face moments of truth in their meeting tomorrow. Given the brutality of American politics, Obama must take control of the runaway train of vitriol surrounding the Gulf of Mexico oil spill by showing he's doing everything short of body-slamming Hayward. (Even that wouldn't satisfy some, such as Louisiana Republican Rep. Joseph Cao, who in a public hearing today suggested that a BP executive commit hara-kiri). For Hayward, the task is to understand these politics and make peace with Obama -- and even that is only one, small step toward preventing his company from breaking into pieces.

The various sides of politics, energy and climate change are conspicuous with strategies for either capitalizing on the spill, or precluding others from doing so. Joe Romm, who writes the Climate Progress blog, says Obama's speech must transcend just the Gulf catastrophe. "The future of his entire presidency hinges on whether he can make a convincing case that he is doing everything he can to get us off of oil,"  he said in an energy roundtable that we held today at Foreign Policy. James Woolsey, former director of the Central Intelligence Agency, made the same essential point -- that the U.S. needs to transition to develop alternatives to fossil fuels.

Obama does in fact cite the spill as evidence of why the United States needs to launch a stronger effort to develop other sources of energy. In his Oval Office speech tonight, Obama will call again for Congress to approve "comprehensive energy legislation" to develop non-fossil fuel energy, according to a senior Administration official who briefed reporters before the address. But he will be misleading the public if he suggests that, even at full bore, any such fuel will scale up to general use any time sooner than a couple of decades from now, if we're lucky.

President Barack Obama and BP CEO Tony Hayward both face moments of truth in their meeting tomorrow. Given the brutality of American politics, Obama must take control of the runaway train of vitriol surrounding the Gulf of Mexico oil spill by showing he’s doing everything short of body-slamming Hayward. (Even that wouldn’t satisfy some, such as Louisiana Republican Rep. Joseph Cao, who in a public hearing today suggested that a BP executive commit hara-kiri). For Hayward, the task is to understand these politics and make peace with Obama — and even that is only one, small step toward preventing his company from breaking into pieces.

The various sides of politics, energy and climate change are conspicuous with strategies for either capitalizing on the spill, or precluding others from doing so. Joe Romm, who writes the Climate Progress blog, says Obama’s speech must transcend just the Gulf catastrophe. "The future of his entire presidency hinges on whether he can make a convincing case that he is doing everything he can to get us off of oil,"  he said in an energy roundtable that we held today at Foreign Policy. James Woolsey, former director of the Central Intelligence Agency, made the same essential point — that the U.S. needs to transition to develop alternatives to fossil fuels.

Obama does in fact cite the spill as evidence of why the United States needs to launch a stronger effort to develop other sources of energy. In his Oval Office speech tonight, Obama will call again for Congress to approve "comprehensive energy legislation" to develop non-fossil fuel energy, according to a senior Administration official who briefed reporters before the address. But he will be misleading the public if he suggests that, even at full bore, any such fuel will scale up to general use any time sooner than a couple of decades from now, if we’re lucky.

Though it’s probably bad politics to tell this truth, the best we can do is to scale up another fossil fuel — cleaner natural gas — for electrification and plug-in hybrids while alternatives are developed.

John Hofmeister, a former president of the U.S. division of Royal Dutch/Shell and now the head of the nonprofit group Citizens for Affordable Energy and the author of Why We Hate the Oil Companies, said before Obama’s speech that the president should hit both themes. "It’s my view that the nation needs re-assurance that we will both continue to produce domestic energy to meet our economic and security needs and … modify and reform extraction and production processes and regulations so that we can do so safely and sustainably," he said.

Hayward, of course, has it worse. In Congress today, executives from the other oil majors treated BP like a leper — that company might make tragic mistakes, the CEOs of Chevron, ConocoPhillips, Exxon, and Shell told lawmakers, but not us. When Big Oil turns on one of its own, you know something is wrong. Clearly, these CEOs sense that the landscape is treacherous now not only for BP, but potentially for themselves as well — enough so that they are willing to publicly hint at what they are probably saying privately, which is that BP is in grave existential peril.

Wall Street is signaling similarly. The company’s share price closed today down 47 percent since the April 20 spill. Fitch has once again downgraded BP’s bonds to just above junk status; that will affect the interest rate at which the company can borrow money, which it will have to do to cover the cost of its growing tab for the spill.

Much attention is focusing just on the cost of the spill: the $20 billion that Obama wants BP to put into an escrow fund to cover the cleanup; the $10 billion in expected dividends that shareholders will demand either in cash, in an escrow account, or in shares in order to keep Hayward and the rest of the board in their seats; the $16 billion in cash that the federal government can levy against BP under the Clean Water Act at $4,300 a spilled barrel; plus the incalculable billions that victims of the spill may obtain in court settlements.

But there is more. A year or so from now — after the well is plugged, the shrimpers are back in the Gulf, and the tourists are on the beaches — BP’s reputation, at least in the U.S., will remain in tatters. There is much question whether it will be able to continue to effectively operate, even if it changes its name. If that is the case, its U.S. assets — 40 percent of the company’s reserves — are in jeopardy.

And that is just the beginning. Another 25 percent of the company’s assets are in Russia, in the partnership known as TNK-BP. BP’s partners are four Russian oligarchs who twice in the last 13 years have forced BP’s back to the wall in bouts of brinksmanship. In the last case in 2008, BP’s secondee to the company, Robert Dudley, had to flee Russia, and stayed underground for months incommunicado. (This is the same Dudley, incidentally, who has been put in charge of the BP’s disaster management unit.)

I emailed one of the oligarchs asking whether it’s possible that they or another Russian group might try to take advantage of BP’s troubles to take over its stake in TNK-BP. "Could be but I think remote at this point," the oligarch replied.

For Hayward, that is a slender reed.

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>

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