corporate power

Bankruptcy is the endpoint of an oil and gas business strategy

Alberta Premier Jason Kenney has asked the Canadian government for financial assistance to clean-up abandoned oil and gas wells in the province. It has been estimated that cleaning up these wells could cost as much as $70 billion.

The existence of 77,000 abandoned wells across Alberta is the result of a financial strategy by the oil and gas business. Billions of dollars in profits and salaries reaped by oil executives are being subsidized by the public that is being asked to foot the bill.

Recently, the confusingly named Houston Oil & Gas declared bankruptcy. The company is abandoning over 1,000 oil wells.

This was not just the unfortunate outcome of a risky business operation. This type of company, and its eventual bankruptcy, is part of the financial ecosystem of the oil and gas business.

Returning Wells to Profitability

Houston’s stated purpose was to “rejuvenate legacy assets into profitable and beneficial operations.”

Over time, the amount of oil coming out of a well decreases. Eventually, the revenue earned from a well falls below the well’s operating costs. Companies like Houston can only return a well to profitability by cutting costs. If the company cannot get costs across its wells below the revenue the wells generate, then they will go bankrupt.

The Supreme Court ruled that bankruptcy does not absolve a company of its responsibility for the clean-up of unproductive wells. That means the assets of a bankrupt company can be seized by the Alberta Energy Regulator (AER) to contribute to well clean-up costs. However, often the sale of assets will not generate enough to cover all the costs. This is why companies like Houston are so useful to the broader oil and gas business.

Passing the Clean-up Liability

Imagine a big, established oil extraction company—we can call it Old MacDonald’s Oil & Gas Co.—has a bunch of wells approaching the limits of profitability; operating costs are close to revenues. They face a large future cost: cleaning up the well. Old MacDonald’s cannot just abandon the unprofitable wells. The AER can come after them. The company has lots of profitable wells and is generating returns for its investors and paying handsome salaries to its executives. It does not want to go bankrupt and disrupt this positive financial flow. But it also does not want to incur the costs associated with well clean-up. That’s where the sale to a company like Houston is useful.

If Old MacDonald’s sells the wells with waning profits to a company like Houston, then it eliminates the liability of future clean-up costs. Those liabilities shift to the buyer, which can try to cut the costs of operating the wells to squeeze more profits from them. If the buyer fails to return enough wells to profitability and goes bankrupt, then the limit of the AER cost-coverage is the assets of the bankrupt company. Neither the owners nor the executives, which may have enjoyed years of dividends and bonuses, will bear any of the liability. Old MacDonald’s will also bear no liability for the wells, since it sold them.

As the price of oil drops, well revenues will drop, meaning many more wells will cease to be profitable. This means many more wells are likely to shift to cost-cutters like Houston. Many of those are likely to be abandoned, with the costs ultimately borne by the public.

Profiting Off the Cheap Disposal of Plastics, or Microplastics are Raining Down from the Sky

“Microplastics are raining down from the sky.”

That is a sentence that should only exist in science fiction.

This is just one more externality associated with profit-driven production. The quest for profit will always drive cost-cutting and externalization is one of the most effective means of cutting costs. The entire price landscape would be different if we had to pay for the clean-up and proper disposal of these microplastics. In a sustainable economy they would be returned as an input to production. The high cost associated with properly managing their recirculation would provoke substitutions and innovations.

There are beneficiaries of this destructive and unjust externalization of costs. Many of those beneficiaries undoubtedly claim personal virtue – thrift, hard-work, foresight – as the reason for their financial success. The truth is that others subsidize their gains. The profitability of any plastic-using product depends on our ability to cheaply – or freely – dispose of plastic products where they get widely distributed into the global environment.

Dealing with our multi-faceted ecological catastrophe does not mean killing the economy. It means transforming the economy. Those who claim measures to address ecological destruction will produce economic harm are actually saying they benefit from the destructive status quo. They are not willing to sacrifice their own lifestyles to ensure basic liveability for others, including future generations.

Airbnb Caters to Tourists and Harms Residents

Airbnb is making city life worse by catering to worsening social inequality.

Thomas Piketty’s monumental Capital in the Twenty-First Century came out in the wake of the Occupy movement. Both sounded the alarm over rising wealth and income inequality. Piketty put numbers to a reality that Occupiers understood and opposed.

Financial inequality has a plethora of material expressions. The poorest of the poor suffer abject deprivation. This comes along with mental health challenges that compound the effects of the structural causes of poverty. Meanwhile, the wealthiest of the wealthy have lavish lifestyles, which also contributes to mental illness. Between the two extremes the majority experience myriad socio-economic transformations as businesses chase dollars trickling upward to the already-rich. Increasingly, businesses look to cater to those with disposable income or those going into debt trying to consume like the wealthy. Systems of production and consumption are shaped by our one-dollar, one-vote economy.

It is in this context that Airbnb has become socially harmful. When it first came to public attention, Airbnb exemplified the promise of the so-called ‘sharing economy.’ The idea was that some people have spare rooms and other people need access to cheap, short-term accommodations. It seemed like a win-win. It also seemed like a tick in favour of the good, old-fashioned market, as well as new-fangled platform capitalism. Airbnb was supposedly facilitating the law of supply and demand to more completely fulfill its potential. For just a small slice of the price charged to the renters, Airbnb provided the means for people to rent their own homes when they were travelling elsewhere or to make some money renting a room in their home. The reality has been much different.

A Toronto Star / Munk School of Global Affairs and Public Policy investigation found that Airbnb has facilitated the rise of “ghost hotels”. These are short term accommodations for tourists in what would otherwise be lived in by owners or long-term renters. Tourist accommodation is displacing housing. UN Special Rapporteur on the Right to Adequate Housing Leilani Farha says the reason is that this is “simply more profitable.”

Airbnb approached the issue of the accommodation market as simply a technical matter. It completely ignored the social context into which that technology was entering. Many of its effects now seem predictable. Perhaps they would have been if the company had social scientists on staff.

The effects of Airbnb are externalities to the markets in which it operates. Some of these are positive externalities. Many businesses cater to tourists. With more rental options more tourists will come to a city. If accommodations are cheaper then tourists can spend their dollars elsewhere. However, the effects on long-term rentals are a negative externality. The consequences will compound and cascade. As people are priced out of a housing market they move further away. Many will leave the local labour market. The same businesses that benefit from more tourists will have more difficulty finding workers. Businesses frequented by lower wage workers will lose their customer base and close.

Whatever ‘sharing economy’ ideals may have motivated the company’s founders, Airbnb is now emblematic of the significant damage a tech company can do outside the digital world.

 

Cheap Goods Come at a Cost

The fascinating chart below tells a tale of ever cheaper consumption. It can be read as verification of one of capitalism’s promise: pursuit of profit results in productivity gains that lower costs and prices. The other profit promise is it leads to innovations that will become widespread as they enter the cycle of cheapness. Continue reading →

The Pinkertons are STILL Muscle for the Bosses

The New York Times reports that the Pinkerton Detective Agency has evolved to respond to the climate crisis. Popularly known as the Pinkertons, the company is best known as the strikebreakers that provoked violence at the Homestead Strike. While it is widely thought that the state has a monopoly on the legitimate use of violence, the Pinkertons employ legitimized violence on behalf of the powerful and the wealthy. Continue reading →