The BP oil disaster of 2010 has established new financial precedents regarding accidental oil spills, specifically when the ratio of duration to cost is taken into consideration. Relatively enormous sums of money have already been distributed on behalf of the company in response to cleanup costs, stipends paid to displaced workers and businesses, and grants issued to affected state governments. But this pales in comparison to what the total amount will in all probability reach.
The Financial Responsibility of BP Oil
As of 18 June 2010, the gulf oil spill has cost BP an estimated 1.6 billion USD. This figure can be itemized as follows:
- 25 million USD in grant money given to the states of Alabama, Florida, and Mississippi
- 60 million USD allocated towards the construction of barrier islands off the coast of Louisiana
- 1.4 billion USD accrued as of 18 June 2010 in cleanup efforts(tabulated at a rate of 33 million USD per day since the incident)
The above figures do not include costs pertaining to current and future lawsuits or the over 6700 compensation claims filed, although 1000 claims have already been settled.
Energy analysts at Barclay Capital project losses totaling 22.6 billion USD will be incurred by BP, including cleanup costs, worker compensation, legal fees and lost revenue. In addition, on 16 June 2010 BP announced it will slash its capital expenditure bill and suspend dividend payments until September 2011 in order to pay for the 20 billion USD claims fund imposed upon the company by the United States. Although these figures are subject to change, it is unlikely they will decrease.
The Gulf Spill Viewed in the Context of Similar Accidents
In order to provide more insight to what these numbers truly represent, it is helpful to view them in perspective to comparable incidents. For example, the Exxon Valdez disaster of 1989 caused 10.8 million gallons of oil to be released into the Prince William Sound, a figure which when compared to the current Gulf situation, seems relatively minor. However, the Exxon Valdez accident shares many traits with the BP spill. The image of Exxon was irrevocably tarnished and there was a stigma attached to the brand that is still present today.
The company was highly criticized by the government and media for lack of a quick response time and refusal to acknowledge the extent of the problem. This led the public to infer they were not taking the accident seriously. The company paid 2.5 billion USD towards cleanup efforts, 1.1 billion USD in settlement costs and a 5 billion USD fine which was later successfully appealed. It is worthy to note that whereas the Exxon Valdez spill was limited in capacity to the vessel in which it was contained, the Deepwater Horizon well, for obvious reasons, is not.
Although not accidental, the Gulf War oil spill of 1991 is still considered the greatest in terms of ecological damage and oil loss. It is estimated 450 to 520 million gallons were released into the Persian Gulf, and its effects on the region’s ecosystem are still felt today.
It is possible the BP Oil spill will reach that magnitude according to an analysis by Stephen Wereley, associate professor of mechanical engineering at Purdue University. His findings indicate an astounding 56,000 to 84,000 barrels are being released daily. This analysis was performed using a technique known as particle image velocimetry, which tracks particles and the velocity at which they travel. The aforementioned figure includes smaller amounts of methane, but it could still bring the total amount of the oil spill into the 500 to 600 million gallon range if BP can have relief wells in place by mid-August 2010.
Consumer Impact of the Crisis
Domestically the damage regarding gas prices have been minimized, and they are congruent with market averages. But BP and its response to the accident have already diminished consumer confidence in the brand. In addition to the social impact imposed upon Gulf area businesses, individuals will be affected on an even broader scale. The seafood industry is demonstrably damaged, and has subsequently raised its prices. BP shareholders have been significantly affected financially, with a 20 percent drop in stock value since the incident and the suspension of dividend payments.
A lesser publicized implication is the U.S. government imposed 6 month moratorium on off shore drilling operations, which is having a profound effect on many. This moratorium will force the United States to rely more heavily on foreign oil, and will defer 19 percent of deepwater oil production until 2015 to 2016. To put it differently, the loss in oil production over this six month period will not be recouped for five to six years, in which time oil from Middle Eastern sources will have to be acquired to satisfy demand. Also, the suspension in off shore drilling will result in 165 to 330 million USD in lost wages and could cost 20,000 oil related jobs by the end of the year. This includes all enterprises related to production, processing, and transport of oil.
The severity of this disaster is evidenced on many levels, but the potential financial damage and subsequent consumer impact is realized in the projected costs that are to be incurred from it.
Sources:
www.economictimes.indiatimes.com
www.energybulletin.net
Jkalal Assar - Jkalal Assar's work has appeared in "Food and Wine", "McGraw Hill Economics 36th Edition" and "Salon". He is a graduate of Le Cordon Bleu ...
