Not that this comes close to estimating the economic impact of the spill, but here are the declines in the market capitalizations for the major parties involved in the operations.
This is an absolute catastrophe. I think this is going to crush BP. Furthermore, realize that BP self-insures while most of the other parties insure. This is creating havoc in the London insurance markets. They expect losses to exceed that of Katrina. This will negatively affect any oil and gas company trying to get insurance regardless of whether they have any deep water operations.
Also, while this isn’t an item that many people are talking about, there are a tremendous number of oil and natural gas wells in the state waters and marshy areas along the coast of LA. Many of those operations are going to be shut in affecting hundreds of the smaller oil and gas companies and related service companies in the area. It is just in general a terrible things for the domestic oil and gas industry.
It isn’t as simple as that though, because legally BP can’t be required to pay more than $75 million towards the damages. In 1986 Congress set up an Oil Spill fund which all major oil companies contribute to and which can be tapped to cover the cost of spills, and in exchange they limited the maximum damages payable by oil companies in the event of a spill to $75 million. The Oil Spill fund is worth between $1 billion and $1.6 billion.
The problem is that’s not going to be anywhere near enough to cover the costs of the spill in the Gulf of Mexico, which this investor’s group estimates will carry costs in the tens of billions at the minimum. Legally, the government and taxpayers will have to pick up that tab. There’s talk from Obama that BP will agree to cover the rest of the costs themselves, but color me sceptical on that one.
And that likely means that gas prices will be going up even moreso than usual this summer, which will spread the pain around enough that everybody gets some.
Of course people shouldn’t misread what you wrote and assume that BP is only going to be responsible for $75 million here. In fact, I am fairly confident that they have already spent more than $75 million. They are responsible for the costs of fixing the spill and cleaning it up. That is going to be in the multi billions level. Further, there is also no way that they pay out only $75 million in damages.
You’re right, the $75 million cap refers to non-containment and clean-up costs. So BP will be on the hook for the containment and clean-up costs, and I’m sure that’ll be expensive. However what I said wasn’t all that misleading, because the economic costs I referred to (estimated to be at least $10-20 billion, and possibly in the hundreds of billions in the worst case scenario) do not include containment and clean-up costs either. As the law stands, the government or affected parties will have to pick up the tab for the vast majority of those costs.
I’m not sure what you’re basing the statement, “there is no way that they pay out only $75 million in damages” on. They cannot legally be held accountable for more than $75 million of the non-containment and clean-up costs. What do you mean?
I don’t think you said anything incorrect. However, for the average person on this website who quickly skims things and has a cynical attitude toward anything that can be remotely considered pro-business, they will read it and think they only are going to be out $75 million for this.
For starters, have you read the Oil Pollution Act and related language saying that a company’s limit is $75 million or are you basing your certainty on the linked article? I went through the OPA website and then quickly skimmed the act and didn’t see any mention of it. I’m not in any way saying that it doesn’t say something like that, I am just wondering why you are so certain. I tend to like first level sources, so I would like to read the actual text of the act.
Further, the market certainly feels like they will pay significantly more than just cleanup costs and damages of $75 million. It’s not like the cleanup costs are going to be anything close to $40 billion and that’s what the market cap is down by. Cleanup and containment is probably somewhere in the $2 - 10 billion range. You could think this is just a massive overreaction by the market, but I think that they believe there will be a massive hit to BP.
It’s Section §1004 of the Oil Pollution Act of 1990 (summary and full text are at that link). It’s also been reported in the New York Times and a group of senators are proposing a bill to raise the cap from $75 million to $10 billion.
I don’t think the market value is necessarily a good way of assessing how much BP will have to pay. BP will indeed be taking a big direct financial hit - I’ve seen predictions that the containment and clean-up will cost them billions. But there’s a whole bunch of other factors that could affecting the market value: the reinstated moratorium on off-shore drilling, the fact they’ve just lost a major rig and the oil beneath it, the fact 11 of their workers just died, the terrible publicity (they’re getting slammed by the US President in televised press conferences, that’s about as bad as publicity can get), the fact that all drilling in the Gulf of Mexico is going to be severely hindered for months. Or a whole host of other factors. I don’t think you can assess it in terms of, “well, their value is down $40 billion, so they must be paying out $40 billion for total damages”.
Well, according to the New York Times and to a handful of Congressmen, the first point does not apply to BP and the answer to the second is “no”. If you have any evidence for either claim I’d be happy to take a look at it though.
In 2003, after a similar accident in the Gulf, BP and NOAA compiled a report that says: “Loss of well containment would result in more oil spilled in a week than occurred during the whole of the T/V Exxon’s Valdez oil spill.”
If this is cranking out 200,000 gallons per day, that’s a million gallons every five days. You’ll hit 10,000,000 gallons in early June unless their containment vessels work. They just started drilling relief wells last week, these are expected to take two or three months to complete. If it takes 90 days, that 18,000,000 gallons sloshing around in the Gulf. The Exxon Valdez spilled 11,000,000 gallons.
It would seem like people would wait until after an investigation is completed before stating that BP was not negligent or in violation of any regulations. Further, how can they make a claim that they have provided all cooperation and assistance in the removal activities when those activities aren’t yet complete.
Also, no offense to the New York Times, but the article you posted has already been corrected once for an error and a second error is obviously still in the article. They state that BP is a well-insured company; we know, however, that BP was self-insuring.
Now the Wall Street Journal quotes “industry experts” saying that the current flow rate may be 25,000 barrels (one million gallons) per day. Also today the Coast Guard and Ken Salazar suggested that the daily flow rate might balloon to 100,000 barrels per day in a “worst case scenario,” if the well head breaks open further, and perhaps take 90 days to bring under control.
By those WAG figures, the current spill could conceivably be 35 times larger than Valdez.
It’s becoming clear that nobody really knows how big this is or how big its going to get before it’s done.
Maybe. On the other hand, maybe BP will make use of this provision:
Then they can blame the crisis on Transocean and end up paying nothing at all! And there’s no way you can disprove that, because there’s been no investigation or legal hearings yet, right? I’m being facetious, but the point is, reading the raw text of the legislation doesn’t offer us much because neither of us is a legislative or legal expert. I’ve seen no evidence that BP will legally have to pay more than $75 million for non-containment and cleanup costs, and until I do I’m not going to buy it.
