Oil has been spewing out into the Gulf of Mexico at an alarming rate soon after the oil rig, The Deepwater Horizon, first sank on April 20. Since then, an estimated 5,000 gallons barrels per day have been let loose into the Gulf, polluting ecosystems and putting commercial fisherman out of work. It is a situation that worsens with every day that passes.
Speaking on the Sunday morning television circuit, Interior Secretary Ken Salazar said it could be 90 days before federal officials and BP, which was leasing the well when a fire broke out April 20, manage to stanch the oil–although he also said it could be stopped much sooner.
Much sooner, only if BP is able to quickly fabricate giant steel domes to be placed over the leaks, and only if the robots responsible for placing the domes can successfully do so in extremely murky conditions where visibility is limited. If this process is not completed soon, this will end up being the worst oil spill in American history, even eclipsing the Exxon Valdez incident in 1989. The local paper of New Orleans, The Times-Picayune, has a great animation of oil spill here.
This incident comes at a bad time for the Obama administration. He recently signed a bill allowing an increase in offshore drilling — and as exploratory drilling increases, accidents like these are likely to follow. Obama visited southeast New Orleans yesterday, telling those listening that, “BP is responsible for this leak. BP will be paying the bill. But as president of the United States, I’m going to spare no effort to respond to this crisis for as long as it continues.”
But Obama may have a larger crisis on his hands than he immediately realizes. As New York Times opinion column writer Stephen J. Dubner put it:
Could the Gulf disaster be just the kind of tragic, visible, easy-to-comprehend event that crystallizes the already-growing rush to de-petroleum our economy? As with TMI [Three Mile Island], it won’t do much to change the facts on the ground about how energy is made. But as we’ve seen before, public sentiment can generate an awful lot of energy on its own, for better or worse.
Comparing this oil spill, and the reaction that follows, to what happened on Three Mile Island may be a bit of exaggeration . . . or maybe not. We will wait and see.
Correction – Emily states that 5,000 gal/day are spewing out into the Gulf. I wish that were true, but it’s really 5,000 BARRELS/day, and a barrel equals 42 gallons. We must be precise and accurate here. So, actually over 200,000 gal/day are dumping into the Gulf.
Thank you Dr. Steven. I actually meant to type “barrels” as I used this same statistic in my previous post about the oil spill. Thank you very much for catching this and bringing it to my attention. And yes, I wish that my typo were true as well.
Some interesting information to be found from BP’s financial reports. Now, BP stresses that it did not cause the leak, but it will ultimately pay for it all. The truth is, BP *is* responsible, ultimately and the firm will be made to bear the burden for the loss since its drilling contractor, Transocean, certainly lacks the resources to pay for whatever financial fallout occurs. Regardless, if you look at BP’s financials since 2005, it had profits of about $16B in 2009, which is enormous, but well below the $21B-$22B it had been netting each year for the previous four. Moreover, BP’s exploration expenses shot up by about 25% in 2009, to $1.1B. Now, their financial reports are rather detailed, and I have not gone through them with a fine-toothed comb (but you can over at http://www.bp.com > Investors > Annual F&OI reporting), but what immediately comes forth is a picture of a firm with dwindling returns and a sudden need to explore more. Couple that with contracting a firm whose safety concerns were so serious that its own Board denied the top executives bonuses last year and you begin to wonder if BP fully knew or understood the risks it was undertaking.
Now, I know all of this might seem overly speculative, and admittedly, it is. I am sure there is well more to this situation than my cursory research reveals. But before you judge me too harshly, consider this: there is a rumor going around in certain blogs that the Deepwater Explorer was, in fact, torpedoed by North Korean submarines because the rig was partially owned by Hyundai, and this event therefore embarrasses South Korea. And people are taking it seriously. God help us all.
Also, thereis an interesting blog post on the possible outcomes from all of this:
http://www.ritholtz.com/blog/2010/05/oil-slickonomics/
Makes for interesting reading until you realize that the best-case scenario is one that might generate a 9/11-size financial cost. I do not know to what degree BP has financed this risk. If this is ultimately an insurable peril, then the impact will go to the reinsurance world, which can absorb this kind of a loss, despite the huge numbers. If there is no insurance remedy here, then BP is on its own, and with the magnitude of losses we’re possibly looking at, one must wonder if there will even be a BP by the end of this thing. It’s kind of a context-altering event, the precise thing that Nassim Taleb warns of in the “extremistan” world we live in today.