Monday, May 24, 2010

Gulf Oil Spill: Will BP Survive?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

British Petroleum (BP) has lost around a quarter of its value since April 20th, when its blown out well started spewing oil into the Gulf of Mexico. Several efforts to control the leak so far have failed and the damage is rapidly escalating. This is not just shaping up to be the biggest man-made environmental disaster of all time, but it will have ramifications for BP and the oil market for years to come.

The oil spill has already reached shore, stretching 150 miles from Grand Isle, Louisiana to Dauphin Island, Alabama. The ecologically fragile marshlands of Louisiana have already suffered noticeable damage. The oil moving underwater could be even more dangerous that the oil on the surface however. Scientists have found vast underwater plumes emanating from the well, one of which is 10 miles long and a mile wide. An outer edge of the spill has already reached the Gulf of Mexico loop current and that could bring oil to Cuba and both coasts of Florida affecting its beaches and the Everglades.

The size of the oil spill has been continually upgraded. It was originally claimed that the leak was only 5000 thousand gallons a day. Most recently BP admitted to 210,000 gallons a day, at least until it employed a siphoning mechanism (a mile long tube) that took in 210,000 gallons a day at its peak. Even at that rate, a lot of oil was still leaking and not being siphoned. This means the 6-million estimate for the spill in the first 30 or so days is in all likelihood is much too low. The Exxon Valdez tanker spilled 11-billion gallons in 1989. Many scientists believe the leak from BP's Macondo seabed well has already exceeded this figure.

The siphoning approach is only the latest one that BP has tried. It has now failed. While there are a number of possible solutions for containment, none of them have been attempted, let alone perfected in deep water. The leaking wells (there are actually three of them) are 5,000 feet below the surface. BP first attempted to place a dome over the hole, but ice crystals caused the dome to clog up. BP is apparently going to try this again because it thinks it can prevent the ice crystal problem next time. This week though BP will attempt to plug the leak with heavy mud and cement. The U.S. government is starting to get irritated though because it hasn't seen much progress. President Obama at first stated that the leak was "BP's mess", despite its multinational environmental, health, and economic consequences. Presumably, some recent political polls indicate that the American public doesn't buy the 'it's not my job' philosophy of the Obama administration and instead thinks the president should provide leadership during a major crisis.

That it was going to be difficult to control the BP oil spill was obvious from the beginning. There is no precedent for dealing with this problem in deep water. A much smaller spill in 150 feet of water in 1979 (IXOT 1) took nine months to fix. BP's spill is considerably more difficult to handle. The company says that it has already spent $760 million on the spill so far. The final figure will be much, much higher. The costs from lawsuits are completely open ended. While the company may survive, it will be severely financially damaged from this spill for years to come.
Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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