It is interesting to look at BP’s share price. Its above where it was last July though it has fallen markedly (by one-third) since the oil spill began in April in the Gulf of Mexico. Yesterday $11b was wiped off the value of the company as further efforts to stop the leak failed. 19,000 barrels of oil per day are pouring into the ocean in what may amount to perhaps the most significant environmental disaster in US history. At least 75 million barrels of oil have leaked so far devastating large areas of the US coastline.
The US government rhetoric is growing more fierce by the day and BP certainly deserves some blame for this catastrophe. But how much blame should be attributed to government decisions which allowed drilling to occur under such risky deep water conditions? The value of such resources is obviously immense but the risks, though small, have catastrophic effects.
Update: There are now several articles comparing the oil spill with the financial crisis in terms of private sector under-appreciation of risks creating a need for regulation. This by Kenneth Rogoff. David Leonhardt in the NYT claims that regulators have created a moral hazard problem by placing a $75m cap on oil spill damage costs. The likelihood is that offshore drilling for the small amount of oil available offshore will be banned for decades. Regulatory underprovisions lead to possible over-regulation longer-term.
Update: (3/6) BP’s shareprice continues to tumble but still surprisingly above its level at start 2009. Analysts are now questioning the firm’s future with many making the (to me always surprising observation) that if the share price continues to tumble BP will become a takeover target. It’s a claim that doesn’t make much sense unless you are trying to put a floor under the price.
Update: 11/6. The share price has collapsed now falling to its lowest level since 1996. Estimated damage claims are now put at $33 billion. (1002)
What catastrophic effects? I have read a lot of reports about the spill but have seen no reference to any significant damage. Oil is an organic product that breaks up naturally, particularly in warm temperatures. What damage is done is not long-lasting. There is plenty of real environmental damage about and people would be better off worrying about those than getting hysterical about oil spills.
John, That’s a plausible line. I’d like to know more. There are certainly severe transitory effects on animal populations. I did a quick search around the web and found this article that suggests mainly transitory issues. It depends on the resiliance of the environment. Other links?
As for the BP share price, I’d buy now if I could. The market seems to be assuming that BP will be made to pay for the damage it’s responsible for. But this is the US – there’s no way in the wide world a large corporation will be made to bear the full cost of something like this. And loss of reputation isn’t much of a threat to the bottom line of any major oil company, because to lose a good reputation you have to have one to start with. The market is simply wrong.
The environmental effects may or may not be transitory (marshes and wetlands can be fragile). But even transitory destruction of the Gulf’s fishing and recreation industries is not a trivial economic matter.
Remember the Exxon Valdez – buy, buy, buy…
It seems like there is finally some good news with the spill. The Houston Chronicle reports, U.S. ships were being outfitted earlier this month with four pairs of skimming booms airlifted from the Netherlands and should be deployed within days.” Finally a good sign. For all those feeling pretty gloomy about this situation, I recommend a good laugh… Here’s a funny joke, http://www.youtube.com/watch?v=Dd0svVWfFbo
This entire issue with BP is chaos. The total amount of crude oil pouring forth into the Gulf of Mexico sprung up by 1000s of barrels Wednesday right after an underwater droid seemingly struck the containment cap that has been getting petroleum from BP’s Macondo well. I wonder how much devastation this entire disaster is going to cost the Gulf when it’s all said and done
The oil spill is nothing to laugh at but I just saw a kid wearing a t-shirt that cracked me up. BP – We’re bring oil to America’s shores. I died laughing because BP’s billion dollar image change to their new sunflower logo is forever going to be associated with the worst environmental disaster to strike America. Check out the shirt here – http://bit.ly/bJAuTb
[...] Pelicans & petroleum Todd Litman has some rough figures on the estimated cost of the Deep Water Horizon oil spill based on a short paper by Mark Cohen. This is ‘order of magnitude’ stuff. Litman claims estimated cleanup and compensation costs from $50b to a whopping $500b although I couldn’t see any rationale at all for the estimates near the top of this range. There have certainly been plenty of oil spills in recent years so the punitive damages that have been awarded in the past have seemingly not forced a resolution of this problem via an internalisation of expected costs. Litman argues that cleanup and compensation costs come to around $100b they amount to about 2% of the gross costs of US petroleum consumption – and that excluses costs inflicted on ‘natural capital’ such as bird species. It is not immediately obvious however why all costs should be attributed to US consumers. Total costs are estimated by Cohen to be 3 times cleanup and compensation costs based on willingness-to-pay data. It is possible these environmental costs have been exaggerated – the natural environment may be more resiliant than we commonly suppose as a discussant to an earlier post of mine pointed out. [...]
[...] spills in Gulf I posted on the Gulf oil spill a while back and a discussant argued I was being alarmist. The NYT thinks he is right. It is bad but therre [...]